Tree Island Wire Income Fund
TSX : TIL.UN

Tree Island Wire Income Fund

May 08, 2008 21:25 ET

Tree Island Announces First Quarter 2008 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwire - May 8, 2008) - Tree Island Wire Income Fund (TSX:TIL.UN) will hold a conference call and webcast to discuss first quarter 2008 financial results on Friday, May 9, 2008 at 8:30 a.m. Pacific Time (11:30 a.m. Eastern). The call can be accessed by dialing: 1-800-446-4472 or 416-695-6320. A replay will be available through May 23, 2008 at: 1-800-408-3053 or 416-695-5800, Passcode: 3260235.

The live and archived webcast can be accessed at www.investorcalendar.com/IC/CEPage.asp?ID=129080.

Tree Island Wire Income Fund (the "Fund") today released results for the first quarter of 2008. The Fund's results are based on the performance of Tree Island Industries Ltd. ("Tree Island" or "the company") - one of North America's largest producers of wire and fabricated wire products.

"A dramatic increase in raw material costs, continued deterioration in the US residential construction market and a stronger Canadian dollar were the dominant market factors in the first quarter of 2008," said Daniel McAtee, President and CEO of Tree Island Industries and a Trustee of the Fund. "Carbon rod costs, which represent close to half of our cost of goods sold, increased significantly, reflecting significant price increases and higher transportation costs. Western US housing starts were down 34.4% and the Canadian dollar climbed 16.7% higher year-over-year. Without question, we faced some of the most challenging market conditions ever experienced in the wire industry."

"Although a tough environment, our strategic initiatives helped us achieve a 29.1% increase in sales volumes compared to the first quarter of 2007," added Mr. McAtee. "We attracted new customers in the commercial construction, agriculture, industrial/OEM and specialty alloy sectors, and importantly, we continued to build our international and import sales through our international trading company. Our sales volumes to the residential light construction market were also up despite the lower housing starts, reflecting the positive impact of new products, regional expansion and customers gained through the acquisition of Baoan International and Universal Metal New Material Company."

"In terms of our relative exposure to specific sectors, we improved our balance with commercial construction, specialty alloys and our international trading company sales representing a larger percentage of our sales volumes compared to Q1 2007. Manufactured products to the residential light construction market, meanwhile, represented a smaller percentage of total sales volumes compared to Q1 2007. This is consistent with our intention to focus more of our growth on non-residential markets," said Mr. McAtee.

"Despite these market gains, our profitability was lower year-over-year mainly due to raw material inflation and the $1.3 million in costs related to the special meeting of unitholders held on March 4, 2008. Announced pricing for purchases of carbon rod has more than doubled since December 2007. The initial impact of this rod inflation was evident in our first quarter rod costs, leading to higher cost of goods sold. We expect to see an even greater impact in the second quarter and through the balance of the year. In an attempt to keep pace with these cost increases, we announced seven product price increases in Canada and eight in the US to take effect on a staggered basis through the first and second quarters. By the end of the first quarter, we had begun to recapture some of the margin lost to higher raw material costs, but had not fully closed the gap. Acceptance of the price increases is improving as customers recognize that higher steel costs and supply constraints will continue, and we expect to make more progress through the second quarter," said Mr. McAtee.

"Although not as good as a year ago, our first quarter gross profit and EBITDA were better than in the fourth quarter with results strengthening as the quarter progressed. This trend is continuing into the second quarter with indications of stronger results as our pricing actions continue to take effect. Our first quarter operating efficiency also increased as we began to benefit from savings created by last year's consolidation of our North American operations."

"While these trends are encouraging, we have significantly more work to do on profit improvement," added Mr. McAtee. "In addition, we are facing an increased need for working capital as raw material costs increase and our sales volumes grow. We are responding with a strict focus on cash and working capital management, which helped us end the quarter with a reduction in our short-term debt."

"Overall, we expect that market conditions will remain challenging through the balance of 2008, but we are confident that we will continue to gain ground as our strategic initiatives and pricing actions provide increased support to our bottom-line results," said Mr. McAtee.

"The Board of Trustees has reviewed our level of distributions in light of current results. Given the improving trend in our business, the positive impact pricing actions are having on profitability and the expected positive impact of other strategic initiatives, the Board has made the decision to maintain cash distributions at the current level. It will continue to closely monitor the Fund's distribution level against market conditions and operating performance," said Mr. McAtee.



Results from Operations

Three Months Ended March 31
2008 2007
--------------------------------------------------------------------------

Sales Volumes - Tons 67,308 52,142
Revenue 76,421 64,894
Cost of Goods Sold (69,397) (55,179)
Depreciation (2,630) (4,088)
-----------------
Gross Profit 4,394 5,627
Gross Profit per Ton 65 108
Selling, General and Administrative Expenses (5,686) (4,298)
-----------------
Operating (Loss) Profit (1,292) 1,329
Foreign Exchange Gain 1,078 2,044
Financing Expenses (1,168) (1,211)
Gain on Disposal of Property plant and equipment 4 -
Amortization of Deferred Gain 116 136
Amortization of Intangible Assets (281) -
Recovery of Income Taxes 2,077 1,099

