Mar. 28, 2011 (Canada NewsWire Group) --
TRADING SYMBOL: Toronto Stock Exchange - HWD.UN
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Hardwoods Distribution Income Fund will hold a conference call and
webcast to discuss fourth quarter and 2010 full- year financial results
on March 29, 2011 at 8:00 a.m. Pacific Time (11:00 a.m. Eastern). The
call can be accessed by dialing: 1-888- 231 - 8191 or (647) 427 - 7450. A
replay will be available until April 12, 2011 at: 1-800-642-1687 or (416)
849-0833 (Passcode 50766876).
>>
LANGLEY, BC, March 28 /CNW/ - Hardwoods Distribution Income Fund (the "Fund") today reported financial results for the three and 12 months ended December 31, 2010. The Fund's results are based on the performance of Hardwoods Specialty Products LP and Hardwoods Specialty Products USLP (collectively "Hardwoods") - one of North America's largest wholesale distributors of hardwood lumber and related sheet good products. Hardwoods operates a network of 26 distribution centres in the US and Canada.
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2010 Overview
(For the 12 months ended December 31, 2010)
- Full-year revenue increased 3.5% to $197.7 million
- Selling and administrative expenses were successfully reduced by $5.9
million, down 16.5% from 2009
- EBITDA increased to $4.7 million from a loss of $1.2 million in 2009
- Net earnings increased to $1.0 million from a net loss of $10.2
million in 2009
- The Fund generated Distributable Cash of $4.1 million, up from
negative Distributable Cash of $0.1 million in 2009
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"Stronger demand and prices for hardwood products and successful implementation of our strategic initiatives contributed to improved financial performance in 2010," said Lance Blanco, President and CEO of Hardwoods Distribution Income Fund. "We improved revenue, EBITDA, and net earnings results, and ended the year with positive Distributable Cash of $4.1 million."
"Although the economic recovery remained fragile, housing starts increased by 5.8% in the US and by a more significant 27.4% in Canada when compared to 2009. We were also able to capitalize on opportunities within specific sectors and geographic markets. For example, a significant increase in deliveries by the US recreational vehicle manufacturing industry led to significantly higher sales for our Lake States' operations. In addition, we continued to make inroads into the Ontario market, which is Canada's largest consumer of wood products. During 2010, we expanded our sales force in this region and succeeded in capturing additional market share. We also leveraged a modest recovery in the California market to grow sales there."
"Combined with a 7.7% increase in average hardwood lumber prices, these factors helped us increase total revenues by 3.5% in 2010, despite the negative impact of a higher Canadian dollar. The revenue gains became more pronounced as the year progressed with fourth quarter sales up 11.6% and underlying sales, which exclude the impact of foreign exchange conversion, up 14.5%, compared to the same period in 2009."
"As we anticipated, our gross profit dollar performance did not keep pace with our revenue gains," added Mr. Blanco. "Market competition based on price remained intense and resulted in a gross profit margin of 17.4% for the year, compared to 18.1% in 2009."
"We were able to offset the negative impact of the lower margins with continued reduction of our sales and administrative (S&A) expenses. We achieved a $5.9 million decrease in S&A for the full year and a $2.1 million decrease in the fourth quarter, primarily as a result of reduced bad debt expense and the positive impact of a stronger Canadian dollar on US operating costs. We also continued to align our branch network with customer demand, closing our Las Vegas location in the fourth quarter and redeploying our sales personnel to regions offering higher sales potential."
"While expense reduction has played a vital role in seeing us safely through the market downturn, we believe we are now at the point in the business cycle where we must strengthen our emphasis on market expansion. During 2010, we began to increase investment in our people and service capabilities to support growing sales. More recently, we introduced an updated business strategy that will see us increase our focus on commercial and institutional construction markets, continue to leverage our successful import program and work to grow market share in high-potential geographic markets. Paired with a continued strong focus on tight management of our business, we expect to achieve further improvement in our financial results in 2011," said Mr. Blanco.
