Coast Wholesale Appliances Income Fund (TSX: CWA.UN) -
Retail sales and margins continue to strengthen, contract business slowed by reduced 2009 housing starts
Coast Wholesale Appliances Income Fund will host a conference call and webcast to discuss its first quarter financial results on Tuesday, May 11, 2010 at 8:00 am Pacific Time (11:00 am Eastern). The call can be accessed by dialing: 1-800-769-8320 or 416-695-6616 (GTA).
A replay will be available through May 25, 2010 at: 1-800-408-3053 or 416-695-5800. Passcode: 4285001.
The live and archived webcast, as well as an mp3 download, can be accessed at http://www.investorcalendar.com/IC/CEPage.asp?ID=157967 or on the Fund's website at www.coastincomefund.com.
Coast Wholesale Appliances Income Fund (the Fund) today reported financial results for the three months ended March 31, 2010, which represents the first quarter of its 2010 fiscal year. The Fund holds a 65% indirect interest in Coast Wholesale Appliances LP (Coast), a leading independent supplier of major household appliances and accessories, and its results are entirely dependent upon Coast's operating results. The remaining 35% interest is held by the former owner of the business, CWAL Investments Ltd. (CWAL).
Performance Highlights (in thousands of dollars except percentages and per-unit amounts) 2010 2009 2008 Q1 Q1 Q1 ---------------------------------------------------------------------------- Sales 30,454 33,179 33,876 Gross margin 7,471 7,723 8,466 As a percentage of sales 24.5% 23.3% 25.0% Income before non-controlling interest 728 1,050 1,941 Basic and diluted net income per unit 0.073 0.105 0.194 ---------------------------------------------------------------------------- EBITDA 1,442 1,990 2,849 EBITDA margin 4.7% 6.0% 8.4% EBITDA per unit 0.144 0.198 0.284 ---------------------------------------------------------------------------- Maintenance capital expenditures 33 43 181 Adjusted distributable cash 1,123 1,614 2,415 Adjusted distributable cash per unit 0.112 0.161 0.241 Distribution per unit 0.125 0.166 0.308 Adjusted distribution ratio 111.5% 103.5% 127.8% ----------------------------------------------------------------------------
First Quarter Operating Results
During the first quarter, Coast recorded sales revenue of $30.5 million, down by $2.7 million, or 8.2%, from the $33.2 million reported in 2009. Retail sales continued to improve year-over-year, reflecting growing consumer confidence in the Canadian economy. However, as expected, Coast's first quarter contract sales to developers and builders were down from the prior year level, due to reduced new home construction activity in 2009. As a result, Coast's sales blend continued to favour retail sales.
In British Columbia, the softening of Coast's contract business was partially offset by the stronger retail sales, but overall revenues declined year-over-year. Business in Alberta and Saskatchewan showed modest growth during the quarter, while revenues in Manitoba were down somewhat from the 2009 level. In the Greater Toronto Area (GTA), the store Coast added in January 2009 continued to perform below expectations, due to challenging economic conditions in Southern Ontario.
Coast's first quarter cost of sales was $23.0 million, or 75.5% of sales. This resulted in a gross margin of $7.5 million, or 24.5% of sales. By comparison, in the first quarter of 2009, cost of sales was $25.5 million, or 76.7% of sales, providing a gross margin of $7.7 million, or 23.3% of sales. The 1.2% improvement in gross margin was mainly due to the shift in Coast's sales mix in favour of retail business, which generates a higher margin than contract sales to developers and builders. The year-over-year gain was somewhat restrained by a more competitive retail pricing environment, as consumers continued to be cautious and selective in their purchases.
First quarter EBITDA was $1.4 million, down by $0.6 million from the $2.0 million reported in the same period of 2009, resulting in an EBITDA margin of 4.7%, compared to 6.0% in 2009. The EBITDA reduction was mainly due to the lower first quarter sales revenues and a resulting $0.3 million reduction in gross margin. In addition, selling, warehouse, facility, and general and administrative expenses (SG&A) for the quarter were up by $0.3 million year-over-year, due in large part to increased sales and marketing expenditures at Coast's GTA store. First quarter net income before non-controlling interest was $0.7 million, or 2.4% of sales, compared to $1.1 million, or 3.2% of sales, in 2009.
"We were pleased with our strong retail sales performance in what is normally a seasonally slower winter period," said Blain Lawson, President and CEO of Coast. "In the contract segment, we knew going into 2010 that our sales for the first half would be impacted by the reduced numbers of building permits issued and new housing starts in the second half of 2008 and the first three quarters of 2009. Typically, once a building permit has been issued, appliance sales are realized within six to eight months for single-family properties and after approximately 18 months for multi-family developments. Given the increases in new home construction activity over the past six months, the outlook for the second half of this year is more positive."
Lawson noted that, although the Canadian dollar strengthened through the first quarter, eventually achieving parity with the US dollar, Coast saw only minor benefits as price adjustments from its US-based suppliers always lag favourable changes in exchange rates.
During the quarter, to strengthen its market position in the GTA, Coast added four new senior members to its local contract sales team. In BC, in support of its on-going focus on increasing operating efficiency, Coast proceeded with arrangements for the consolidation of its Vancouver and Burnaby warehouses at the Burnaby site by the end of the second quarter. The Burnaby site will be expanded to accommodate the expected increase in product flow.
Cash Distributions
For each of the months of January, February and March 2010, the Fund declared and paid distributions in the amount of $0.0416 per unit, representing an annualized distribution rate of $0.50 per unit. A distribution in the same amount has been declared for the month of April 2010. Since its inception, the Fund has paid a total of 57 consecutive monthly cash distributions to its public unitholders, and equivalent cash distributions to the non-controlling interest held by CWAL.
