ST. LAWRENCE CEMENT GROUP INC.
TSX : ST.A

ST. LAWRENCE CEMENT GROUP INC.

August 01, 2006 08:00 ET

St. Lawrence Cement Group Second Quarter Results

MOUNT ROYAL, QUEBEC--(CCNMatthews - Aug. 1, 2006) - St. Lawrence Cement Group (TSX:ST.A) reported sales of $364.7 million for the second quarter ended June 30, 2006, compared to $360.4 million for the same period last year, an increase of 1.2%. The higher sales result from increased selling prices for construction materials which offset lower demand for the Company's products as well as a negative foreign exchange impact of approximately $8.7 million on the translation of U.S. sales into Canadian currency.

Sales volumes of cementitious products, aggregates and ready-mix concrete were lower in the second quarter of 2006 compared to the same period last year. This is explained mainly by the early start to the construction season in 2006 which resulted in exceptionally strong sales volumes in the first quarter of the year. Additionally, sales volumes in the second quarter were negatively impacted by unfavourable weather conditions and a general softening in demand.

ANALYSIS OF SECOND QUARTER

Gross profit for the second quarter increased to $91.0 million compared to $81.6 million for the same period in 2005. This increase is attributable to higher sales prices for construction materials and slightly lower operating costs.

Operating profit was $51.1 million compared to $40.6 million for the second quarter of 2005. Selling and administrative costs were stable at $25.5 million, reflecting mainly increased pension plan expenses and additional sales and marketing costs. The 2005 amount included $1.8 million of costs related to the implementation of a finance shared service centre with Holcim (US). Depreciation decreased by $0.9 million compared to the same period last year mainly as a result of the year-over-year appreciation of the Canadian dollar.

Financial expenses increased to $5.6 million compared to $4.6 million for the second quarter last year. This reflects higher interest rates compared to the same period last year.

The Company recorded a reduction of $8.0 million in future income tax expense during the quarter as a result of the impact of the 3% decrease in the Canadian federal income tax rate on future income tax liabilities. Excluding this adjustment, the effective tax rate for the second quarter was 39.3%.

Net earnings were $35.0 million ($0.83 basic earnings per share) compared to a net loss of $15.5 million ($0.37 basic loss per share) for the second quarter last year. Excluding the $8.0 million reduction in future income tax expense, basic earnings per share for the second quarter of 2006 was $0.64. The 2005 amount includes a write-down of $65.5 million (approximately $37.8 million after-tax) of capitalized development costs related to the Greenport project. Excluding the write-down related to the Greenport project, basic earnings per share for the second quarter of 2005 was $0.54.

YEAR-TO-DATE RESULTS

For the first six months of 2006, sales increased 8.4% to $542.8 million compared to $500.7 million for the same period last year. Excluding the negative translation impact resulting from the year-over-year appreciation of the Canadian dollar, sales increased by 10.9% . Most of the sales increase was recorded in the first quarter as a result of the exceptionally early start to the construction season.

Gross profit was $116.0 million compared to $85.9 million for the same period last year, an increase of 35.0%. This improvement is due to higher sales prices for construction materials in the period, increased sales volumes of cementitious products, and stable operating costs.

Operating profit was $39.0 million compared to $6.8 million for the first six months of 2006. Selling and administrative expenses were $49.3 million, or $0.9 million lower than for the first six months of 2005. The 2005 amount included $2.7 million of costs related to the implementation of the finance shared service centre. As a percentage of sales, selling and administrative expenses were 9.1% compared to 9.5% (excluding the finance shared service implementation costs) for the first six months of 2005, reflecting continued tight management of controllable expenses.

Depreciation amounted to $27.7 million compared to $28.9 million for the first six months of 2005. This decrease is mainly currency related.

The Company recorded a reduction of $8.0 million in future income tax expense during the second quarter as a result of the impact of the 3% decrease in the Canadian federal income tax rate on future income tax liabilities. Excluding this adjustment, the effective tax rate for the six-month period ended June 30, 2006 was 39.4%.

Net earnings increased to $25.7 million ($0.61 basic earnings per share) compared to a net loss of $39.1 million ($0.94 basic loss per share) for the first six months of 2005. Excluding the adjustment in future income tax expense in the second quarter, basic earnings per share for the six-month period ended June 30, 2006 was $0.42. Excluding the write-down related to the Greenport project, basic loss per share for the six-month period ended June 30, 2005 was $0.03.

