Coast Wholesale Appliances Income Fund
TSX : CWA.UN

Coast Wholesale Appliances Income Fund

November 08, 2010 16:05 ET

Coast Wholesale Appliances Income Fund Reports 2010 Third Quarter and Nine-Month Results

Fund Continues to Reduce Term Debt; Coast Reports Slowing of Retail Sales, Contract Business Remains Down from Prior Year

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Nov. 8, 2010) - Coast Wholesale Appliances Income Fund (TSX:CWA.UN) will host a conference call and webcast to discuss its third quarter and nine-month financial results on Tuesday, November 9, 2010 at 8:00 am Pacific Time (11:00 am Eastern). The call can be accessed by dialing: 1-888-340-9655 or 416-340-2219 (GTA).

A replay will be available through November 23, 2010 at: 1-800-408-3053 or 416-695-5800. Passcode: 1701632.  

The live and archived webcast, as well as an mp3 download, can be accessed at http://www.investorcalendar.com/IC/CEPage.asp?ID=162396 or on the Fund's website at www.coastincomefund.com.

Coast Wholesale Appliances Income Fund (the Fund) today reported financial results for the three and nine months ended September 30, 2010. The three-month period represents the third quarter of its 2010 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)                       
  2010   2009   2008   2010   2009   2008  
  Q3   Q3   Q3   YTD   YTD   YTD  
Sales 34,947   37,341   38,547   102,461   108,433   110,673  
Gross margin 8,575   8,813   9,686   25,421   25,364   27,566  
As a percentage of sales 24.5 % 23.6 % 25.1 % 24.8 % 23.4 % 24.9 %
Income before non-controlling interest 1,817   2,241   2,352   4,409   5,292   7,034  
Basic and diluted net income per unit 0.181   0.223   0.234   0.439   0.527   0.701  
                         
EBITDA before conversion costs 2,422   3,117   2,955   6,821   7,886   9,346  
EBITDA margin before conversion costs 6.9 % 8.3 % 7.7 % 6.7 % 7.3 % 8.4 %
EBITDA per unit before conversion costs 0.241   0.311   0.294   0.680   0.786   0.931  
                         
EBITDA 2,422   3,117   2,955   6,435   7,886   9,346  
EBITDA margin 6.9 % 8.3 % 7.7 % 6.3 % 7.3 % 8.4 %
EBITDA per unit 0.241   0.311   0.294   0.641   0.786   0.931  
                         
Maintenance capital expenditures 32   459   175   157   600   741  
Adjusted distributable cash 2,182   2,335   2,534   5,502   6,296   7,855  
Adjusted distributable cash per unit 0.217   0.233   0.253   0.548   0.627   0.783  
Distribution per unit 0.125   0.125   0.308   0.374   0.416   0.923  
Adjusted distribution ratio 57.4 % 53.6 % 121.8 % 68.3 % 66.3 % 117.9 %

Third Quarter Operating Results

During the third quarter, Coast generated sales revenue of $34.9 million, a 6.4% decrease from the $37.3 million reported in 2009. Retail sales started strong but softened later in the quarter, ultimately dipping slightly below the 2009 level. In the contract segment, Coast continued to see very strong sales to builders of single-family homes in the Alberta and Saskatchewan markets. However, its contract business in British Columbia continued to be negatively affected by a generally reduced flow of new projects, particularly in the multi-family sector. As a result, contract sales were down from the 2009 level. Consequently, its sales blend continued to favour retail business.

In British Columbia, the softening of Coast's contract business and moderation of its retail sales brought revenues down considerably from the third quarter of 2009. Sales in Alberta and Saskatchewan benefited from the increase in single-family home construction activity, rising well above the 2009 levels. Sales in Manitoba increased modestly from the 2009 level, and Coast's Greater Toronto Area (GTA) store continued to perform below expectations.

Coast's third quarter gross margin decreased slightly to $8.6 million from $8.8 million in 2009, but improved as a percentage of sales to 24.5% from 23.6% last year. The 0.9% improvement in gross margin percentage was mainly due to the shift in sales mix in favour of retail business, which typically generates a higher margin than contract sales to developers and builders.

The drop in gross margin dollars, together with increased selling, warehouse, facility, and general and administrative expenses (SG&A expenses), brought third quarter EBITDA down to $2.4 million from $3.1 million in 2009. The higher SG&A expenses were due mainly to rent increases at the end of Q2 2010, and increased sales and marketing expenditures at Coast's GTA store. EBITDA margin for the three months decreased to 6.9% from 8.3% last year. The lower gross margin and added SG&A expenses reduced third quarter net income before non-controlling interest to $1.8 million, or 5.2% of sales, from $2.2 million, or 6.0% of sales, in 2009.

During the third quarter, building on the sales success it experienced with the introduction of the Miele product line in 2009, Coast added the Bosch and Thermador brands at selected locations. It expects that the introduction of these products will generate incremental revenues in both the contract and retail segments of its business. As part of its ongoing strategy to enhance profitability by increasing sales from its existing stores, Coast also proceeded with a minor upgrade to its Calgary South location, which was completed subsequent to quarter-end in mid-October. 

In September 2010, the Fund repaid $2.0 million of its term loan, reducing total term debt to $18.0 million. The debt repayment required the Fund to use its operating line of credit during the quarter but will reduce interest expense going forward.

"Our third quarter results reflect the current generally uncertain business environment and the slowing of economic recovery in Canada. We are pleased with our continued progress in strengthening our balance sheet, but disappointed with our financial performance during the period," said Blain Lawson, President and CEO of Coast. "Our retail sales were negatively affected by significantly decreased consumer confidence, as well as generally more cautious spending following the introduction of HST in BC and Ontario. In the contract segment, while we have benefited from increased sales to single-family projects in some markets, there has been a slowdown in the resurgence of construction activity for larger multi-family projects that we began to see in Q2 of this year."

