Coast Wholesale Appliances Income Fund

Coast Wholesale Appliances Income Fund

March 22, 2010 16:05 ET

Coast Wholesale Appliances Income Fund Reports 2009 Fourth Quarter and Year-End Results

Annual revenue close to 2008 level despite much more challenging business environment, Fund strengthens balance sheet

VANCOUVER, BRITISH COLUMBIA--(Marketwire - March 22, 2010) -

Coast Wholesale Appliances Income Fund (TSX:CWA.UN) will host a conference call and webcast to discuss its 2009 fourth quarter and annual financial results on Tuesday, March 23, 2010 at 8:00 am Pacific Time (11:00 am Eastern). The call can be accessed by dialing: 1-800-769-8320 or 416-695-6616 (GTA).

A replay will be available through April 6, 2010 at: 1-800-408-3053 or 416-695-5800. Passcode: 6713815.

The live and archived webcast, as well as an mp3 download, can be accessed at or on the Fund's website at

Coast Wholesale Appliances Income Fund (the Fund) today reported financial results for the three and 12 months ended December 31, 2009. The three-month period represents the fourth quarter of the Fund's 2009 fiscal year.

The Fund holds a 65% indirect interest in Coast Wholesale Appliances LP (Coast), a leading independent supplier of major household appliances, and its results are entirely dependent upon Coast's operating results. The remaining 35% interest is held by the former owner of the business, CWAL Investments Ltd. (CWAL).

Performance Highlights
(in thousands of dollars except percentages and per-unit amounts)

  2009 2008 2007 2009 2008 2007
  Q4 Q4 Q4 Fiscal year Fiscal year Fiscal year
Sales 35,617 36,077 37,306 144,050 146,750 143,035
Gross margin 8,768 9,200 9,317 34,132 36,766 35,772
As a percentage of sales 24.6% 25.5% 25.0% 23.7% 25.1% 25.0%
Income before non-controlling interest 1,670 1,959 2,227 6,962 8,993 10,827
Basic and diluted net income per unit 0.166 0.195 0.222 0.694 0.896 1.079
EBITDA 2,587 3,356 3,175 10,472 12,702 14,059
EBITDA margin 7.3% 9.3% 8.5% 7.3% 8.7% 9.8%
EBITDA per unit 0.258 0.334 0.316 1.044 1.266 1.401
Maintenance capital expenditures 123 171 495 725 912 679
Adjusted distributable cash 2,172 2,876 2,434 8,468 10,731 12,428
Adjusted distributable cash per unit 0.216 0.287 0.243 0.844 1.070 1.239
Distribution per unit 0.166 0.250 0.308 0.582 1.173 1.208
Adjusted distribution ratio 76.9% 87.2% 126.8% 69.0% 109.6% 97.5%

Fourth Quarter Operating Results
During the fourth quarter, Coast recorded sales revenue of $35.6 million, down by $0.5 million, or 1.3%, from the $36.1 million reported in 2008. Retail sales continued to improve, reflecting growing consumer confidence in the Canadian economy. However, Coast's fourth quarter contract business with developers and builders slowed after five consecutive quarters of growth, due to reduced new home construction activity. As a result, Coast's sales blend favoured retail sales.

In British Columbia, the softening of Coast's contract business was partially offset by the stronger retail sales, but overall revenues declined year-over-year. Business in Alberta remained generally down, particularly in the contract segment. As in the third quarter, sales in Saskatchewan were up year-over-year, while revenues in Manitoba remained in line with the 2008 level. In the Greater Toronto Area (GTA), Coast's new store continued to perform below expectations, due to the challenging economic conditions in Southern Ontario.

Coast's fourth quarter cost of sales was $26.8 million, or 75.4% of sales. This resulted in a gross margin of $8.8 million, or 24.6% of sales. The gross margin percentage, while improved from the first three quarters of 2009, was down by 0.9% from the fourth quarter of 2008, when cost of sales of $26.9 million, or 74.5% of sales, resulted in a gross margin of $9.2 million, or 25.5% of sales. The year-over-year reduction was mainly due a generally more competitive retail pricing environment.

EBITDA for the fourth quarter was $2.6 million, down by $0.8 million from the $3.4 million recorded in 2008, resulting in an EBITDA margin of 7.3%, compared to 9.3% in 2008. The reduction was largely due to the slight decrease in revenue and lower gross margin, and the impact of the expenses added by Coast's GTA store. Fourth quarter 2009 net income before non-controlling interest of $1.7 million, or 4.7% of sales, compared to the $2.0 million, or 5.4% of sales, reported in the same period of 2008.

"In the final three months of 2009, we were pleased to see our quarterly retail sales surpass the 2008 level for the first time this year, bringing our annual retail sales slightly ahead of the total recorded in 2008," said Blain Lawson, President and CEO of Coast. "In the contract segment of our business, our builder and developer customers continued to face tight credit markets for financing of new projects. The number of housing starts and building permits issued increased during the fourth quarter, but remained significantly below the levels we saw in 2007 and early 2008."