RESULTS BY SEGMENT

With price increases in all product segments and higher demand for construction services, the Ontario division increased sales to $206.9 million for the second quarter compared to $194.7 million for the same period last year, an increase of 6.3%. Operating profit was $29.5 million compared to $28.0 million, an increase of 5.4%. For the first six months of 2006, sales reached $296.9 million, an increase of $22.1 million over the prior year while operating profit was $5.7 million higher.

Quebec and Atlantic division sales decreased by $7.6 million to $76.8 million for the second quarter as a result of lower construction services revenues compared to the same period last year. This shortfall was partially compensated by higher sales prices of construction materials. Operating profit increased to $15.3 million for the second quarter compared to $13.1 million for the same period last year reflecting the lower proportion of construction services revenues which typically generate lower margins than sales of construction materials. For the first six months of 2006, sales reached $109.4 million, a decrease of $0.4 million over the prior year while operating profit was $6.5 million higher.

The U.S. division posted an 11.0% sales increase in local currency for the second quarter; however, reported sales decreased by 0.4% to $81.0 million compared to $81.3 million due to an unfavourable foreign exchange impact of $8.4 million. This significant improvement, in local currency, reflected higher sales prices and strong demand for cementitious products. Operating profit was $6.3 million compared to an operating loss of $0.5 million for the second quarter of 2005, which included higher maintenance expenses related to an unplanned shutdown at the Catskill cement plant. For the first six months of 2006 sales amounted to $136.5 million compared to $116.1 million in the same 2005 period, an increase of 17.6%. Excluding the negative translation impact, sales increased by 28.0%. Operating profit amounted to $12.2 million compared to an operating loss of $7.8 million for the first six months of last year.

LIQUIDITY AND CAPITAL RESOURCES

Funds from operations for the first six months of 2006 increased by $22.4 million to $47.4 million compared to last year, in line with the higher net earnings (when excluding the non-cash $37.8 million after-tax write-down of capitalized development costs related to the Greenport project in 2005). Working capital increased by $139.2 million compared to an increase of $95.3 million for the same period last year. The $43.9 million increase is attributable to the higher net sales and inventories compared to the same period in 2005. Net cash used for operations was $91.8 million compared to $70.3 million for the same period last year. As a result of the seasonal nature of our business, working capital requirements are variable throughout the year. Therefore, year-over-year comparisons of statements of cash flows and balance sheet items such as accounts receivable, inventories and accounts payable and accrued liabilities are generally more meaningful than with the previous quarter or year-end.

The Company ended the second quarter in a comfortable financial position with a ratio of long-term debt on total capitalization of 28:72 compared to 29:71 at the end of the second quarter of 2005. Total long-term debt, including the current portion payable, as of June 30, 2006 amounted to $300.6 million compared to $293.8 million for the same 2005 period. The increase is mainly related to the increase in capital expenditures and working capital requirements. As at June 30, 2006 the Company held cash and cash equivalents of $1.4 million compared to $13.6 million at June 30, 2005.

DIVIDENDS

A dividend of $0.14 per share ($0.14 last year) was paid on May 1, 2006 to shareholders of record on April 15, 2006. In addition a dividend of $0.14 per share has been declared for payment on August 1, 2006 to shareholders of record on July 15, 2006.

OUTLOOK

Entering the second half of 2006, the Company faces some sluggishness in demand in our markets. However, based on a good backlog, firm selling prices and systematic cost control, we expect improved results compared to the corresponding period of 2005.

St. Lawrence Cement Group is a leading producer and supplier of products and services for the construction industry, namely cement, concrete, aggregates and construction. The company operates in Canada and on the eastern seaboard of the United States, and employs a total of 3, 200 people.



Consolidated Statements
of Earnings and Retained Earnings

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(millions of For the three month For the six month
Canadian dollars period ended period ended
except per share data) June 30, June 30, June 30, June 30,
2006 2005 2006 2005
--------------------------------------------------------------------
(unaudited)(unaudited)(unaudited)(unaudited)

Sales 364.7 360.4 542.8 500.7
Cost of sales 273.7 278.8 426.8 414.8
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Gross profit 91.0 81.6 116.0 85.9
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Expenses
Selling and administrative 25.5 25.7 49.3 50.2
Depreciation and
amortization of property,
plant and equipment and
other long-term assets 14.4 15.3 27.7 28.9
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39.9 41.0 77.0 79.1
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Operating profit 51.1 40.6 39.0 6.8

Other expenses 1.2 1.0 1.2 2.3
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Earnings before interest,
taxes and unusual items 49.9 39.6 37.8 4.5

