Hardwoods Distribution Income Fund Announces 2011 First Quarter Results and Intended Post-Conversion Dividend Policy

TRADING SYMBOL: Toronto Stock Exchange - HWD.UN

Hardwoods Distribution Income Fund will hold a conference call and webcast to discuss first quarter 2011 financial results on Friday, May 6, 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 May 25, 2011 at: 1-800-642-1687 or 416-849-0833 (Passcode 63105234 followed by the number sign).

LANGLEY, BC, May 5 /CNW/ - Hardwoods Distribution Income Fund (the "Fund") today reported financial results for the three months ended March 31, 2011. The Fund holds, indirectly, securities which represent an 80% ownership interest in Hardwoods Specialty Products LP and Hardwoods Specialty Products US LP (collectively, "Hardwoods"). The Sauder Group has retained a 20% interest in Hardwoods in the form of holding special voting units of the Fund and Class B limited partner units of Hardwoods (the "Retained Interest"). The Fund's results are based on the performance of Hardwoods, one of North America's largest wholesale distributors of hardwood lumber and related sheet good products, operating a network of 26 distribution centres in the US and Canada.

First Quarter Highlights

(For the three months ended March 31, 2011)

  • First quarter revenue increased 7.3% to $52.0 million compared to the first quarter of 2010
  • The Fund generated positive Distributable Cash of $0.5 million or $0.03 per unit
  • The Fund announced that at its annual general and special meeting of unitholders to be held on May 19, 2011 it will ask unitholders to approve the conversion of the Fund to a corporation, including approval to exchange the Retained Interest's 20% investment in Hardwoods for 1,366,428 common shares representing an 8.6% interest in the new corporation
  • The Board of Trustees announced that it intends to institute a quarterly dividend upon conversion to a corporation. The new dividend is expected to commence with a dividend of $0.02 per share in the third quarter of 2011.

"We continued to grow sales and achieved operational improvements in our business during the first quarter of 2011," said Lance Blanco, President and CEO of Hardwoods Distribution Income Fund. "All nine of our operating regions posted year-over-year sales gains compared to a year ago, and we increased revenues by 7.3% despite the negative impact of a much stronger Canadian dollar. We view these gains as particularly significant given the continued fragility of US residential construction markets. According to the US Commerce Department, in March the seasonally adjusted annual rate number of new housing starts in the US was just 549,000 units , a low level by historic standards, while the rate of new homes under construction fell to a four-decade low."

"Our stronger sales results reflect gradually improving conditions in non-residential construction sectors, as well as our shift to a market-expansion strategy.  As part of this strategy, we are successfully identifying and targeting new customers in the commercial and institutional construction sectors, while continuing to leverage our successful import program. Compared to the first quarter of last year, we achieved 30.8% growth in sales of our import products. We also continued to assess opportunities related to our larger-markets strategy, which focuses on expanding our market share in selected high potential geographic markets over the next two years."

"While our bottom-line results were not as strong as last year, this was largely due to the impact of $0.3 million in expenses related to our proposed conversion to a corporation, and the absence of a one-time $0.3 million recovery from a lawsuit settlement that helped our 2010 first quarter results. Factoring out the impact of these unusual items, our first quarter Distributable Cash performance would have improved by 25% due to our higher sales and continued tight management of the business."

"Overall we are pleased with the progress made in the first quarter of 2011.  The investments we're making to support sales growth are delivering results and we anticipate continued operational improvements through the balance of the year. While market conditions are expected to remain challenging and a stronger Canadian dollar could continue to affect results both by reducing the dollar value of our sales and by making it more difficult for our Canadian customers to compete in US markets, we remain confident about what we can achieve in 2011," said Mr. Blanco.

"Based on our recent performance and a positive outlook for sustainable and more predictable cash generation by our business, our Board of Trustees has announced that following the Fund's proposed conversion to a publicly traded corporation in the third quarter of 2011, it is intended that the new corporation will institute a quarterly dividend of $0.02 per share, with the first quarterly dividend to be paid in October 2011. However, the actual amounts and timing of any future dividends will depend on Hardwoods' earnings performance and other factors," said Mr. Blanco.

