GRANBY INDUSTRIES INCOME FUND
TSX : GBY.UN

GRANBY INDUSTRIES INCOME FUND

November 10, 2006 07:35 ET

Granby Industries Income Fund Announces Third Quarter 2006 Results, Suspension of Distributions and Management Changes

GRANBY, QUEBEC--(CCNMatthews - Nov. 10, 2006) - Granby Industries Income Fund (TSX:GBY.UN) ("the Fund") announced today its results for the three and nine-month periods ended September 30, 2006 and determined that it will suspend its monthly distribution for a period of time in order to adjust the Fund's payout ratio to a more sustainable level.

Also announced today was the promotion of Mr. Pierre Fournier to the position of President & Chief Operating Officer effective December 4, 2006. Mr. Fournier recently joined Granby as Vice President and General Manager and brings 20 years of manufacturing and HVAC experience to the position. Prior to joining Granby, Mr. Fournier held a number of senior positions over a seven year career with MAAX Inc., a leading North American manufacturer of bathroom products and Outdoor spas. "I am confident that the leadership of the Granby business is in very capable hands," said Lucio Di Clemente.

With Mr. Fournier's promotion, Mr. Di Clemente will resign as President and Chief Executive Officer effective December 4, 2006. Mr. Di Clemente will continue to serve on the Board as a Trustee and Director. "Lucio was asked by his fellow Trustees to provide leadership at a difficult time for Granby Industries and we thank him for his significant contribution to the business," said Lorie Waisberg, Lead Trustee.

Overview

For the third quarter ended September 30, 2006 consolidated sales amounted to $16.0 million, a 15.3% decrease from $18.9 million for the same period a year ago. EBITDA was $2.6 million or 16.4% of sales versus $3.1 million or 16.6% for the quarter ended September 30, 2005. The decrease in EBITDA in the third quarter of 2006 is primarily due to lower volumes in both the storage tank and coated copper businesses, and the appreciation of the Canadian dollar. Distributable cash for the third quarter of 2006 was $2.2 million as compared to $2.5 million for the same quarter last year. Net earnings in the third quarter of 2006 were $0.9 million compared to net earnings of $1.6 million in the same quarter of 2005.

"While financial results in the third quarter and the first nine months of 2006 were disappointing, management does not believe they are representative of Granby's underlying value and long-term prospects. Despite external and market related factors that have negatively impacted performance so far in 2006, Granby remains a viable, cash producing business and we continue to perform well operationally," stated Mr. Di Clemente. "The introduction of the robotic welding cells, seamless welding equipment and commercial tank line enhancements have led to measurable productivity gains this year."

Storage tank sales were $12.8 million in the third quarter, down 14.2% from the same quarter last year, and $39.9 million year-to-date for a 7.1% decrease year over year. Sales in the United States decreased $2.0 million or 15.5% in the third quarter to $10.7 million compared to $12.7 million for the same quarter in 2005. The decrease resulted from lower unit volumes and the unfavourable impact of the stronger Canadian dollar, offset to some degree by higher selling prices. Canadian tank sales of $2.0 million in the third quarter of 2006 were 6% below sales of last year for the same period. In Canada, the rate of decrease year over year slowed considerably in the third quarter compared to approximately 33% experienced in the first six months of 2006. Management believes that the decline in sales reflects a soft storage tank market in North America and increased price competition from Canadian competitors offering 14 gauge storage tanks, which are lighter and less expensive than the 12 gauge steel storage tanks sold by the Fund.

Management believes that during 2005 and through the first nine months of 2006, the increased spending on energy as a percentage of disposable income and the more recent softening in the U.S for housing and other major consumer products has led to deferred replacement of aging home oil storage tanks. However, management also continues to believe that conversion from heating oil to alternative energy sources was not a factor in industry demand in its key U.S. markets

Sales at Kamco for the quarter ended September 30, 2006 totalled $3.2 million compared with $4.0 million for the same period in 2005, representing a $0.8 million or 19.7 % decrease. The decrease in sales was the result of lower unit volumes, offset partly by higher selling prices. The lower volumes were primarily due to lower market consumption, driven in part by the onset of the slowdown in the U.S. housing sector. Other contributing factors were competition gains in select markets and a shift to substitute products for Kamco's Aqua Shield tubing line ("AST"). AST is used primarily in potable water systems. The move to substitute products is occurring in Arkansas where the high cost of copper has resulted in contractors designing systems that use alternative products as a means of reducing their costs.