During the quarter, as part of its successful, ongoing strategy to drive up comparable store sales, Coast officially opened its new Edmonton North store, which it had relocated in September 2009 to smaller premises in a higher-traffic area. To support its growth in the Edmonton market, where Coast operates two outlets, it also added a small warehouse near the new store location earlier in the year.

12-Month Operating Results
Revenue for the 12 months ended December 31, 2009 was $144.1 million, down by $2.7 million, or 1.8%, from $146.8 million in 2008. On a regional basis, annual sales were consistent with the fourth quarter results.

Annual cost of sales was $109.9 million, or 76.3% of sales, resulting in a gross margin of $34.1 million, or 23.7% of sales. This compares with cost of sales of $110.0 million, or 74.9% of sales, and a gross margin of $36.8 million, or 25.1% of sales, in 2008. The decline in annual gross margin was largely due to Coast's proportionately higher contract sales during the first three quarters of 2009 and the more competitive retail pricing environment.

Full-year EBITDA was $10.5 million, down by $2.2 million from $12.7 million in 2008, bringing Coast's EBITDA margin down to 7.3% from 8.7% in 2008. As with the quarterly result, the decrease in EBITDA was largely due to the lower sales and gross margin in 2009, and the added costs associated with Coast's new GTA store. Net income before non-controlling interest was $7.0 million, or 4.8% of sales, compared to $9.0 million, or 6.1% of sales, in 2008. The reduction in net income was mainly due to the reduced gross margin.

At December 31, 2009, the Fund's cash position was significantly improved over the 2008 year-end, with no drawings on its operating line and a cash balance of $2.4 million. This compares favourably to an operating line of $3.5 million and cheques issued in excess of funds on deposit of $1.6 million at December 31, 2008. During 2009, the Fund also paid down $3.3 million of the $5.3 million it borrowed in January 2009 to finance Coast's acquisition of Morley's Appliance Centre, a leading independent appliance dealer in the GTA.

"Given the difficult economic conditions that challenged our industry as a whole in 2009, we are pleased with our performance and the progress we made during the year," said Lawson. "In addition to maintaining our revenues at close to the 2008 level and improving our gross margin from the beginning of the year, we significantly strengthened our balance sheet. We also achieved our long-term strategic objective of entering Canada's most populous region and created new sales opportunities without adding substantially to our fixed costs."

Lawson added that the sales success that Coast experienced with the introduction of the Miele product line at the beginning of 2009 continued through the fourth quarter. Miele appliances are sold under an agency agreement on a consignment basis, so there was no cost to add the new line to Coast's inventory. On a more modest vein, the Fund is also continuing to generate incremental contract sales revenue from the Maritime region under an agreement it signed in the second quarter of 2009 with a Nova Scotia-based sales agent. Sales to customers in the Maritimes are administered under existing corporate systems, with deliveries flowing through a local third-party warehouse.

Cash Distributions
In January 2009, the Fund declared and paid distributions in the amount of $0.0833 per unit, representing an annualized distribution rate of $1.00 per unit. In light of the worldwide economic uncertainty and significant deterioration of the Canadian economy last winter, the Trustees reduced the per-unit monthly amount to $0.0416, or $0.50 per annum beginning with the February 2009 distribution. Monthly distributions in the reduced amount continued for the balance of the year. In December 2009, the Fund also declared a special distribution of $0.0416 per unit, based on Coast's stronger than anticipated performance in the second half of 2009. Subsequent to year-end, the Fund paid regular distributions in this amount for the months of January and February. Since its inception, the Fund has paid a total of 56 consecutive monthly cash distributions to its public unitholders, and equivalent cash distributions to the non-controlling interest held by CWAL.

During the fourth quarter, the Fund generated adjusted distributable cash (before non-controlling interest) of $2.2 million, or $0.22 per unit. This compares to $2.9 million, or $0.29 per unit, in 2008. The amount distributed and accrued for payment to unitholders and the non-controlling interest in the fourth quarter decreased to $1.7 million, or $0.17 per unit, in 2009 from $2.5 million, or $0.25 per unit, in 2008.

For the full 2009 fiscal year, the Fund's adjusted distributable cash (before non-controlling interest) totaled $8.5 million, or $0.84 per unit. This compares to $10.7 million, or $1.07 per unit, in 2008. With the reduction in the per-unit monthly distribution, annual distributions to unitholders and the non-controlling interest decreased to $5.8 million, or $0.58 per unit, in 2009 from $11.8 million, or $1.17 per unit, in 2008.

The Fund's adjusted payout ratio for 2009 decreased to 69.0% from 109.6% in 2008. The lower payout ratio in 2009 was due mainly to the February 2009 reduction in the Fund's distribution level. On a cumulative basis, from its inception, the Fund's adjusted payout ratio is 92.9%.

