Arriscraft International Income Fund
TSX VENTURE : AIN.UN

Arriscraft International Income Fund

November 07, 2006 17:39 ET

Arriscraft International Income Fund Announces Third Quarter Results and Expansion of Georgia Plant

CAMBRIDGE, ONTARIO--(CCNMatthews - Nov. 7, 2006) - Arriscraft International Income Fund ("Arriscraft" or the "Fund") (TSX:AIN.UN) today released its financial results for the three and nine months ended September 30, 2006.



Third Quarter Highlights:

- Sales up 14.5% on growth in Canadian and U.S. markets
- Adjusted EBITDA up 17.4%
- Cash distributions reinstated during the quarter
- Trustees approve expansion of Georgia manufacturing facility

Financial Results: Consolidated third quarter and year-to-date financial
highlights are summarized below (in $ thousands, except per unit amounts):

---- Three Months ---- ---- Nine Months ----
Ended September 30 Ended September 30
2006 2005 2006 2005
---- ---- ---- ----
Sales 22,018 19,234 59,947 52,297
Gross Profit 10,638 9,313 29,286 23,705
% 48.3% 48.4% 48.9% 45.3%
Net Income (Loss) 892 1,854 1,374 ( 605)
Per Unit (a) $0.103 $0.215 $0.159 $(0.070)
Adjusted EBITDA (b) 3,355 2,857 7,858 6,650
Distributable Cash 2,259 2,127 5,465 3,551
Cash Distributions Declared 491 NIL 491 4,204
Per Unit $0.07 NIL $0.07 $0.60


(a) Per unit calculations assume the conversion of all restricted, subordinated Management Units into Units.

(b) "Adjusted EBITDA" removes the following non-cash items from earnings before interest, taxes, depreciation and amortization: (i) the non-controlling interest in the Fund's income or loss for the period, and (ii) all unrealized foreign exchange gains and losses. Adjusted EBITDA in 2005 included a $1.0 million non-recurring, non-cash charge related to an inventory valuation adjustment stemming from the valuation of the Fund's inventory at the time of its IPO in December, 2004. This non-cash adjustment effectively impacted cost of sales throughout 2005 and, accordingly, was added back to net income in calculating Adjusted EBITDA.

Consolidated third quarter sales increased by 14.5% over the third quarter of 2005 as the current year's focused sales efforts on both sides of the border, investments made in new U.S. sales personnel and marketing materials and the continued strength of the commercial markets in the U.S. resulted in higher sales in both Canada and the U.S. Canadian sales, led by gains in Ontario, were 19.4% higher than they were in last year's third quarter despite housing start declines in several of Arriscraft's principal markets in Southern Ontario and Quebec. U.S. sales, in U.S. dollars, were up 10% for the quarter (21% year-to-date) due largely to continued high activity levels in Arriscraft's traditional commercial markets. A slight shift in sales mix towards higher value-added products during the quarter, combined with higher sales, contributed to a 14.2% improvement in gross profit margins which more than offset the third quarter's higher operating expenses. Adjusted EBITDA for the quarter rose to $3.4 million from $2.9 million in the third quarter last year and distributable cash increased to $2.3 million, or $0.262 per outstanding unit, from $2.1 million ($0.246 per outstanding unit).

The Fund's net income includes unrealized gains and losses from holding foreign currency forward contracts. Actual currency movements during a period relative to locked-in exchange rates pursuant to such contracts can have a significant positive or negative impact on reported income for a period. The net income reported for the third quarter of 2005 included unrealized foreign exchange gains of $1.7 million while the results for the current year's third quarter included only a nominal unrealized loss.

On a year-to-date basis, Arriscraft's consolidated sales have increased by 14.6% compared to the same period in 2005 for the reasons cited above. Gross profits have increased by 23.5% as a result of the current year's higher sales and improved gross profit margins. Adjusted EBITDA has increased by 18.2% to $7.9 million, or by 38.2% before the non-recurring adjustment in 2005's EBITDA noted above. Distributable cash has increased by 54.0% to $5.5 million from $3.6 million.