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Net Income 534 3,397
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Operating (Loss) Profit (1,292) 1,329
Addback Depreciation 2,630 4,088
-----------------
EBITDA(1) 1,338 5,417
Foreign Exchange Gain 1,078 2,044
-----------------
EBITDA Plus Foreign Exchange Gains 2,416 7,461
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Costs relating to the special meeting 1,284 -
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Normalized EBITDA Plus Foreign Exchange 3,700 7,461
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Distributable Cash per Unit 0.0905 0.3006
Distributable Cash Paid or Payable per Unit 0.25 0.3333
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Distribution Payout %(2) 276% 111%
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Normalized Distributable Cash per Unit 0.1490 0.3006
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Normalized Payout %(2) 168% 111%
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Total Assets 250,963 241,611
Revolving Credit (Net of Cash) 39,927 43,435
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Long Term Debt 60 160
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(1) For the three months ended March 31, 2008 costs included $1.3 million
for the special meeting.
(2) Distribution Payout % is calculated as distributions paid or payable
per unit divided by Distributable Cash generated per unit. Normalized
Distribution Payout % excludes the $1.3 million in special meeting
costs and is calculated as distributions paid or payable per unit
divided by Normalized Distributable Cash generated per unit.


First Quarter Operating Results

For the three months ended March 31, 2008, Tree Island reported revenue of $76.4 million, up 17.8% from $64.9 million in the same period in 2007. This improvement reflects a 29.1% increase in sales volumes and higher product selling prices, partially offset by the negative impact of the stronger Canadian dollar relative to the US dollar.

The Canadian-to-US dollar exchange rate moved from an average of $1.17 in Q1 2007 to $1.00 in Q1 2008. Had exchange rates for the Canadian dollar remained consistent with 2007, first quarter 2008 revenue would have been $8.6 million higher at $85 million, rather than the $76.4 million recorded.

The increase in sales volumes reflects the ongoing implementation of Tree Island's strategic initiatives, including the July 2007 acquisition of the assets of Baoan International Investment Co. and 100% of the shares of Universal Metal New Material Co. (the "BII/UM acquisition"). It also reflects the positive impact of higher international trading and North American import sales, which represented 16.4% of sales volumes in Q1 2008, compared to 1.9% a year earlier.

The improvement in sales volumes was achieved in all markets, with results as follows:



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% of Total Q1 2007 % of Total
Q1 2008 Sales Tons Sales
Market Tons (000's) Volumes (000's) Volumes
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Residential light construction 26 38.8% 24 46.2%
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Commercial construction 6 9.0% 3 5.8%
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Industrial - OEM (Original
Equipment Manufacturers) 19 28.4% 18 34.6%
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Agricultural 7 10.4% 6 11.5%
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Specialty 2 3.0% 1 1.9%
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International Trading(i) 7 10.4% - -
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Total 67 100% 52 100%
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(i) Includes direct trading company sales only; excludes import sales which
are reflected in sales volumes to other markets.


Tree Island's success in increasing sales volumes continues to be significant given the sharp drop in residential housing starts during the period. According to the US Census Bureau, first quarter residential housing starts in the Western United States - a key market for Tree Island's stucco reinforcing products and collated nails - fell by 34.4% compared to Q1 2007 and by 9% compared to the fourth quarter of 2007.

As discussed above, first quarter raw material costs were higher year-over-year. Carbon rod costs (representing 45.6% of Q1 2008 cost of goods sold) increased by 16.6% per ton compared to Q1 2007 and stainless steel rod costs (representing 8.1% of Q1 2008 cost of goods sold) increased by 18.2% as a result of nickel surcharges. By contrast, zinc costs (representing 3.6% of cost of goods sold) decreased by 23.4%.

Selling general and administrative ("SG&A") expenses increased to $5.7 million in the first quarter of 2008, a year-over-year increase of $1.4 million. This was primarily driven by $1.3 million in costs relating to the special meeting and $0.4 million of increased costs relating to the addition of the BII/UM operations, partially offset by the benefit of a stronger Canadian dollar on the conversion of costs at Tree Island's US operations, a reduction in expenses resulting from the 2007 restructuring of the US commercial team and a reduction in bonus-related expenses.

First quarter EBITDA, before adding foreign exchange gains, was $1.3 million, $4.1 million below Q1 2007. The change in EBITDA reflects substantially higher raw material costs, $1.3 million in special meeting costs and the negative impact of a strengthening Canadian dollar, partially offset by higher sales volumes and increased selling prices. First quarter EBITDA, including foreign exchange gains, was $2.4 million compared to $7.5 million in 2007, reflecting a lower gain on foreign exchange conversions in the most recent quarter.

The Fund reported first quarter net income of $0.5 million ($0.02 per unit), compared to $3.4 million ($0.15 per unit) during the same period in 2007. The decrease in net income reflects lower operating profit and a lower gain on foreign exchange conversions, partially offset by lower interest costs and a higher income tax recovery.

For the three months ended March 31, 2008, the Fund generated distributable cash of $0.0905 per unit, and declared distributions of $0.25 per unit, for a payout ratio of 276%. By comparison, the Fund generated distributable cash of $0.30 per unit, and declared distributions of $0.333 per unit for a payout ratio of 111% during the same period in 2007.

Outlook

The Fund anticipates a continuation of challenging market conditions through the balance of 2008.

Demand from the residential light construction market remains weak, reflecting continuing deterioration in the US residential housing market and the slowdown in the broader North American economy. Tree Island will continue to actively build business in market sectors less affected by the slowdown, including commercial construction, agricultural and specialty alloys. The company is also continuing to pursue the significant growth opportunities in international markets via its international trading company and Chinese operations.

Maximizing profit potential from all markets will be a key focus for Tree Island in 2008. Consistent with its stated strategy, the company successfully built sales volumes and extended its geographic reach in 2007. In 2008 and 2009, Tree Island is working to better balance its product portfolio around its key markets and fine tune the profitability that can be generated from each. This will be critical to improving margins and offsetting the impact of increasing raw material costs.