Summary of Results
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Selected Unaudited Consolidated Financial Information
(in thousands of Canadian dollars except where noted)
Year Year 3 months 3 months
ended ended ended ended
December December December December
31, 2010 31, 2009 31, 2010 31, 2009
-------- -------- -------- --------
Total sales $ 197,655 $ 190,923 $ 46,392 $ 41,577
Sales in the US (US$) 114,532 101,212 27,230 22,987
Sales in Canada 79,653 75,339 18,826 17,500
Gross profit 34,357 34,482 7,689 7,636
Gross profit % 17.4% 18.1% 16.6% 18.4%
Selling and
administrative expenses (29,740) (35,636) (8,006) (10,057)
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Earnings before interest,
taxes, depreciation and
amortization and
non-controlling interest
("EBITDA") 4,617 (1,154) (317) (2,421)
Add (deduct):
Amortization (532) (870) (90) (198)
Interest (709) (586) (167) (152)
Non-cash foreign
currency gains
(losses) (161) (1,553) (117) (171)
Non-controlling
interest (643) 2,347 138 590
Income tax recovery
(expense) (1,616) (8,424) 10 1,808
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Net earnings (loss) for
the period $ 956 $ (10,240) $ (543) $ (544)
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Basic and fully diluted
earnings (loss) per
Class A Unit $ 0.07 $ (0.71) $ (0.04) $ (0.04)
Average Canadian dollar
exchange rate for one
US dollar 1.030 1.142 1.013 1.057
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Distributable Cash and Cash Distributions
Selected Unaudited Consolidated Financial Information
(in thousands of dollars except per unit amounts)
Year Year 3 months 3 months
ended ended ended ended
December December December December
31, 2010 31, 2009 31, 2010 31, 2009
-------- -------- -------- --------
Net cash provided by (used
in) operating activities $ (3,402) $ 10,247 $ 4,452 $ 1,380
Increase (decrease) in
non-cash operating
working capital 7,553 (10,291) (4,614) (1,885)
----------- ----------- ----------- -----------
Cash flow from operations
before changes in
non-cash operating
working capital 4,151 (44) (162) (505)
Capital expenditures (74) (95) (37) -
----------- ----------- ----------- -----------
Distributable Cash $ 4,077 $ (139) $ (199) $ (505)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Distributions relating
to the period:
Class A Units $ - $ - $ - $ -
Class B Units(1) - - - -
----------- ----------- ----------- -----------
Total Units $ - $ - $ - $ -
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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Weighted average
outstanding units and
per unit amounts:
Class A Units
outstanding 14,410,312 14,410,000 14,411,238 14,410,000
Class B Units
outstanding 3,602,500 3,602,500 3,602,500 3,602,500
----------- ----------- ----------- -----------
Total Units
outstanding 18,012,812 18,012,500 18,013,738 18,012,500
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Distributable Cash per
Total Units $ 0.226 $ (0.008) $ (0.011) $ (0.028)
Distributions relating
to the period:
Class A Units $ - $ - $ - $ -
Class B Units(1) $ - $ - $ - $ -
Total Units $ - $ - $ - $ -
Payout ratio(2) 0.0% 0.0% 0.0% 0.0%
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March 23,
2004 to
December 31,
2010
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Cumulative since inception:
Distributable Cash 79,555
Distributions relating
to the period 66,754
Payout ratio(2) 83.9%
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(1) On January 10, 2006, Hardwoods Specialty Products LP and Hardwoods
Specialty Products US LP, limited partnerships in each of which the
Fund owns an 80% interest, announced that quarterly distributions
were suspended on the Class B LP and Class B US LP units. The Class B
LP units and Class B US LP units represent a 20% interest in
Hardwoods Specialty Products LP and Hardwoods Specialty Products US
LP, respectively. No distributions are to be paid on the Class B LP
units and Class B US LP units unless distributions in stipulated
minimum amounts are paid on the units in the limited partnerships
held by the Fund, and in certain other circumstances. Accordingly, no
distributions have been declared since the third quarter of 2005 to
the non-controlling interests. No liability for distributions payable
to the non-controlling interests is reflected in the December 31,
2010 balance sheet.
(2) Payout ratio measures the ratio of distributions by the Fund relating
to the period to Distributable Cash for the period.