The decline in consolidated sales in the third quarter and first nine months of 2006 results in a reduction in EBITDA to $2.6 million in the third quarter of 2006 from $3.1 million last year, and to $5.2 million in the first nine months of 2006 from $6.1 million in 2005. The net earnings in the third quarter of 2006 were $0.9 million compared with net earnings of $1.6 million in the same quarter of 2005.

"Looking ahead, we will continue to build on Granby's strong brand and its market presence, robust distribution network, quality products, and our experienced management team to enhance our position in current markets, expand into new product lines and grow the business by leveraging our production capacity. In addition, management is reviewing all costs to determine where expenses can be reduced and efficiencies realized to match current levels of business," said Pierre Fournier. "We will examine all product and geographic markets to determine the greatest and most immediate opportunities to grow Granby's revenues."

Selected Financial and Operating Information

The following table sets forth selected financial information regarding the Fund's operating performance and should be read in conjunction with the unaudited interim financial statements of the Fund for the quarter ended September 30, 2006 and the related notes thereto.



(in Quarter Quarter Nine Months Nine Months
thousands Ended Ended Ended Ended
of dollars, September 30, September 30, September 30, September 30,
unaudited) 2006 2005 2006 2005
---------------------------------------------------------------------

Sales $15,996 $18,890 $38,682 $40,904
Cost of sales 11,953 14,030 28,903 29,749
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Gross margin 4,043 4,860 9,779 11,155
Selling, general
& administrative
expenses 1,440 1,438 4,410 4,157
(Gain) loss on
foreign exchange (94) 381 57 925
Loss (gain) on
interest rate
swaps 76 (90) 97 (50)
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EBITDA (1) 2,621 3,131 5,215 6,123
EBITDA margin (1) 16.4% 16.6% 13.5% 15.0%
Restructuring
costs 490 - 490 -
Amortization 841 756 2,444 2,007
Interest 368 322 987 749
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Earnings before
non-controlling
interest 922 2,053 1,294 3,367

Non-controlling
interest - (431) - (733)
---------------------------------------------------------------------
Net earnings $922 $1,622 $1,294 $2,634
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(1) EBITDA and EBITDA margin are not recognized measures under GAAP and do not have standardized meanings prescribed by GAAP. The Fund's method for calculating this information may differ from that used by other issuers and, accordingly, this information may not be comparable to measures used by other issuers. EBITDA shown in this press release represents earnings before non-controlling interest, amortization, interest expense and restructuring costs. EBITDA margin refers to the ratio of EBITDA for any period to sales for that period. See "Non-GAAP Measures".

Distributions and Distributable Cash(i)

The Fund generated $2.2 million in distributable cash during the third quarter of 2006 and paid distributions totalling $2.1 million. During the third quarter of 2005, the Fund generated $2.5 million in distributable cash and paid distributions to public unitholders totalling $2.1 million and Granby LP paid distributions of $0.5 million on its Class B LP Units. During the nine months ended September 30, 2006, the Fund generated $4.1 million in distributable cash with distributions totalling $6.2 million during the period. In the first nine months of 2005, the Fund generated $5.9 million in distributable cash with distributions totalling $5.9 million and Granby LP paying distributions of $1.1 million on its Class B LP Units. On December 20, 2005, Granby LP suspended the quarterly distribution on its Class B LP Units. The suspension remains in effect. On September 19, 2006, the Fund reduced its monthly distribution on its units from $0.09375 to $0.075 per unit beginning with the September 2006 distribution that was paid on October 13, 2006.

The financial results for the third quarter were weaker than anticipated by management. As a result, the Trustees believe it is prudent to suspend its monthly distribution for a period of time that is sufficient to adjust the Fund's payout ratio closer to a sustainable level. The Trustees intend to regularly review he Fund's distribution policy in order to assess whether or not to resume the payment of monthly cash distributions said Lucio Di Clemente. Given the seasonality of the business and the need to finance working capital during the traditionally slow period at the beginning of the year, the Fund does not currently expect that it will resume distributions in the near term.