Prices for carbon rod continue to climb, with higher transportation costs adding to the total cost of raw materials. Supply constraints for carbon rod are also increasing. Although on a short-term basis, the company may see shortages of certain rod grades, overall Tree Island believes it will be able to source sufficient supplies to meet demand and has implemented a series of price increases in response to the higher costs. The company is intent on closing the gap between raw material costs and product prices and expects to gain more ground in the second quarter. US anti-dumping legislation on imported nails is helping to support price increases on Tree Island's domestic nails and could provide added support if duties are increased when the US Department of Commerce makes its final determination later this year.

Operational efficiency is also expected to continue improving through the year as savings from last year's consolidation and restructuring of the North American operations are realized. Management and the Board have also been pursuing opportunities to enhance unitholder value. The Board is actively reviewing proposals for the sale of the surplus land located adjacent to Tree Island's Richmond facility in BC.

Said Mr. McAtee, "While we anticipate continued market challenges in 2008, we expect to realize performance improvements as our pricing actions take effect, our operating efficiency continues to improve and our efforts to fine tune the profitability from each of our market sectors begin to bear fruit."

The Fund continues to monitor distribution levels in light of current market and operating conditions. Given the cyclical nature of the industry, the Fund does not set short-term payout ratio targets, but rather seeks to maintain a cumulative average payout ratio since inception of 75% to 85%.

Fund Profile

The Fund holds a 100% ownership interest in Tree Island Industries Ltd., one of North America's largest producers of wire and fabricated wire products. The Fund was launched on November 12, 2002 with the completion of an initial public offering. There are currently 21,960,447 units of the Fund outstanding. There are an additional 223,750 Phantom Units issued under the Fund's long-term incentive plan as at May 8, 2008. The Fund's performance depends entirely on the performance of Tree Island.

Tree Island Profile

Headquartered in Richmond, British Columbia, Tree Island Industries produces wire products for a diverse range of construction, agricultural, manufacturing and industrial applications. Its products include bright wire, stainless steel wire and galvanized wire; a broad array of fasteners, including packaged, collated and bulk nails; stucco reinforcing products, engineered structural mesh, fencing and other fabricated wire products. The Company markets these products under the Tree Island, K-Lath, Halsteel, TI Wire, Industrial Alloys, USA-Wire and HK Universe brand names. Tree Island also owns and operates a Hong Kong-based trading company that provides internationally sourced products to Tree Island and its customers worldwide.

Non-GAAP Measures

References in this news release to "EBITDA" are to operating profit plus depreciation. EBITDA is a measure used by many investors to compare issuers on the basis of ability to generate cash flows from operations. EBITDA is not an earnings measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP. Management believes that EBITDA is an important supplemental measure in evaluating the Fund's performance. You are cautioned that EBITDA should not be construed as an alternative to net income or loss determined in accordance with GAAP as indicators of performance or to cash flows from operating, investing and financing activities as measures of liquidity and cash flows. Tree Island's method of calculating EBITDA may differ from methods used by other issuers and, accordingly, Tree Island's EBITDA may not be comparable to similar measures presented by other issuers.

"Distributable cash" is also not a recognized measure under GAAP and does not have a standardized meaning prescribed by GAAP. Canadian open-ended income trusts, such as this Fund, use distributable cash as an indicator of financial performance and ability to fund distributions. We define distributable cash as net cash from operating activities less all capital expenditures, plus the change in non-cash operating assets and liabilities, plus non-maintenance capital expenditures, plus the 2006 pre-tax proceeds on the sale of a property option (the tax provision for these proceeds on sale is included in the net cash provided from operating activities). Changes in non-cash operating assets and liabilities and non-maintenance capital expenditures are added back in the calculation of distributable cash because they are funded through the Fund's committed credit facilities. Tree Island's distributable cash may differ from similar computations as reported by other entities and, accordingly, may not be comparable to distributable cash as reported by such entities. The Fund believes that distributable cash is a useful supplemental measure that may assist investors in assessing the return on their investment in units.

The Fund defines maintenance capital expenditures as cash outlays required to maintain our plant and equipment at current operating capacity and efficiency levels. Non-maintenance capital expenditures are defined as cash outlays required to increase business operating capacity or improve operating efficiency, and are also referred to as profit improvement capital.

Forward-Looking Statements

This press release includes forward-looking information with respect to the Fund and the company, including their business, operations and strategies, as well as financial performance and conditions. The use of forward-looking words such as, "may", "will", "expect" or similar variations generally identify such statements. Any statements that are contained herein that are not statements of historical fact may be deemed to be forward-looking statements. These statements speak only to the conditions in existence as of the date of this press release, and the Fund maintains no obligation to update such statements. Although management believes that expectations reflected in forward-looking statements are reasonable, such statements involve risks and uncertainties including the risks and uncertainties discussed in the Fund's annual information form dated March 26, 2008 and management's discussion and analysis for the fiscal year ended December 31, 2007.

Forward-looking statements, by their nature, necessarily involve risks and uncertainties that could cause actual results to differ materially from those contemplated by the statements. Such risks and uncertainties include, but are not limited to, risks associated with operations such as competition, dependence on the construction industry, market conditions for products, supplies of and costs for raw materials, dependence on key personnel, labour relations, regulatory matters, environmental risks, the successful execution of acquisition and integration strategies, foreign exchange fluctuations, the effect of leverage and restrictive covenants in financing arrangements, product liability, the ability to obtain insurance, energy cost increases, the ability to fund necessary future capital investments, changes in tax legislation, other legislation and governmental regulation, changes in accounting policies and practices, operations in a foreign country, and other risks and uncertainties set forth in our publicly filed materials.