Nine-Month Operating Results

Revenue for the nine months ended September 30, 2010 was $102.5 million, down by 5.5% from $108.4 million in 2009. Gross margin remained consistent year-over-year at $25.4 million, but improved as a percentage of sales to 24.8% from 23.4% in 2009. As with the quarterly result, the improvement was driven by the shift in Coast's business mix in favour of retail sales.

Before expenses associated with the Fund's planned conversion to a corporation of $386,000, EBITDA for the nine months was $6.8 million. This was down by $1.1 million from the $7.9 million reported in 2009. EBITDA margin decreased to 6.7% from 7.3% in 2009. The reduction in nine-month EBITDA was due to increased SG&A expenses in the first nine months of 2010. EBITDA after conversion costs was $6.4 million, representing an EBITDA margin of 6.3%. Net income before non-controlling interest was $4.4 million, or 4.3% of sales, compared to $5.3 million, or 4.9% of sales, in the same period of 2009. The reduction in net income was mainly due to the Fund's higher SG&A expenses and the conversion costs, which were incurred in the first half of this year.

Cash Distributions

For each of the months of July, August and September 2010, the Fund declared and paid distributions in the amount of $0.0416 per unit, representing an annualized distribution rate of $0.50 per unit. A distribution in the same amount has been declared for the month of October 2010. Since its inception, the Fund has paid a total of 63 consecutive monthly cash distributions to its public unitholders, and equivalent cash distributions to the non-controlling interest held by CWAL.

During the third quarter, the Fund generated adjusted distributable cash (before non-controlling interest) of $2.2 million, or $0.22 per unit. This compares to $2.3 million, or $0.23 per unit, in 2009. The amount distributed and accrued for payment to unitholders and the non-controlling interest remained consistent in both quarters at $1.3 million, or $0.13 per unit.

In the first nine months of the year, adjusted distributable cash (before non-controlling interest) of $5.5 million, or $0.55 per unit, was down from $6.3 million, or $0.63 per unit, in 2009. With the February 2009 reduction in the per-unit monthly distribution amount, nine-month distributions decreased in 2010 to $3.8 million, or $0.37 per unit, from $4.2 million, or $0.42 per unit, in 2009.

The Fund's adjusted payout ratio for the third quarter increased to 57.4% from 53.6% in 2009, while its adjusted payout ratio for the nine months increased to 68.3% from 66.3% in 2009. On a cumulative basis, from its inception, the Fund's adjusted payout ratio is 90.6%.

Conversion to Corporation

As previously announced, the Fund's conversion to a publicly traded corporation is expected to be completed on or about January 1, 2011. Common shares of the new public entity, Coast Wholesale Appliances Inc. (Coast Inc.), will trade on the Toronto Stock Exchange under the symbol "CWA". The Fund expects to continue to pay unitholders a monthly cash distribution of $0.0416 per unit up to the November 2010 distribution, which will be payable on December 15, 2010. Beginning in 2011, it anticipates that the new entity will pay a monthly dividend approximately equal to 50% of net income, which management expects will initially translate to $0.035 ($0.42 per annum) per share of Coast Inc.

Outlook

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 continues to be cautious. On the retail side, consumers are increasingly careful about major purchases and the retail pricing environment is expected to remain extremely competitive, putting downward pressure on sales and margins. In the contract segment, while the number of building permits issued and new housing starts have improved year-over-year, construction activity has not increased as quickly as expected.

"Given that we expect economic growth in Canada to remain sluggish through the balance of 2010 and well into 2011, we do not anticipate a marked improvement in our sales revenues over the short-term," said Lawson. "However, we do expect that we will continue to benefit from our balanced business model, as well as the essential nature of the products we sell. We also remain confident in our ability to grow our business when market conditions improve and to continue to deliver solid returns for our investors."

Lawson added that Coast expects to begin to see a return from its added investment in sales and marketing in the GTA over the coming year. "We have been making inroads on acquiring new contracts with single-family and multi-family builders for future projects with delivery in 2011 and 2012," he said. "The experience, contacts and market knowledge of our recently expanded GTA contract sales team position us well to capitalize on additional new business opportunities with developers, builders and designers in Southern Ontario as they arise."

A more detailed discussion of the Fund's financial results can be found in its 2010 third quarter Management's Discussion and Analysis, which will be posted with the unaudited interim consolidated financial statements at the Fund's website (www.coastincomefund.com) and at SEDAR (www.sedar.com) on or before November 9, 2010.

Coast Profile

Coast is a leading independent supplier of major household appliances and accessories 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 sections titled Third Quarter Operating Results and Outlook.

These forward-looking 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; interest rates; reliance on suppliers and their ability to supply product for sale on a timely basis; changes in consumer preferences; changes in the mix of product sales; 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; lack of supplier agreements; reliance on key personnel; and foreign exchange rates as they relate to imported products.

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: slower economic growth through the final quarter of 2010 and during 2011 in both Western Canada and the Greater Toronto Area (our current market areas); continued fluctuations in exchange rates; low but increasing interest rates as we move through 2011; improved but still cautious credit markets for our major builder customers to obtain financing for their current and future building activities; a weakening in consumer confidence due to the slowing of economic recovery, which may be reflected in lower retail sales; a continued increase in new home construction activity, reflected in higher levels of new building permits issued and housing starts compared to last year; and the successful completion of the Fund's conversion from a trust structure to a corporation on or before January 1, 2011. 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 and adjusted distributable cash are non-GAAP financial measures that are defined in the 2010 third quarter Management's Discussion and Analysis to be posted on the Fund's website and SEDAR on or before November 9, 2010.

Contact Information