The presentation below conforms to the requirements of the Canadian Securities Administrators ("CSA"). Cash flows from operating activities for the periods presented is the GAAP measure reported in the Fund's consolidated statements of cash flow. The table below reconciles cash provided by or used in operating activities to distributable cash:



(in Quarter Quarter Nine Months Nine Months
thousands Ended Ended Ended Ended
of dollars, September 30, September 30, September 30, September 30,
unaudited) 2006 2005 2006 2005
---------------------------------------------------------------------

Cash provided
by (used in)
operating
activities $420 $1,057 $(2,530) $(1,519)
Restructuring
costs (1) 490 - 490 -
Maintenance
capital
expenditures (2) (129) (45) (345) (163)
---------------------------------------------------------------------
781 1,012 (2,385) (1,682)
Net change in
non-cash operating
working capital
items (3) 1,451 1,523 6,460 7,549
---------------------------------------------------------------------
Distributable
Cash (4) $2,232 $2,535 $4,075 $5,867
---------------------------------------------------------------------

Cash distributed
to Fund
unitholders $2,074 $2,074 $6,222 $5,888
Cash distributed
to non
controlling
interest $- $518 $- $1,128
---------------------------------------------------------------------
$2,074 $2,592 $6,222 $7,016
---------------------------------------------------------------------

Distributable
Cash per Fund
unit $0.3026 $0.3437 $0.5525 $0.7955
Distributable
Cash per unit
diluted (5) $0.2421 $0.2750 $0.4420 $0.6364
Cash distributed
per Fund unit $0.2812 $0.2812 $0.8436 $0.7983
Cash distributed
to
non-controlling
interest per
unit $- $0.2809 $- $0.6117

Units
outstanding
- Fund 7,375,644 7,375,644 7,375,644 7,375,644
- Granby LP
Class B 1,843,911 1,843,911 1,843,911 1,843,911
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(1) The Fund excludes restructuring costs as such costs do not impact
sustainable distributable cash.

(2) Maintenance capital expenditures refer to capital expenditures
necessary to sustain current sales levels. The Fund believes
funding for maintenance capital expenditures must be deducted
from cash flows from operating activities.

(3) Distributable cash is adjusted to exclude non-cash working
capital as the Fund's working capital requirements are not
permanent and are primarily due to the seasonality of the
business.

(4) See discussion on Non-GAAP Measures.

(5) Based on actual number of units outstanding for the period on a
fully-diluted basis.


The Fund retroactively applied the recommendations of the Canadian Securities Administrators staff notice 52-306 -Non-GAAP Financial Measures issued on August 4, 2004. According to this notice, staff is of the view that distributable cash should be calculated from cash flows from operating activities as presented in the issuer's financial statements rather than from EBITDA. The impact of this change on the Fund's distributable cash was to decrease it by $0.3 million for the third quarter of 2005, and increase it by $0.6 million for the nine months ended September 30, 2005. In prior periods, the Fund did not include non-cash unrealized gains and losses on interest rate swaps and the settlement of financial instruments in the calculation of distributable cash.

Non-controlling Interest - Subordination

The Class B LP units of Granby LP are held indirectly by Torquest Partners and represent a 20% indirect interest in the Fund. In connection with the Fund's acquisition of Granby LP, the former shareholders of the Business retained a 20% economic interest in Granby LP through 1,843,911 Class B LP units of Granby LP. The Class B LP units may be exchanged for units of the Fund on a one-for-one basis on and following (and the subordination provisions only apply until) the first date (the "Subordination End Date") following December 31, 2006 on which both of the following conditions are satisfied: (i) the Fund has earned EBITDA for the immediately preceding fiscal year of at least $11.7 million; and (ii) average monthly cash distributions of at least $0.09375 per unit have been paid by the Fund on the units, and average quarterly cash distributions of at least $0.28125 per Class B LP unit have been paid by Granby LP on the Class B LP units, in each case for the 12 month period ending on the last day of the month immediately preceding such date. The Class B LP units may be exchanged for units prior to the Subordination End Date in other specified circumstances. If the Subordination End Date does not occur by December 31, 2008, then the holders of the Class B LP units will have the option after such date and before the Subordination End Date to exchange their Class B LP units for units at a lower exchange ratio.