Interim Consolidated Financial Statements of

TREE ISLAND WIRE INCOME FUND

March 31, 2008

TREE ISLAND WIRE INCOME FUND
Interim Consolidated Balance Sheets (Unaudited)
(In thousands of dollars)

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As at As at
March 31 December 31
2008 2007
---------- -----------

Assets

Current
Cash $ 38 $ 6,032
Accounts receivable 36,535 22,641
Income and other taxes receivable 5,138 4,144
Inventories 90,292 88,499
Prep aid expenses 3,481 2,902
Future income taxes 1,700 2,467
---------- -----------
137,184 126,685
Property, plant and equipment 60,421 62,233
Intangible assets 6,180 6,245
Deferred charges 14 14
Goodwill 47,164 46,434
---------- -----------
$ 250,963 $ 241,611
---------- -----------
---------- -----------

Liabilities

Current
Revolving credit $ 39,965 $ 49,467
Accounts payable and accrued liabilities 68,500 44,765
Interest payable 313 418
Current portion of long-term debt 60 78
---------- -----------
108,838 94,728
Deferred gain on sale of option (note 8) 4,111 4,066
Other non-current liabilities 448 421
Future income taxes 5,634 7,591
---------- -----------
119,031 106,806
---------- -----------

Contingent liabilities and commitments (note 10)

Unitholders' Equity 131,932 134,805
---------- -----------
$ 250,963 $ 241,611
---------- -----------
---------- -----------

Approved on behalf of Tree Island Wire Income Fund

--------------------------------------------------
Trustee Trustee

See accompanying Notes to the Interim Consolidated Financial Statements


TREE ISLAND WIRE INCOME FUND
Interim Consolidated Statements of Operations (Unaudited)
(In thousands of dollars, except units and per unit amounts)

--------------------------------------------------------------------------
Three Months Three Months
Ended Ended
March 31, March 31,
2008 2007
--------------------------

Sales $ 76,421 $ 64,894
Cost of goods sold 69,397 55,179
Depreciation 2,630 4,088
--------------------------
Gross profit 4,394 5,627
Selling, general and administrative
expenses 5,686 4,298
--------------------------
Operating (loss) profit (1,292) 1,329
Foreign exchange gain 1,078 2,044
Gain on sale of fixed assets 4 -
Amortization of intangible assets (281) -
Amortization of deferred gain (note 8) 116 136
Financing expenses (1,168) (1,211)
--------------------------
(Loss) income before recovery of income
taxes (1,543) 2,298
Recovery of income taxes (note 7) 2,077 1,099
--------------------------

Net income for the period $ 534 $ 3,397
--------------------------
--------------------------

Net income per unit - basic $ 0.02 $ 0.15
--------------------------
--------------------------

Net income per unit - diluted $ 0.02 $ 0.15
--------------------------
--------------------------

Weighted-average number of units - basic 21,933,648 21,918,400
--------------------------
--------------------------

Weighted-average number of units - diluted 22,002,138 21,918,400
--------------------------
--------------------------

See accompanying Notes to the Interim Consolidated Financial Statements


TREE ISLAND WIRE INCOME FUND
Interim Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands of dollars)

--------------------------------------------------------------------------
Three Months Three Months
Ended Ended
March 31, March 31,
2008 2007
--------------------------

Net income for the period $ 534 $ 3,397

Other comprehensive income (loss)
Unrealized income (loss) on translating
financial statements of self-sustaining
operations 2,141 (612)

Related income tax expense (recovery) (150) 64

--------------------------
Other comprehensive income (loss) 1,991 (548)
--------------------------

Comprehensive income for the period $ 2,525 $ 2,849
--------------------------
--------------------------

See accompanying Notes to the Interim Consolidated Financial Statements


TREE ISLAND WIRE INCOME FUND
Interim Consolidated Statements of Unitholders' Equity (Unaudited)
(In thousands of dollars)

--------------------------------------------------------------------------
Total Total
for for
Accumu- three three
lated months months
Contri- Accumu- Other ended ended
Unit- buted lated Compre- March March
holders' Sur- Earn- Distri- hensive 31, 31,
Capital plus ings butions Loss 2008 2007
--------------------------------------------------------------

Balance,
beginning
of period $209,857 $ 589 $94,057 $(138,917) $(30,781) $134,805 $155,753

Activity
for the
three
months
ended
March 31 317 (205) 534 (5,510) 1,991 (2,873) (4,458)

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Balance,
end of
period $210,174 $ 384 $94,591 $(144,427) $(28,790) $131,932 $151,295
--------------------------------------------------------------
--------------------------------------------------------------

See accompanying Notes to the Interim Consolidated Financial Statements


TREE ISLAND WIRE INCOME FUND
Interim Consolidated Statements of Cash Flows (Unaudited)
(In thousands of dollars)

--------------------------------------------------------------------------
Three Months Three Months
Ended Ended
March 31, March 31,
2008 2007
--------------------------
Cash flows from operating activities
Net income for the period $ 534 $ 3,397
Items not involving cash
Depreciation 2,630 4,088
Gain on disposal of fixed assets (4) -
Amortization of deferred charges 86 133
Amortization of intangible assets 281 -
Amortization of deferred gain (116) (136)
Future income taxes (1,277) (704)
Unit-based compensation 89 -
--------------------------
2,223 6,778