Unusual expense (Note 2) - 65.5 - 65.5
Financial expenses 5.6 4.6 8.9 7.9
Gain on sale of assets (0.2) (0.4) (0.3) (0.9)
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Earnings (loss)
before income taxes 44.5 (30.1) 29.2 (68.0)

Provision for (recovery
of) income taxes
Current 17.2 15.9 11.8 (0.8)
Future (7.7) (30.5) (8.3) (28.1)
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9.5 (14.6) 3.5 (28.9)
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Net earnings (loss) 35.0 (15.5) 25.7 (39.1)

Retained earnings at
beginning of period 490.0 478.8 505.2 508.4

Dividends (6.0) (5.9) (11.9) (11.9)
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Retained earnings
at end of period 519.0 457.4 519.0 457.4
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Basic and diluted earnings
(loss) per share 0.83 (0.37) 0.61 (0.94)
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Weighted average number of
outstanding shares used in
computing basic earnings
(loss) per share (millions) 42.0 41.8 41.9 41.8
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Weighted average number of
outstanding shares used in
computing diluted earnings
(loss) per share (millions) 42.1 41.9 42.1 41.9
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The accompanying notes are an integral part of the interim
consolidated financial statements.



Consolidated Balance Sheets

--------------------------------------------------------------------
As at As at As at
(millions of June 30, December 31, June 30,
Canadian dollars) 2006 2005 2005
--------------------------------------------------------------------
(unaudited) (audited) (unaudited)

ASSETS

Current assets
Cash and cash equivalents 1.4 10.8 13.6
Accounts receivable 197.8 173.8 138.1
Inventories 153.5 148.4 133.7
Prepaid expenses and other 30.6 4.0 21.0
Income taxes recoverable 28.0 - 32.2
Future income taxes 7.5 7.5 12.2
---------------------------------------------------------------
418.8 344.5 350.8

Property, plant and equipment 743.7 733.1 736.3
Goodwill 75.2 75.2 75.3
Investments and other assets 27.0 30.7 41.5
Employee future benefits 4.8 6.3 5.0
---------------------------------------------------------------
1,269.5 1,189.8 1,208.9
---------------------------------------------------------------
---------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Accounts payable and
accrued liabilities 171.1 213.0 158.3
Dividends payable 6.0 5.9 5.9
Construction advances, net 4.5 12.9 7.9
Current portion
of long-term debt 40.7 0.2 0.8
---------------------------------------------------------------
222.3 232.0 172.9

Employee future benefits 4.1 4.2 3.2
Long-term provision (Note 3) 26.2 27.5 27.1
Long-term debt 259.9 168.0 293.0
Future income taxes 142.9 151.1 145.8

Shareholders' equity
Share capital 137.9 136.7 135.0
Cumulative translation
adjustment (44.2) (35.9) (26.2)
Retained earnings 519.0 505.2 457.4
Contributed surplus 1.4 1.0 0.7
---------------------------------------------------------------
614.1 607.0 566.9

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1,269.5 1,189.8 1,208.9
---------------------------------------------------------------
---------------------------------------------------------------

Disclosure of guarantees (Note 5)

The accompanying notes are an integral part of the interim
consolidated financial statements.



Consolidated Statements of Cash Flows

--------------------------------------------------------------------
For the three month For the six month
period ended period ended
(millions of June 30, June 30, June 30, June 30,
Canadian dollars) 2006 2005 2006 2005
--------------------------------------------------------------------
(unaudited) (unaudited)(unaudited)(unaudited)

OPERATIONS
Net earnings (loss) 35.0 (15.5) 25.7 (39.1)
Depreciation and
amortization 14.4 15.3 27.7 28.9
Future income taxes (7.7) (30.5) (8.3) (28.1)
Unusual expense (Note 2) - 65.5 - 65.5
Gain on sale of assets (0.2) (0.4) (0.3) (0.9)
Other 1.5 (1.2) 2.6 (1.3)
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Funds from operations 43.0 33.2 47.4 25.0