During the first quarter, the Fund generated adjusted distributable cash (before non-controlling interest) of $1.1 million, or $0.11 per unit. This compares to $1.6 million, or $0.16 per unit, in Q1 2009. The amount distributed and accrued for payment to unitholders and the non-controlling interest in the first quarter decreased to $1.3 million, or $0.13 per unit, in 2009 from $1.7 million, or $0.17 per unit, in 2009. The difference was due to the February 2009 reduction in the distribution amount.
The Fund's adjusted payout ratio for the quarter increased to 111.5% from 103.5% in 2009. The higher payout ratio in 2010 was due mainly to the year-over-year reduction in adjusted distributable cash, offset somewhat by the reduction in distributions. On a cumulative basis, from its inception, the Fund's adjusted payout ratio is 93.3%.
Outlook
The following discussion is qualified in its entirety by the forward-looking statements report at the end of this news release.
The outlook for Coast's business remains cautious. In the contract segment, based on the year-over-year increases in the number of building permits issued and new housing starts that were recorded in both the final quarter of 2009 and first quarter of 2010, Coast anticipates that its sales to developers and builders will begin to improve in the second half of the year. On the retail side, although sales have steadily increased, consumers remain cautious about major purchases and the retail pricing environment is expected to remain extremely competitive, putting downward pressure on margins.
"Thanks in large part to our balanced business model, we were able to sustain the balance sheet improvements we achieved in 2009 into the first quarter of 2010, retaining a strong cash position, with no usage of our operating line of credit for the third consecutive quarter, and reducing interest expense year-over-year," said Lawson. "While the economic outlook has improved, the business climate remains somewhat uncertain. Our major builder and developer customers now have better access to financing for both their current and future projects compared to last year, but we expect that they will continue to be restricted by tight credit markets and rising lending rates throughout 2010. Over the longer-term, we remain confident of our ability to grow our business when market conditions improve and to continue to deliver solid returns for our investors."
Building on the sales success it experienced with the introduction of the Miele product line at the beginning of 2009, Coast has entered into an agreement to add the Bosch and Thermador brands at selected locations by early in the third quarter. It expects that the introduction of these products will generate incremental revenues in both the contract and retail segments of its business. As part of its on-going strategy to enhance profitability by increasing sales from its existing stores, it is proceeding with preparations for a minor upgrade to its Calgary South location, to begin later in the year.
As announced on May 5, 2010, subject to the approval of unitholders at the annual and special meeting of unitholders to be held June 23, 2010, the Fund intends to convert from an income trust to a corporate structure by the end of the current fiscal year.
A more detailed discussion of the Fund's financial results can be found in its 2010 first quarter Management's Discussion and Analysis, which will be posted with the unaudited interim consolidated financial statements at the Fund's website (www.coastincomefund.com) and at SEDAR (www.sedar.com) on or before May 11, 2010.
Coast Profile
Coast is a leading independent supplier of major household appliances and accessories to developers and builders of multi-family and single-family housing, and to retail customers. Founded in 1978, Coast currently operates 15 stores across the four western provinces and one store in the GTA of Ontario, as well as a network of warehouse distribution centres strategically situated to serve these locations.
Forward-looking Statements
This news release includes forward-looking statements. These involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements are identified by the use of terms and phrases such as "anticipate", "believe", "estimate", "expect", "may", "plan", "will", and similar terms and phrases, including references to assumptions. Such statements may involve, but are not limited to, comments with respect to the sustainability of the Fund's distributions and the level of its payout ratio in the future. Forward-looking statements are included in, but not limited to, the section titled Outlook.
These forward-looking statements reflect current expectations of the Fund's management regarding future events and operating performance as of the date of this news release. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to: sensitivity to general economic conditions; maintenance of profitability and management of growth; competition; changes in consumer preferences; changes in the mix of product sales; fluctuations in fuel and commodity pricing, which may impact freight and other costs; usage of extended warranty programs and the costs to deliver these services; changes to planning and supply chain processes; reliance on suppliers; lack of supplier agreements; reliance on key personnel; foreign exchange rates as they relate to imported products; and interest rates.
Although the forward-looking statements contained in this news release are based upon what management believes to be reasonable assumptions, the Fund cannot assure investors that actual results will be consistent with these forward-looking statements. The forward-looking statements reflect management's current beliefs and are based on information currently available to the Fund. They speak only as of the date of this news release, and reflect current assumptions regarding future events and operating performance. These assumptions include, without limitation: modest economic growth in 2010 in both Western Canada and the Greater Toronto Area (Coast's current market areas); continued fluctuations in exchange rates; low but slowly increasing interest rates through 2010; improved but still cautious credit markets for its major builder customers to obtain financing for their current and future building activities; a continued, gradual improvement in consumer confidence as the economy recovers, reflected in increasing retail sales of major household appliances; and a continuation of the recent resurgence of new home construction activity, reflected in higher levels of new building permits issued and housing starts compared to last year. These forward-looking statements are made only as of the date of this news release and the Fund assumes no obligation to update or revise them to reflect new events or circumstances, other than as required by law.
Non-GAAP Financial Measures
EBITDA, EBITDA margin and adjusted distributable cash are non-GAAP financial measures that are defined in the 2010 first quarter Management's Discussion and Analysis to be posted on the Fund's website and SEDAR.
Contacts: Coast Wholesale Appliances Income Fund Jack Peck Chief Financial Officer (604) 301-3400 invest@coastappliances.comwww.coastincomefund.com