Change in non-cash operating assets and
liabilities
Accounts receivable (13,894) (6,959)
Inventories (1,793) 9,229
Accounts payable and accrued liabilities 23,731 (9,959)
Income and other taxes (884) (1,037)
Other (241) 224
--------------------------
Total change in non-cash operating
assets and liabilities 6,919 (8,502)

--------------------------
Net cash provided by (used in) operating
activities 9,142 (1,724)
--------------------------

Cash flows from investing activities
Proceeds on disposal of long-lived
assets 6 -
Purchase of property, plant and
equipment (238) (407)
--------------------------
Net cash used in investing activities (232) (407)
--------------------------

Cash flows from financing activities
Repayment of long-term debt (21) (24)
Drawdown (repayment) of revolving credit (9,588) 9,086
Distributions to unitholders (5,487) (7,307)
--------------------------
Net cash (used in) provided by financing
activities (15,096) 1,755
--------------------------

Effect of exchange rate changes on cash
and cash equivalents 192 (23)
--------------------------

Decrease in cash (5,994) (399)
Cash, beginning of period 6,032 1,055
--------------------------
Cash, end of period $ 38 $ 656
--------------------------
--------------------------

Supplemental Cashflow Information:

Interest paid $ 1,187 $ 986
--------------------------
--------------------------

Income taxes paid $ 83 $ 642
--------------------------
--------------------------

See accompanying Notes to the Interim Consolidated Financial Statements


TREE ISLAND WIRE INCOME FUND

Notes to the Interim Consolidated Financial Statements

For the three month periods ended March 31, 2008 and March 31, 2007

(In thousands of dollars, except per unit amounts)

(Unaudited)
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1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The accompanying Interim Consolidated Financial Statements of Tree Island Wire Income Fund (the "Fund") have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP") on a basis consistent with those followed in the most recent audited annual consolidated financial statements except as described in note 3. These Interim Consolidated Financial Statements do not include all the information and note disclosures required by GAAP for annual consolidated financial statements and therefore should be read in conjunction with the December 31, 2007 audited consolidated financial statements of the Fund and the notes below.

Operating results for the interim periods are not necessarily indicative of the result that may be expected for the full fiscal year ending December 31, 2008. Our operations are impacted by the seasonal nature of the various industries we serve, primarily the Canadian construction and agriculture industries. Accordingly, fourth quarter results are traditionally lower than other quarters due to the onset of Winter and the corresponding reduction in consumer activities.

2. FORMATION OF THE FUND

The Fund is an unincorporated open-ended, limited purpose trust established under the laws of the Province of British Columbia pursuant to a Declaration of Trust dated September 30, 2002.

Each unitholder participates pro rata in distributions of net earnings and, in the event of termination of the Fund, participates pro rata in the net assets remaining after satisfaction of all liabilities.

The Fund owns 100% of the common shares of Tree Island Industries Ltd. ("TIL").

3. ADOPTION OF NEW ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

NEW ACCOUNTING POLICIES

Effective January 1, 2008 the Fund adopted the following new recommendations of the Canadian Institute of Chartered Accountants (CICA).

(a) Capital

CICA Handbook Section 1535, Capital Disclosures establishes standards for disclosing information about an entity's capital and how it is managed to enable users of financial statements to evaluate the entity's objectives, policies and procedures for managing capital. This new disclosure is provided in note 4.

(b) Financial Instruments

CICA Handbook Section 3862, Financial Instruments - Disclosures requires entities to provide disclosures in their financial statements that enable users to evaluate:

(i) the significance of financial instruments for the entity's financial position and performance;

(ii) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and how the entity manages those risks.

CICA Handbook Section 3863, Financial Instruments - Presentation establishes standards for presentation of financial instruments and non-financial derivatives. It deals with the classification of financial instruments, from the perspective of the issuer, between liabilities and equity, the classification of related interest, dividends, losses and gains, and the circumstances in which financial assets and financial liabilities are offset. The adoption of CICA Handbook Section 3863 did not impact the Fund's financial position.

(c) Inventories

CICA Handbook Section 3031, Inventories introduces significant changes to the measurement and disclosure of inventory. The measurement changes include; the elimination of LIFO, the requirement to measure inventories at the lower of cost and net realizable value, the allocation of overhead based on normal capacity, the use of the specific cost method for inventories that are not ordinarily interchangeable or goods and services produced for specific purposes, the requirement for an entity to use a consistent cost formula for inventory of a similar nature and use, and the reversal of previous write-downs to net realizable value when there is a subsequent increase in the value of inventories. Disclosures of inventories have also been enhanced. Inventory policies, carrying amounts, amounts recognized as an expense, write-downs and the reversals of write-downs are required to be disclosed. The adoption of CICA Handbook Section 3031 did not impact the Fund's financial position.

RECENT ACCOUNTING PRONOUNCEMENTS

The CICA has recently issued a new accounting standard, Section 3064 - "Goodwill and Intangible Assets", which establishes standards for the recognition, measurement, presentation and disclosure by profit-oriented enterprises for goodwill, subsequent to initial recognition, and for intangible assets, subject to certain exceptions. Section 1000 - "Financial Statement Concepts" was also amended to provide consistency with this new standard. These standards are effective for the Fund beginning January 1, 2009. The Fund is currently assessing the impact of these standards on its consolidated financial statements.

4. CAPITAL DISCLOSURES

The capital structure of the Fund consists of its unitholders' equity, long-term debt, and short-term borrowing.