Net changes in working
capital balances (44.3) (9.6) (139.2) (95.3)
--------------------------------------------------------------------
Net cash (used)
provided by operations (1.3) 23.6 (91.8) (70.3)
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INVESTMENTS
Additions to property,
plant and equipment (29.5) (25.9) (46.2) (37.3)
Proceeds from
sale of assets 0.5 0.5 0.6 2.0
Decrease in long-
term receivables 0.4 0.7 0.7 1.2
Other 0.2 (2.9) 0.2 (1.7)
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Net cash used
for investments (28.4) (27.6) (44.7) (35.8)
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FINANCING
Share capital issued 0.3 0.2 0.6 0.5
Redemption of shares - - (0.4) -
Repayment of loans to
officers included
in share capital 0.3 0.2 1.0 0.6
Increase in
long-term debt 35.3 15.7 137.8 94.4
Dividends paid (6.0) (5.9) (11.9) (11.9)
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Net cash provided
by financing 29.9 10.2 127.1 83.6
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Net increase (decrease) in
cash and cash equivalents 0.2 6.2 (9.4) (22.5)
Cash and cash equivalents,
beginning of period 1.2 7.4 10.8 36.1
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Cash and cash equivalents,
end of period 1.4 13.6 1.4 13.6
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The accompanying notes are an integral part of the interim
consolidated financial statements.



Summary of Quarterly Net Earnings (Loss)
(unaudited)
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(millions of Canadian dollars) 2006 2005 2004
--------------------------------------------------------------------
First quarter (9.3) (23.6) (19.3)
Second quarter 35.0 (15.5) 27.5
Third quarter 42.5 39.2
Fourth quarter 17.2 19.7
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Net earnings to date 25.7 20.6 67.1
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Segmented Information
(unaudited)

For the three month period ended June 30
---------------------------------------------------------------------
Quebec & United
(millions of Ontario Atlantic States Total
Canadian dollars) 2006 2005 2006 2005 2006 2005 2006 2005
---------------------------------------------------------------------
Sales to external
customers 206.9 194.7 76.8 84.4 81.0 81.3 364.7 360.4
Inter-segment
sales 3.3 5.7 0.7 0.5 - - 4.0 6.2
Operating
profit (loss) 29.5 28.0 15.3 13.1 6.3 (0.5) 51.1 40.6


For the six month period ended June 30
---------------------------------------------------------------------
Quebec & United
(millions of Ontario Atlantic States Total
Canadian dollars) 2006 2005 2006 2005 2006 2005 2006 2005
---------------------------------------------------------------------
Sales to external
customers 296.9 274.8 109.4 109.8 136.5 116.1 542.8 500.7
Inter-segment
sales 5.8 8.9 1.1 0.7 - - 6.9 9.6
Operating
profit (loss) 17.2 11.5 9.6 3.1 12.2 (7.8) 39.0 6.8



Financial Summary
(unaudited)

---------------------------------------------------------------------
For the six month For the year ended
(millions of period ended June 30 December 31
Canadian dollars) 2006 2005 2005 2004 2003
---------------------------------------------------------------------
Sales 542.8 500.7 1,317.8 1,278.0 1,149.2

Net earnings (loss) 25.7 (39.1) 20.6 67.1 65.4

Funds from operations 47.4 25.0 128.4 136.8 120.2

Per share values
Basic earnings (loss) 0.61 (0.94) 0.49 1.61 1.58
Operating cash flow 1.13 0.60 3.07 3.29 2.91
Dividends 0.28 0.28 0.56 0.52 0.50

Total assets 1,269.5 1,208.9 1,189.8 1,213.3 1,143.1

Long-term debt 259.9 293.0 168.0 186.5 229.1

Future income taxes
liabilities 142.9 145.8 151.1 173.4 165.7

Shareholders' equity 614.1 566.9 607.0 610.5 590.1

Long-term debt on total
capitalization 28:72 29:71 18:82 20:80 23:77

Return on average
equity (%) 4.4 (6.7) 3.4 11.2 11.2



General Information
--------------------------------------------------
As at June 30, 2006
--------------------------------------------------
Stock listings
Toronto Stock Exchange

Trading symbol ST.A

Stock price (last 6 months)
Closing $34.50
High $36.00
Low $26.75

Book value $14.66

Outstanding shares
Class A (1 vote) 26,711,651
Class B (3 votes) 15,252,848
Special 519,569

Approximate "Float" (Class A) 15,526,046

Corporate Office
1945 Graham Boulevard
Mount Royal, Quebec H3R 1H1
Telephone : (514) 340-1881
Fax : (514) 342-8154


NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

As at June 30, 2006

(Tabular amounts are expressed in millions of Canadian dollars except per share data) (unaudited)

1. Basis of presentation

The interim consolidated financial statements included in this interim report are unaudited and reflect normal and recurring adjustments which are, in the opinion of the Company, considered necessary for fair presentation. These financial statements have been prepared in conformity with Canadian generally accepted accounting principles. The same accounting policies as described in the Company's latest annual report have been used. These consolidated financial statements, however, do not include all disclosures required under Canadian generally accepted accounting principles and accordingly should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest annual report. The Company's business is seasonal, with slow construction activity generally resulting in net losses during the first quarter of each year. As a result, earnings of any one interim period should not be considered as indicative of results for an entire year.