In addition, for the purposes of these subordination provisions, distributions on Granby LP's Class B LP units are cumulative, such that the amount of any deficiency will accumulate for a period of 12 months. Payments of deficiencies will be made based on the date the deficiency arose, with the earliest deficiencies being paid first. Any accumulated deficiency not satisfied by a distribution by Granby LP within 12 months of the date it arose will cease to be payable. As at September 30, 2006, the total deficiency on the Class B LP units was $2.1 million representing the undeclared and unpaid distributions on these units for the fourth quarter of 2005 and the first three quarters of 2006. This amount has not been recognized as a liability on the balance sheet.

Granby LP intends to resume distributions on the Class B LP Units in accordance with their terms if distributable cash increases in an amount sufficient to support distributions on both the Class A LP Units and the Class B LP Units. Payments of deficiencies will be made based on the date the deficiency arose, with the earliest deficiencies being paid first. Any accumulated deficiency (whether on Granby LP's Class A LP Units or the Class B LP Units not satisfied by a distribution by Granby LP within 12 months of the date it arose will cease to be payable. Granby LP does not at this time know when it will be able to reinstate distributions on the Class B LP Units.

About Granby Industries Income Fund

Granby Industries is a leading North American manufacturer of high quality tanks for the residential and light commercial storage of heating oil and other petroleum-based products and is also a leading manufacturer of coated copper tubing. Granby has been operating in the heating oil storage tank industry for more than 50 years and its primary business is manufacturing replacement residential tanks. Granby Industries has operations in Granby, Quebec and Oakville, Ontario.

(i) Non-GAAP Measures

Distributable cash and maintenance capital expenditures are not measures recognized by GAAP, do not have standardized meanings prescribed by GAAP and therefore, may not be comparable to similar measures presented by other issuers. The Fund believes that distributable cash as a cash flow measure is a useful supplemental measure as it helps the readers to evaluate the ability of the Fund to generate cash that could be used for distributions and provides an indication of the amount of cash available for distribution to the Fund's Unitholders. Investors are cautioned, however, that distributable cash is not meant to be an alternative to using cash flows from operating, investing and financing activities as a measure of the Fund's liquidity and cash flows.

References in this press release to the term "EBITDA" are to earnings before non-controlling interest, amortization, interest expense and restructuring costs and to "EBITDA margin" are to the ratio of EBITDA for any period to sales for that period. EBITDA is not a recognized measure under GAAP in Canada and may not be comparable to similar measures used by other companies. The Fund believes that EBITDA is a useful supplementary measure of operating performance as it provides investors with an indication of cash available for distributions prior to debt service and maintenance capital expenditures. Investors are cautioned, however, that EBITDA should not replace net earnings or loss as an indicator of the Fund's performance, or cash flows from operating, investing and financing activities as a measure of the Fund's liquidity and cash flows. It is not intended to be representative of cash flow from operating activities or results from operations determined in accordance with GAAP or cash available for distribution.

Conference Call and Webcast

Management will host a conference call at 10 a.m. ET on Friday, November 10, 2006 to discuss the results. The call can be accessed by dialling 1-866-250-4665. A replay of the session will be available until midnight on Friday August 18, 2006. It can be accessed by dialing 1-877-289-8525 or 416-640-1917 and entering the passcode 21207369#. The webcast can be accessed at the Fund's web site at www.granbyincomefund.com.

Forward-Looking Statements

Certain statements in this press release of Financial Results are "forward-looking statements", which reflect management's expectations regarding the Fund's future growth, results of operations, performance, business prospects and opportunities. Such forward-looking statements reflect management's current beliefs and are based on information currently available to management. Many factors could cause results to differ materially from the results discussed in the forward-looking statements, including risks related to dependence on key suppliers, economic conditions, competition, regulatory change, foreign exchange rates and interest rates, among others. Although the forward-looking statements are based on what management believes to be reasonable assumptions, the Fund cannot assure investors that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this report and accordingly, the Fund assumes no obligation to update or revise them to reflect new events or circumstances.

Contact Information

  • Granby Industries Income Fund
    Mr. Paul Antoniadis CA
    Vice President, Finance & CFO
    450-378-2334 ext. 225