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Results from Operations - Three Months Ended December 31, 2010
For the three months ended December 31, 2010, total sales increased by 11.6% to $46.4 million, from $41.6 million in 2009. The performance improvement reflects a 14.5% increase in underlying sales activity, partially offset by a 2.9% decrease in sales upon conversion, due to the negative effect of a stronger Canadian dollar. Sales in the United States, as measured in US dollars, increased by 18.5% to $27.2 million. Sales in Canada, as measured in Canadian dollars, increased by 7.6% to $18.8 million.
Fourth quarter gross profit increased to $7.7 million, from $7.6 million in Q4 2009. This gain reflects the higher sales revenue, partially offset by a weaker gross profit margin. Gross profit as a percentage of sales was 16.6% compared to 18.4% Q4 2009, reflecting valuation writedowns and other adjustments made to year-end inventory.
Selling and administrative (S&A) expenses were reduced by $2.1 to $8.0 million, from $10.1 million during the same period in 2009. The most significant area of cost savings was a $1.6 million year-over-year reduction in bad debt expense. The positive impact of the stronger Canadian dollar on conversion of S&A expenses at our US operations accounted for $0.3 million of the S&A reductions.
The Fund reported a fourth quarter EBITDA loss of $0.3 million, compared to a loss of $2.4 million in Q4 2009. The $2.1 million improvement in EBITDA reflects the higher gross profit and the reduction in S&A expenses. The Fund also reported a fourth quarter net loss of $0.5 million, on par with a net loss of $0.5 million during the same period in 2009. The Q4 2010 net loss reflects $0.5 million decrease in recovery from non-controlling interest and the $1.8 million decrease in income tax recovery, partially offset by the $2.1 million increase in EBITDA and the $0.1 million decrease in amortization expense.
For the three months ended December 31, 2010 the Fund and its subsidiaries reported negative Distributable Cash of $0.2 million or ($0.011) per unit. By comparison, the Fund reported negative Distributable Cash of $0.5 million or ($0.028) per unit in the fourth quarter of 2009. No distributions were paid to either the public unitholders (Class A Units) or to the Class B Units in either period, resulting in a payout ratio of 0% in both the fourth quarter of 2009 and 2010.
Results from Operations - 12 months ended December 31, 2010
For the 12 months ended December 31, 2010, total sales increased by 3.5% to $197.7 million, from $190.9 million in 2009. This performance improvement reflects a 10.2% increase in underlying sales activity, partially offset by a 6.7% decrease in sales upon conversion, due to the negative effect of a stronger Canadian dollar. Sales at Hardwoods' US operations, as measured in US dollars, increased by 13.2%. Sales in Canada, as measured in Canadian dollars, were up 5.7% year-over-year.
Gross profit for the 2010 year was $34.4 million, largely unchanged from the $34.5 million achieved in 2009. Although sales increased by 3.5% in 2010, the higher sales were offset by a lower gross profit margin. As a percentage of sales, gross profit was 17.4% in 2010, compared to 18.1% in 2009.
Selling and administrative expenses decreased by $5.9 million to $29.7 million, from $35.6 million in 2009. The significant reduction in S&A expense reflects lower bad debt expense due to fewer customer credit failures, reduced premises expense relating to lower rental rates and branch consolidation, the positive impact of a stronger Canadian dollar on the conversion of S&A expense at the US operations, and expense recoveries related to proceeds from legal settlements. In addition, 2009 S&A included $1.5 million of restructuring costs which were not repeated in 2010. These decreases were partially offset by the higher staffing expenses and sales and warehouse costs required to support the 10.2% increase in underlying sales.
EBITDA for 2010 increased to $4.6 million, from a loss of $1.2 million in 2009. The significant improvement in EBITDA reflects the lower S&A expenses.
Net earnings increased to $1.0 million, from a loss of $10.2 million in 2009. This improvement primarily reflects the higher EBITDA, a $0.3 million decrease in amortization expense, a $1.4 million reduction in non-cash foreign currency losses and a $6.8 million decrease in income tax expense. These gains were partially offset by a $0.1 million increase in interest expense and a $2.9 million decrease in recovery from the non-controlling interest.