The Fund's objectives when managing its capital are:

- To maintain a strong capital base so as to preserve and enhance investor, creditor, and market confidence and to sustain future development of the business;

- To manage capital in a manner that will comply with its external financial covenants and distribution requirements.

The Fund manages its capital structure in accordance with these objectives, as well as considerations given to changes in economic conditions and the risk characteristics of the underlying assets.

Under the revolving credit facility, the Fund is required to comply with a minimum ratio of free cash flow to interest expense. To date, the Fund has complied with this externally imposed financial covenant. The Fund's loan agreement has a threshold for distributions. In the event that distributions exceed the threshold they require the consent of our lender. For the months of January, February and March of 2008, distributions exceeded this threshold, and consent from our lender was provided.

The Fund will become subject to Canadian corporate income taxes beginning in 2011. This may result in changes to the capital structure of the Fund or the nature of the Fund itself.

5. FINANCIAL INSTRUMENTS

The Fund's financial instruments include cash, accounts receivable and payable, revolving credit, accrued liabilities, interest payable, and long-term debt. All financial instruments are classified into one of five categories: held-for-trading, held-to-maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments are measured in the balance sheet either at fair value except for loans and receivables, held-to-maturity investments and other financial liabilities which are measured at amortized cost. Transaction costs are included in the carrying value of financial instruments. Subsequent measurement and changes in fair value will depend on their initial classification, as follows: held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net income. Available-for-sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive income until the instrument is derecognized or impaired.

The Fund has classified its cash as held-for-trading. Accounts receivable are classified as loans and receivables. Revolving credit, accounts payable, accrued liabilities, interest payable and long-term debt are classified as other liabilities, all of which are measured at amortized cost.

Carrying value and fair value of financial assets and liabilities are summarized as follows:



Carrying value Fair value
Classification $ '000 $ '000
---------------------------------------------------------------------
Held-for-trading 38 38
Loans and receivables 36,535 36,535
Other liabilities 108,838 108,838


The carrying values of cash, accounts receivable, amounts payable under the revolving lines of credit, accounts payable, interest payable and long-term debt approximate their fair values due to the immediate or short-term maturity of these financial instruments.

Under Section 3855, certain of the Fund's non-financial contracts for forward purchases of zinc and natural gas meet the definition of a derivative but qualify for an expected usage exemption as they are settled through physical delivery for use in the normal course of business.

Financial instruments risk exposure and management

The Fund is exposed to various risks associated with its financial instruments. These risks are categorized as credit risk, liquidity risk and market risk.

Credit Risk

The Fund is exposed to credit losses in the event of non-payment of accounts receivable by Tree Island Industries Ltd. and its subsidiary Universal Metal New Material Co. ("UM"), and Tree Island Wire (USA) Inc. customer accounts. However Tree Island Industries Ltd., and Tree Island Wire (USA) Inc. normally sell to well established customers of high credit quality. The credit worthiness of customers is assessed using credit scores supplied by a third party, and through direct monitoring of their financial well-being on a continual basis. The Fund establishes guidelines for customer credit limits and should thresholds in these areas be reached, appropriate precautions are taken to improve collectability. The trade accounts receivable are aged as follows at March 31, 2008:



Up to date $ 30,386
Under 30 days past due 5,121
30-60 days past due 1,819
61-90 days past due 436
Over 91 days past due 914
Reserves and Other (2,141)
----------
$ 36,535
----------
----------


The maximum credit risk that the Fund is exposed to by way of its accounts receivable is equal to the carrying amount of $36,535 at March 31, 2008. The Fund believes that it has no significant concentrations of credit risk related to its accounts receivable.

Liquidity risk

Liquidity risk is the risk that the Fund will encounter difficulty in meeting obligations associated with its financial liabilities. The table below summarizes the future undiscounted cash flow requirements for financial liabilities at March 31, 2008:



less than less than less than
$ '000 1 month 1 year 5 years Total
--------------------------------------------------------------------------
Revolving credit $ - $ - $ 39,965 $ 39,965
Accounts payable and accrued
liabilities 41,679 26,821 - 68,500
Interest payable 313 - - 313
Long-term debt 7 53 - 60

-------------------------------------------
$ 41,999 $ 26,874 $ 39,965 $ 108,838
-------------------------------------------
-------------------------------------------


The Fund monitors and manages its liquidity risk within the constraints of its available credit facilities. The operating requirements of the Canadian operations and its subsidiary UM are funded by a secured CDN $44.5 million revolving credit facility. The operating requirements of the US operations are funded by a secured US $44.0 million revolving credit facility. These credit facilities will expire in July 2012. The amounts available from these facilities are limited to the amount of the calculated borrowing base. The borrowing base is calculated as 85% of eligible receivables, plus 85% of the net orderly liquidation of inventory plus a percentage of fixed assets to a maximum of CDN $4.5 million for the Canadian facility and US $4.0 million for the US facility.

Market risk

The significant market risk exposures affecting the financial instruments held by the Fund are those related to foreign currency exchange rates and interest rates which are explained as follows:

Foreign currency exchange rates

The Fund's U.S. dollar-denominated accounts receivable, accounts payable and accrued liabilities, interest payable and long-term debt are exposed to foreign currency exchange rate risk because the value of these financial instruments will fluctuate with changes in the U.S./Canadian dollar exchange rate. For each US$0.01 decrease in the U.S./Canadian dollar exchange rate (i.e. the US dollar strengthening against the Canadian dollar), the net value of the Fund's financial instruments outstanding as of March 31, 2008 would increase by approximately $555 (holding all variables constant excluding foreign exchange), which would be charged to net income.