Dave Boles, President & CEO, commented, "We are pleased with the Fund's third quarter results. Sales were up on both sides of the border as demand for our products remained strong despite weakness in certain markets, such as Quebec. We believe that our geographic and product diversification are important elements in managing the cyclicality of the construction industry."

Distributions: In light of the current year's improved financial performance and all other relevant factors, the Trustees of the Fund reinstituted monthly cash distributions in August at a rate of $0.035 per unit. As a consequence of paying distributions for only a portion of the year, total cash distributions for the current year are expected to aggregate less than the Fund's anticipated taxable income for the year. It is therefore the intention of the Fund to make a special year-end 2006 distribution in addition to its regular monthly distributions. The amount of the special distribution, presently estimated at approximately $0.25 per unit, will be determined and announced in early December, 2006. While the Trustees of the Fund will continue to monitor the Fund's financial results in assessing its level of regular monthly distributions, no change is anticipated at this time to the current monthly distribution rate of $0.035.

Georgia Plant Expansion: The Fund also announced that the Board of Trustees today approved an expansion of Arriscraft's manufacturing facility located in Fort Valley, Georgia. The Georgia plant commenced operations in 2002 and currently employs approximately 100 people. It presently supplies product primarily for commercial applications. Management believes that its expansion will provide the necessary production capacity to best support its traditional commercial business while accelerating the growth of Arriscraft's residential products business in the U.S. This strategy was noted in Arriscraft's second quarter, 2006 press release and discussed in detail in Management's Discussion and Analysis for the second and third quarters of 2006.

The U.S. south-east residential market is the strongest real estate market in the country. Government statistics show that close to 50% of all housing starts in the U.S. occur in this market. It is also a very strong market for masonry products such as those produced and sold by Arriscraft. Although U.S. housing starts have declined from last year's levels, Arriscraft's small U.S. residential position within the extremely large residential market, particularly as it exists in the U.S. south-east, should mean that Arriscraft's ability to capture even a small portion of this market will have a meaningful impact on its future operating results.

Highlights of the expansion and its anticipated positive impact on Arriscraft's business are as follows:

- A 50,000 square foot expansion of the existing 55,000 square foot plant which will facilitate the addition of a second production line designated primarily for the manufacturing of residential building stone as well as Arriscraft's new "Thin Clad" and cast stone product lines. The projected completion date is the first quarter of 2008, although this timing could be extended by deferring certain aspects of the expansion if necessary.



- Anticipated benefits of this expansion include:

- increased product line diversification: The expanded capacity will
enable the Georgia plant to produce residential building stone, Thin
Clad Renaissance stone and cast stone in addition to its traditional
commercial stone products, thereby allowing Arriscraft to meet the
growing demand for these high margin products in the U.S. without
affecting its ability to continue producing goods for the U.S.
commercial markets in which Arriscraft has developed its reputation
over the years.

- increased geographic diversification: Increasing the Fund's
participation in the U.S. residential market will reduce its
reliance on other key markets such as the U.S. commercial markets
and the southern Ontario residential market.

- enhanced market proximity: Increased shipping costs have
significantly reduced the economic viability of servicing
the U.S. south-east market from Canada. Producing goods within this
target market will reduce shipping costs and increase profitability.

- enhanced manufacturing efficiencies: The addition of a second
production line is expected to facilitate economies of scale and
related production efficiencies within the Georgia plant, thereby
reducing unit manufacturing costs.

- reduced exposure to currency fluctuations: Increased U.S. sales of
products manufactured in the U.S. will provide a further natural
hedge to help offset the negative impact of the strong Canadian dollar.

- a high return on investment: Internal projections based on various
economic scenarios suggest a highly favourable return on investment
once the expansion is complete and the new production line is fully
operational. This is expected to enable Arriscraft to pursue its
future growth strategies while maintaining a strong balance sheet.