On a full-year basis, the Fund and its subsidiaries generated Distributable Cash of $4.1 million, or $0.226 per unit, compared to negative Distributable Cash of $0.1 million, or ($0.008) per unit, in 2009. No distributions were paid to the Class A or Blass B Units in either year, resulting in a payout ratio of 0% for both periods.
Outlook
Looking ahead, forecasts continue to call for gradually improving market conditions in 2011, but the Fund's outlook remains cautious. In the US, unemployment hovers around 9% and lenders continue to foreclose on delinquent homeowners, creating a market in which new homebuilders must compete with an excess of unsold properties. In Canada, housing starts are expected to moderate, with industry forecasts calling for a slight dip in Canadian housing starts in 2011 compared to 2010. It remains to be seen what impact recent government measures to tighten Canadian mortgage lending rules will have on 2011 housing starts. The new measures, which came into effect on March 18, 2011, reduced the maximum mortgage loan amortization from 35 years to 30, and increased the minimum down payment on government-backed insured mortgages.
Given the market outlook, Hardwoods does not anticipate significant demand-driven growth in 2011. However, the Fund expects to achieve continued improvement in its financial performance as a result of strategic initiatives. In the latter part of 2010, Hardwoods introduced an updated business strategy which shifts the emphasis from cost reduction to market expansion, and focuses on areas of improving market opportunity.
End-Market Diversification: As part of this strategy, Hardwoods is increasing its emphasis on the commercial and institutional construction markets to help offset the slow recovery anticipated for the residential construction market. Both the commercial and institutional markets fared better than residential construction during the downturn and are currently enjoying a more robust recovery. Recent initiatives related to this strategy include identifying potential customers and their needs, strengthening Hardwoods' sales team with new expertise, and expanding training for existing sales staff.
Leverage Import Products: Hardwoods believes it has one of the strongest import programs in the industry, offering branded products with a high quality-to-price ratio. In 2011, the Company plans to continue building on the 17% growth achieved in import sales in 2010, while seeking out new products and introducing its import line to a broader range of customers.
Focus on High-Potential Geographic Markets: Hardwoods will also focus on increasing market share in three densely populated geographies where hardwood demand is significant, but where Hardwoods currently holds a relatively small market share. To achieve this objective, Hardwoods plans to pursue specific organic growth initiatives, complemented by possible acquisition activity should attractively priced opportunities become available.
S&A expenses are expected to increase in 2011 as the Company implements strategies and supports increased sales activity. However, with the expectation that market conditions will remain challenging, Hardwoods will continue to exercise tight control of costs, inventories and working capital, while working to minimize customer credit risk. Overall, management anticipates continued gradual improvement in results in the year ahead.
The Fund generated $4.1 million in Distributable Cash in 2010, a significant turnaround from the $0.1 million of negative Distributable Cash generated in the same period in 2009. Although this improvement is encouraging, cumulative Distributable Cash generated by the Fund since distributions were suspended nine fiscal quarters ago is just $2.2 million. Trustees of the Fund regularly evaluate market conditions, and will consider reinstating a distribution when satisfied with the sustainable and predictable cash generation capability of the Fund.
Regarding the January 2011 implementation of new taxes on Canadian income trusts, the Fund's taxable earnings currently flow through corporate subsidiaries in both Canada and the US, which are already subject to corporate taxation. Accordingly, the new trust tax is not expected to have any near-term impact on the Fund's tax situation. The tax free roll-over rules for income trusts do not expire until the end of 2012 so adequate time remains to convert to an alternate structure should the Board of Trustees determine it is advantageous to do so. We continue to monitor the situation closely.
A more detailed discussion of the Fund's financial performance can be found in its Management's Discussion and Analysis (MD&A) for the three and 12 months ended December 31, 2010. The MD&A will be posted, along with the Fund's audited consolidated financial statements on SEDAR (www.sedar.com) and on the Fund's website at http://www.hardwoods-inc.com.
About the Fund
Hardwoods Distribution Income Fund is an unincorporated, open-ended, limited purpose trust established to hold, indirectly, the securities of Hardwoods Specialty Products LP and Hardwoods Specialty Products USLP (collectively, "Hardwoods"). The Fund was launched on March 23, 2004, with the completion of an initial public offering of 14,410,000 shares.