The Fund's RMB denominated accounts receivable, accounts payable and accrued liabilities, interest payable and long-term debt are exposed to foreign currency exchange rate risk, however this amount is not significant.

Interest rates

The Fund is exposed to interest rate risk on its Canadian and U.S. revolving loan facilities. The Fund's Canadian revolving loan bears interest at the Canadian prime rate plus 0.50% per annum for current asset revolving credit advances and at the Canadian prime rate plus 1.00% per annum for fixed asset revolving credit advances or at the election of the Fund, the Bankers' Acceptance rate plus 1.75% per annum for current asset revolving credit advances or at the Bankers' Acceptance rate plus 2.25% for fixed asset revolving credit advances.

The Fund's U.S. revolving loan bears interest at the U.S. index rate plus 0.50% per annum for current asset revolving credit advances and at the U.S. Index rate plus 1.00% per annum for fixed asset revolving credit advances or at the election of the Fund, the LIBOR rate plus 1.75% per annum for current asset revolving credit advances or the LIBOR rate plus 2.25% per annum for fixed asset revolving credit advances.

A 1% (i.e. 100 basis point) increase in the interest rate would cause interest expense to increase by approximately $414 per annum based on the revolver balances as at March 31, 2008 and assuming these balances represent average balances per annum.

6. LONG-TERM UNIT INCENTIVE PLAN

On May 11, 2007, unitholders approved the Tree Island Wire Income Fund Long-Term Unit Incentive Plan. This plan provides for the allotment of up to 500,000 Phantom Units to designated employees of Tree Island Industries Ltd. (each a "Member") at the discretion of the Board of Trustees. The value of the Phantom Units will appreciate or depreciate with increases or decreases in the market price of the Fund's units.

The Board, at its discretion, may attach certain terms or conditions to the vesting and may accelerate the vesting period. The Phantom Units granted in 2007 vest one-third on the date of the grant and one-third on each of the first and second anniversary date of the grant. The Phantom Units granted in 2008 do not vest at the time of the grant but will vest one-third on each of the first, second and third anniversary dates of the grant. Vested Phantom Units may be converted to regular units at any time after vesting. Conversion to regular units will be satisfied by the Fund issuing to the member that number of units equal to the number of vested Phantom Units then credited to the Member. All of the Phantom Units issued to date will be converted by March 15, 2010.

The unvested Phantom Units earn additional Phantom Units for the distributions that would otherwise have been paid on the Phantom Units if they were regular units. These additional Phantom Units vest immediately. The number of additional Phantom Units is calculated based on dividing the value of the distribution by the weighted average market price of the Fund units in the 20 days immediately preceding each distribution.

Phantom Units granted are considered to be in respect of future services and are recognized in unit-based compensation costs over the vesting period. Compensation costs is measured based on the market price of the Fund's units on the date of the grant of the Phantom Units.

On May 16, 2007 the Fund granted 100,000 Phantom Units at a grant value of $800. Additional grants were made on August 13, 2007 of 37,500 Phantom Units at a grant value $269. One-third of these vested at the time of the grant and this has been recognized as unit based compensation at that time. The balance of the Phantom Units are unvested and are recognized in compensation costs on a straight-line basis over the 24 month period vesting period. Additional grants were made on March 28, 2008 of 123,750 Phantom Units at a grant value of $574. None of these units vested at the time of the grant. These unvested Phantom Units are recognized in compensation costs on a straight-line basis over the 36 month period vesting period. Compensation expense related to Phantom Units for the three month period ended March 31, 2008 was $89 ($Nil for three month period ended March 31, 2007) and is included in selling, general and administrative expense. Non-cash distributions for the three month ended March 31, 2008 was $23 ($Nil for three months period ended March 31, 2007).

On February 28, 2008, 42,047 Phantom Units were converted to regular units resulting in a reclassification $317 from contributed surplus to unitholders' capital.

The Fund's obligation to issue units on the vesting of Phantom Units is an unfunded and unsecured obligation of the Fund.



Three Months Three Months
Ended Ended
March 31, March 31,
2008 2008
--------------------------

Vested Unvested

Balance, beginning of period 53,643 91,667

Phantom Units converted to regular units on
February 28, 2008 (42,047) -

Phantom Units granted on March 28, 2008 - 123,750

Additional Phantom Units earned in respect
of distributions on Phantom Units 4,962 -
--------------------------

Balance, end of period 16,558 215,417
--------------------------
--------------------------


7. INCOME TAXES

Income tax obligations relating to distributions from the Fund are the obligations of the unitholders and, accordingly, no provision for income taxes on the income of the Fund has been made. A provision for income taxes is recognized for TIL and its wholly-owned subsidiaries, as TIL and its wholly-owned subsidiaries are subject to tax. The provision for the period is divided between current and future taxes as follows:



Three Months Three Months
Ended Ended
March 31, March 31,
2008 2007
--------------------------

Current tax recovery $ 800 $ 395
Future tax recovery 1,277 704
--------------------------
$ 2,077 $ 1,099
--------------------------
--------------------------


The recovery of income taxes varies from the amount that would be expected if computed by applying the Canadian federal and provincial and US federal and state statutory income tax rates to the income before income taxes as shown in the following table:



Three Months Three Months
Ended Ended
March 31, March 31,
2008 2007
--------------------------

Loss (income) before provision for
income taxes $ (1,543) $ 2,298
Income of the Fund subject to tax in
the hands of the recipient (4,639) (5,906)
--------------------------

Loss of wholly-owned subsidiary
companies before income taxes (6,182) (3,608)