The following discussion is qualified in its entirety by the forward-looking statements report at the end of this news release.

The outlook for Coast's business remains very cautious. In the contract segment, based on the low level of building permits issued in late 2008 and the first six months of 2009, Coast anticipates that its business will remain slow through the first half of 2010. Typically, once a permit has been issued, sales are realized within six to eight months for single-family properties and after approximately 18 months for multi-family developments. On the retail side, although sales improved throughout 2009, consumers remain cautious about major purchases and the retail pricing environment is expected to remain competitive, putting downward pressure on margins. In addition, Coast expects that its first quarter 2010 results will be negatively affected by the 2010 Winter Olympics and Paralympics in Vancouver and Whistler, BC.

"We are encouraged by the modest rebound in building permits that began in the fourth quarter of 2009 and continued into early 2010, as well as the increase in Canadian housing starts since the beginning of the year," said Lawson.

"Over the longer term, we remain confident of our ability to grow our business when market conditions improve by capitalizing on our balanced business model and our recently established foothold in the GTA," he continued. "To support our growth in the GTA, we have expanded our contract sales team with industry veterans, and will be focusing on developing new business with developers, builders and designers."

Lawson noted that Coast will experience higher than normal inventory levels through the end of the first quarter, due in part to additional purchases at the end of 2009 to attain rebates and lock in pricing from certain suppliers. Inventories will also continue to be impacted by the full product line changeover commenced by its largest supplier in the third quarter of 2009. In addition to introducing technological advances and streamlined designs, the updated products respond to growing consumer demand for increased energy efficiency in major home appliances. In the coming months, Coast expects that its retail business will continue to benefit from provincial government rebate programs that offer consumers incentives to move to energy-saving appliances.

The Fund's Board of Trustees continues to evaluate the Fund's options in response to the taxation of distributions at the trust level set to begin in 2011. It expects to reach a decision on the most advantageous course of action, and the timing of that action, over the new few months. "As ever, we are focused on best meeting the needs of our unitholders while supporting the growth and profitability of our business," said Lawson.
A more detailed discussion of the Fund's financial results can be found in its 2009 year-end Management's Discussion and Analysis, which will be posted with the consolidated financial statements at the Fund's website ( and at SEDAR ( on or before March 23, 2010.

Coast Profile
Coast is a leading independent supplier of major household appliances to developers and builders of multi-family and single-family housing, and to retail customers. Founded in 1978, Coast currently operates 15 stores across the four western provinces and one store in the Greater Toronto Area of Ontario, as well as a network of warehouse distribution centres strategically situated to serve these locations.

Forward-looking Statements
This news release includes forward-looking statements. These involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements are identified by the use of terms and phrases such as "anticipate", "believe", "estimate", "expect", "may", "plan", "will", and similar terms and phrases, including references to assumptions. Such statements may involve, but are not limited to, comments with respect to the sustainability of the Fund's distributions and the level of its payout ratio in the future. Forward looking statements are included in, but not limited to, the section titled Outlook.

These statements reflect current expectations of the Fund's management regarding future events and operating performance as of the date of this news release. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to: sensitivity to general economic conditions; maintenance of profitability and management of growth; competition; fluctuations in fuel and commodity pricing, which may impact freight and other costs; usage of extended warranty programs and the costs to deliver these services; changes to planning and supply chain processes; changes in consumer preferences; changes in the mix of product sales; reliance on suppliers; lack of supplier agreements; reliance on key personnel; foreign exchange rates as they relate to imported products; and interest rates.

Although the forward-looking statements contained in this news release are based upon what management believes to be reasonable assumptions, the Fund cannot assure investors that actual results will be consistent with these forward-looking statements. The forward-looking statements reflect management's current beliefs and are based on information currently available to the Fund. They speak only as of the date of this news release and reflect current assumptions regarding future events and operating performance. These assumptions include, without limitation: slow economic growth in 2010 in both Western Canada and the Greater Toronto Area (Coast's current market areas); continued access to its current, or equivalent, credit facilities; volatility in exchange rates; low and stable interest rates; difficult credit markets for its major builder customers to obtain financing for their current and future building activities; no significant improvement in consumer confidence in light of the slow resumption of economic growth, as reflected in a continued reluctance on the part of consumers to purchase major household appliances; and a continued reduced level of new building permits compared to the last few years. These forward-looking statements are made only as of the date of this news release and the Fund assumes no obligation to update or revise them to reflect new events or circumstances, other than as required by law.

Non-GAAP Financial Measures
EBITDA, EBITDA margin, maintenance capital and adjusted distributable cash are non-GAAP financial measures that are defined in the 2009 year-end Management's Discussion and Analysis posted on the Fund's website and SEDAR.

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