About Hardwoods
Hardwoods is one of North America's largest distributor of high-grade hardwood lumber and sheet goods to the cabinet, moulding, millwork, furniture and specialty wood products industries. The company currently operates a network of 26 distribution centres in the U.S. and Canada.
Non-GAAP Measures - EBITDA and Distributable Cash
References to "EBITDA" are to earnings before interest, income taxes, depreciation and amortization, mark-to-market adjustments on foreign currency contracts, impairment of goodwill and other intangible assets, and the non-controlling interest in earnings. In addition to net income or loss, EBITDA is a useful supplemental measure of performance and cash available for distribution prior to debt service, changes in working capital, capital expenditures and income taxes.
References to "Distributable Cash" is to net cash provided by operating activities, before changes in non-cash operating working capital, less capital expenditures and contributions to any reserves that the Boards of Directors of Hardwoods' operating entities determine to be reasonable and necessary for the operation of the businesses owned by these entities.
Hardwoods believes that, in addition to net income or loss, EBITDA and Distributable Cash are each a useful supplemental measure of operating performance that may assist investors in assessing their investment in units of the Fund. Neither EBITDA nor Distributable Cash are earnings measures recognized by GAAP and they do not have a standardized meaning prescribed by GAAP. Investors are cautioned that EBITDA should not replace net income or loss (as determined in accordance with GAAP) as an indicator of our performance, nor should Distributable Cash replace cash flows from operating, investing and financing activities or as a measure of liquidity and cash flows. The Fund's method of calculating EBITDA and Distributable Cash may differ from the methods used by other issuers. Therefore, the Fund's EBITDA and Distributable Cash may not be comparable to similar measures presented by other issuers. For reconciliation between EBITDA and net income or loss as determined in accordance with GAAP, and for reconciliation between Distributable Cash and net cash provided by operating activities as determined in accordance with GAAP, please refer to the Fund's Management's Discussion and Analysis (MD&A) for the three and 12 months ended December 31, 2010 which will be posted on SEDAR (www.sedar.com) and on the Fund's website http://www.hardwoods-inc.com.
Additional guidance regarding disclosure of distributable cash and cash distributions was issued in 2007 in an interpretative release by the Canadian Institute of Chartered Accountants (the "CICA") in respect of "Standardized Distributable Cash in Income Trusts and other Flow Through Entities" and National Policy 41-201 of the Canadian Securities Administrators "Income Trusts and other Indirect Offerings" (collectively, the "Interpretative Guidance"). For disclosure and discussion of the Fund's Standardized Distributable Cash in accordance with the Interpretive Guidance, please refer to the Fund's Management's Discussion and Analysis (MD&A) for the three and 12 months ended December 31, 2010 which will be posted on SEDAR (www.sedar.com) and on the Fund's website http://www.hardwoods-inc.com .
Forward-Looking Statements
This press release may contain forward-looking statements, which reflect management's expectations regarding the future growth, results of operations, performance and business prospects, and opportunities of the Fund. Forward-looking statements contain such words as "anticipate", "believe", "continue", "could", "expects", "intend", "may", "plans" or similar expressions suggesting future conditions or events. Such forward-looking statements reflect current beliefs and are based on currently available information. Forward-looking statements involve significant risks and uncertainties. A number of factors could cause actual results to differ materially from results discussed in the forward-looking statements, including the effects, as well as changes in: national and local business conditions; political or economic instability in local markets; competition; consumer preferences, spending patterns and demographic trends; legislation and governmental regulation. Although the forward-looking statements contained in this press release are based on what management believes to be reasonable assumptions, management cannot assure readers that actual results will be consistent with these forward-looking statements.
All forward-looking information in this news release is qualified in its entirety by this cautionary statement and, except as may be required by law, the Fund undertakes no obligation to revise or update any forward-looking information as a result of new information, future events or otherwise after the date hereof.
Rob Brown, Chief Financial Officer, Phone: (604) 881-1990, Fax: (604) 881-1995, Email: robbrown@hardwoods-inc.com, Website: http://www.hardwoods-inc.com