- Capital costs related to the expansion are presently estimated at $8.5 million Cdn. The Trustees of the Fund and management gave careful consideration to various means of financing the expansion, in particular, the different sources of capital potentially available to the Fund. In light of all relevant factors, including the high rate of return the expansion is expected to generate, the Trustees and management believe that financing the project primarily from the Fund's internal cash flow after all working capital and cash distribution needs have been met represents a prudent and responsible use of distributable cash. Consequently, as provided for in the constating documents and distribution policies of the Fund and those of its direct and indirect subsidiary entities, reserves have been taken from distributable cash during the third quarter by the Fund's U.S. and Canadian operating entities to provide for, among other things, a portion of the internal cash flow which will be allocated to the expansion. Further such reserves will be taken during 2007 and 2008, as necessary, to provide the financing necessary to complete this expansion. Further information can be obtained from the Fund's Management's Discussion and Analysis for the third quarter, 2006.

Mr. Boles commented, "We are eager to move ahead with the Georgia plant expansion. We believe that it will enhance the long-term growth prospects of the Fund and will open up new and exciting business opportunities for Arriscraft in a prosperous, high growth area of the U.S."

Proposed Legislation: On October 31, 2006, the Minister of Finance announced proposed changes to the income tax treatment of "flow-through entities", including income trusts. If the proposal is implemented in its current form, income trusts will be subject to tax at corporate rates on the taxable portion of their distributions. Further, unitholders will be treated as if they have received a dividend equal to the taxable portion of their distributions, and will be taxed accordingly. These proposed changes will generally apply beginning in the 2007 taxation year for trusts that begin to be publicly-traded after October 2006, but would only apply beginning with the 2011 taxation year to those trusts, such as Arriscraft, that were already publicly traded at the time of the announcement. At present, there can be no assurance the proposed changes will be implemented as proposed, or at all. Any change to the rules relating to the taxation of income trusts could have a material adverse effect on the Fund, its ability to pay distributions and the market value of its units.

Arriscraft International Income Fund

The Fund owns the Arriscraft International manufactured stone, brick and natural stone masonry products business conducted through Arriscraft International Limited Partnership, Arriscraft International LLC and certain affiliates in Canada and the United States. Arriscraft produces manufactured stone masonry products in Canada and the United States using its proprietary The Natural Edge ® manufacturing process. Arriscraft also produces brick and natural stone masonry products and distributes its masonry products across Canada and most of the United States.

This press release contains forward-looking statements. The statements that are not historical facts contained in this press release are forward-looking statements that involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Fund to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Examples of such statements include the anticipated costs of the Georgia expansion and the possible effects thereof. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this press release. Such forward-looking statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to: the ability of the Fund to implement its programs for growth and production enhancements; level of activity in the residential and non-residential construction markets and the economy generally; consumer interest in the Fund's products; competition; foreign exchange rates; and anticipated and unanticipated costs. While the Fund anticipates that subsequent events and developments may cause the Fund's views to change, the Fund specifically disclaims any obligation to update these forward-looking statements. These forward-looking statements should not be relied upon as representing Fund's views as of any date subsequent to the date of this press release. Although the Fund has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. The factors identified above are not intended to represent a complete list of the factors that could affect the Fund. Additional factors are noted in Management's Discussion and Analysis of the Fund for the quarter ended September 30, 2006 under "Risks and Uncertainties".

"Adjusted EBITDA" is determined by making adjustments to earnings before interest, taxes, depreciation and amortization ("EBITDA") for certain items that Management believes do not affect Arriscraft's cash flow. EBITDA and Adjusted EBITDA are not recognized measures under Canadian generally accepted accounting principles ("GAAP"); however, Management believes EBITDA and Adjusted EBITDA are useful supplemental measures to net earnings as they provide investors with an indication of cash available for distribution prior to debt service, capital expenditures and income taxes. "Distributable cash" is not a measure recognized under GAAP and does not have a standardized meaning prescribed by GAAP. Management believes distributable cash is a relevant measure of the ability of the Fund to earn and distribute cash returns to Unitholders. A reconciliation of cash provided by operating activities to distributable cash is set out in Management's Discussion and Analysis of the Fund for the quarter ended September 30, 2006.

The Fund's Consolidated Financial Statements for the quarter ended September 30, 2006 and Management's Discussion and Analysis are available on the Fund's web site at www.arriscraft.com and on SEDAR at www.sedar.com.

Contact Information

  • Arriscraft International Limited Partnership
    David Boles
    President and CEO
    (519) 653-3275
    Website: www.arriscraft.com