2. Unusual expense

For several years, the Company was engaged in the permitting process for a replacement cement plant in Greenport, New York. Altogether, 17 federal, state and local permits and approvals were needed before construction could begin. Among the required permits, the New York State Department of State (DOS) certification was key to qualify for other approvals. On April 19, 2005, the Company received a negative determination from the DOS, which ruled that the proposed plant was inconsistent with the state's Coastal Zone Policies.

Following careful review of the impacts of the DOS decision, the Company's Board of Directors decided not to appeal the DOS decision and to withdraw the project from the permitting process.

Consequently, the Company recorded, as an unusual expense, an amount of $65.5 million before income taxes (US$ 53.3 million) in the quarter ended June 30, 2005, reflecting the write-down of capitalized development costs related to this project. This unusual expense amounts to $37.8 million on an after-tax basis (US$ 30.7 million).

3. Long-term provision

The asset retirement obligation is included in the long-term provision balance in the consolidated balance sheet.

The analysis of the asset retirement obligation for the six months ended June 30, 2006 is as follows:



Balance as at December 31, 2005 $27.5
Accretion expense 0.6
Payment of obligation (1.9)
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Balance as at June 30, 2006 $26.2
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--------------------------------------------------

Included in depreciation and amortization of property, plant and
equipment and other long-term assets, is a charge of $0.4 million for
the amortization of the asset retirement cost.

The following assumptions were used to estimate the fair values of
the obligation as at June 30, 2006:

Total undiscounted amount of the estimated cash flows $ 169.6
Expected timing of payment of the cash flows 2006 to 2060
Risk-free interest rate 3 % to 5.23%


The estimate of the total liability for future asset retirement obligation is subject to change, based on amendments to laws and regulations and as new information concerning the Company's operations becomes available. Future changes, if any, to the estimated total liability as a result of amended requirements, laws, regulations and operating assumptions may be significant and would be recognized prospectively as a change in estimate, when applicable.

4. Stock-based compensation and other stock-based payments

The Company applies the fair value based method to all employee stock options granted on or after January 1, 2003. Under the fair value based method, the compensation cost is measured at fair value at the date of grant and is expensed over the award's vesting period.

Had compensation expense been determined based upon fair values at the date of grant for awards issued in 2002 under all plans, the Company's pro forma net earnings and earnings per share for the six month period ended June 30 would have been as follows:



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2006 2005

--------------------------------------------------------------
Reported net earnings (loss) $ 25.7 $ (39.1)
--------------------------------------------------------------
Adjustment using the
fair market value method:
Special shares purchase plan - (0.1)
--------------------------------------------------------------
Adjusted pro forma net earnings (loss) $ 25.7 $ (39.2)
--------------------------------------------------------------
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Basic and diluted earnings
(loss) per share $ 0.61 $ (0.94)
--------------------------------------------------------------
Adjustment using fair
market value method - -
--------------------------------------------------------------
Adjusted pro forma basic and
diluted earnings (loss) per share $ 0.61 $ (0.94)
--------------------------------------------------------------

The pro forma disclosure omits the effect of awards granted prior to
January 1, 2002.


5. Disclosure of guarantees

The Company has entered into various guarantee agreements that arose out of transactions related to goods purchased from suppliers and to borrowings of the Company's customers.

The following table provides the undiscounted maximum amount of potential future payments for each major group of guarantees:



Standby letters of credit $ 7.2
Guarantees on customer debts 1.1
------------------------------------------------------------
Total $ 8.3


6. Employee future benefits

The Company's total net benefit cost for the three and six month periods ended June 30, 2006 was $3.2 million and $6.4 million respectively ($1.8 million and $4.1 million for the three and six month periods ended June 30, 2005).

7. Comparative figures

Certain 2005 comparative figures have been reclassified to conform with the basis of presentation adopted in the current year.

Contact Information

  • Source :
    Nicole Jarry
    Director, Corporate Communications
    (514) 340-1555, ext. 206
    or
    Dean Bergmame
    Vice President and Chief Financial Officer
    (514) 340-1555 ext. 223