Tax Rate 31.0% 34.1%

Expected recovery of income taxes $ 1,916 $ 1,231
Increased (Reduced) by:
Revisions of prior period estimates (3) -
Recovery not deductible for tax 12 (29)
Differential tax rates on U.S.
subsidiaries 131 75
Reduction in statutory future income
tax rate 73 (23)
Other (52) (155)
--------------------------
Income tax recovery $ 2,077 $ 1,099
--------------------------
--------------------------


On October 31, 2006, the Canadian federal government announced proposed legislation to tax distributions made by income trusts. This legislation has now received royal assent and as a result income trusts will be subject to tax at corporate rates on the taxable portion of their distributions and unitholders will be taxed as if they have received a dividend equal to the taxable portion of their distributions. There will be a transitional period so that the Fund will not be subject to the tax until 2011. The legislation has had no material effect on the Fund's financial position, result of operations or cash flows.

8. DEFERRED GAIN ON SALE OF PURCHASE OPTION

During 2006 the Fund sold a purchase option on its leased property in Pomona, California. The net pre-tax cash proceeds received on the sale was $5,264. The sale was treated as a sale and lease back and the gain totaling $5,264 has been deferred and amortized over the ten year life of the new lease entered into with the new owners of the property. During the three month period ended March 31, 2008 an amount of $116 ($136 for three month period ended March 31, 2007) of the deferred gain was amortized and included in income.

9. POST-RETIREMENT BENEFITS

(a) The Fund has three defined contribution pension plans. Contributions made by the Fund amounted to $421 for the three months ended March 31, 2008 ($408 for the three months ended March 31, 2007). Funding obligations are satisfied upon making contributions.

(b) The Fund had one multi employer defined benefit pension plan. Contributions made by the Fund amounted to $nil for the three months ended March 31, 2008 ($3 for the three months ended March 31, 2007). Effective July 15, 2007, the Fund withdrew from the multi-employer defined benefit pension plan.

10. CONTINGENT LIABILITIES AND COMMITMENTS

(a) Litigation and claims

The Fund is party to certain legal actions and claims, none of which individually, or in the aggregate, is expected to have a material adverse effect on the Fund's financial position, results of operations or cash flows.

(b) Commitments

The Fund and its wholly-owned subsidiaries have committed to rod purchases totaling $32,073 (US$22,426 and RMB64,350), finished goods purchases totaling $59 (US$57) and gas purchases totaling $394 (US$383) at March 31, 2008.

The Fund has an exclusive Supply, Production and Distributorship Agreement where it has committed to pay processing fees of between $4,800 (RMB32,742) and $7,000 (RMB47,749) over a 2 year period from January 1, 2008 to December 31, 2009. Of the amount committed, $568 (RMB3,871) has already been paid in the first three months ended March 31, 2008.

The Fund and its subsidiaries also have various operating lease agreements with remaining terms of up to ten years with varying renewal options. Annual lease rental payments due under non-cancelable operating leases are as follows:



April - December 2008 $ 2,588
2009 3,098
2010 2,945
2011 2,590
2012 1,518
Thereafter 2,955
----------------
$ 15,694
----------------
----------------


11. SEGMENTED INFORMATION

(a) General information

The Fund operates primarily within one industry, the steel wire and fabricated wire products industry with no separately reportable business segments. The products are sold primarily to customers in the United States, Canada and China.

(b) Geographic information



Three Months Three Months
Ended Ended
March 31, 2008 March 31, 2007
-------------- --------------
SALES (i)
Canada $ 22,919 $ 19,489
United States 50,099 44,422
China 1,765 -
Other 1,638 983
-------------- --------------
$ 76,421 $ 64,894
-------------- --------------
-------------- --------------


As at As at
March 31 December 31
2008 2007
-------------- --------------

PROPERTY, PLANT AND EQUIPMENT (ii)
Canada $ 46,811 $ 47,696
United States 13,314 14,254
China 296 283
-------------- --------------
$ 60,421 $ 62,233
-------------- --------------
-------------- --------------

GOODWILL (ii), (iii)
Canada $ 23,463 $ 23,463
United States 18,164 17,435
China 5,537 5,536
-------------- --------------
$ 47,164 $ 46,434
-------------- --------------
-------------- --------------

(i) Sales are attributed to geographic areas based on the location of
customers.

(ii) Property, plant and equipment and goodwill are attributed to
geographic areas based on the location of the subsidiary company
owning the assets.

(iii) The change in goodwill arises from changes in exchange rates used to
translate goodwill denominated in a foreign currency.


12. RESTRUCTURING COSTS

In September 2007 the Fund announced that it would consolidate operations at its US plants and offices in order to realize efficiencies resulting from its acquisition of USA Wire and Baoan International. In November 2007 the Fund announced additional restructuring measures by reducing the number of employees in order to reduce costs.

The portion of the costs incurred that related to restructuring an acquired company were allocated to the purchase price of Baoan International.

The following table provides a summary of the costs included in the consolidated statements of operations and cash payments made:



Total Total Grand
Q1 2008 2007 Total
--------- --------- --------

Employee termination benefits $ - $ 250 $ 250
Costs of relocation of equipment 34 658 692
Lease costs 81 250 331
--------- --------- --------
Total costs expensed in the
period $ 115 $ 1,158 $ 1,273
--------- --------- --------

--------- --------- --------
Paid $ 511 $ 577 $ 1,088
--------- --------- --------


As at As at
March 31, December 31,
2008 2007
--------- -----------

Net liability, end of period $ 186 $ 581


Contact Information