Summary of Results

Selected Unaudited Consolidated Financial Information  (in thousands of Canadian dollars)
         
  For the three months
Ended March 31,
2011
  For the three months
Ended March 31,
2010
Total sales $ 52,030   $ 48,498
  Sales in the US (US$)   31,840     27,703
  Sales in Canada   20,642     19,685
Gross profit   9,099     8,629
  Gross profit %   17.5%     17.8%
Operating expenses   (8,772)     (7,719)
Profit from operating activities $ 327   $ 910
Add: Depreciation   231     330
Earnings before interest, taxes, depreciation and amortization ("EBITDA")  $ 558   $ 1,240
Add (deduct):          
    Depreciation   (231)     (330)
    Net finance cost   (735)     (126)
    Income tax (expense) recovery   (293)     (215)
Profit (los)s for the period $ (701)   $ 569
Basic and fully diluted loss per Class A Unit $ (0.05)   $ 0.04
Average Canadian dollar exchange rate for one US dollar   0.986     1.040

 

Distributable Cash and Cash Distributions

Selected Unaudited Consolidated Financial Information
(in thousands of dollars except per unit amounts)                
 
 




Three months
ended
March 31,
2011
 
 
 
Three months
ended
March 31,
2010
           
Net cash provided by (used in) operating activities  $ 828   $ (3,579)
Increase (decrease) in non-cash operating working capital
and income taxes paid/received
  (81)     4,797
           
    747     1,218
Principal repayments on finance lease obligation   (168)     (195)
Capital expenditures   (42)     (31)
Distributable Cash $ 537   $ 992
           
Distributions relating to the period:          
  Class A Units $ -   $ -
  Class B Units(1)   -     -
  Total Units $ -   $ -
           
           
Weighted average outstanding units and per unit amounts:          
  Class A Units outstanding   14,524,749     14,410,000
  Class B Units outstanding   3,602,500     3,602,500
  Total Units outstanding   18,127,249     18,012,500
           
Distributable Cash per Total Units $ 0.030     $0.055
           
Distributions relating to the period:          
  Class A Units $ -   $ -
  Class B Units(1) $ -   $ -
  Total Units $ -   $ -
           
Payout ratio (2)   0.0%     0.0%
           
           




March 23, 2004
to March 31,
2011


 
 
Cumulative since inception:          
  Distributable Cash   80,122(3)       
  Distributions relating to the period   66,754      
  Payout ratio(2)   83.3%      

 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 March 31, 2011 balance sheet.
2 Payout ratio measures the ratio of distributions by the Fund relating to the period to Distributable Cash for the period.
3 Information for Q1, 2010 and Q1, 2011 are in accordance with IFRS.  All other periods are in accordance with Canadian GAAP.

Results from Operations - Three Months Ended March 31, 2011

For the three months ended March 31, 2011, total sales increased by 7.3% to $52.0 million, from $48.5 million in Q1 2010. The performance improvement reflects a 10.8% increase in underlying sales activity, partially offset by a 3.5% 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 14.9% to $31.8 million. Sales in Canada, as measured in Canadian dollars, increased by a more modest 4.9% to $20.6 million, reflecting the negative impact of the Canadian dollar on product prices and on demand from Canadian manufacturing customers exporting to the US.

First quarter gross profit increased to $9.1 million, from $8.6 million in Q1 2010. This gain reflects the higher sales revenue, partially offset by a weaker gross profit margin. Gross profit as a percentage of sales was 17.5%, in line with expectations, but lower than the 17.8% achieved in Q1 2010.  The Fund views a 17.5% gross margin as appropriate given competitive conditions at this point in the business cycle.

Q1 operating expenses were $8.8 million, compared to $7.7 million during the same period in 2010. The most significant contributor to the year-over-year increase in costs was $0.3 million related to the proposed conversion of the Fund to a corporation. The balance primarily reflects higher personnel costs related to Hardwoods' market expansion strategies. First quarter results from a year ago also included a one-time credit related to proceeds from a lawsuit that reduced expenses by $0.3 million in that quarter.

The Fund reported first quarter EBITDA of $0.6 million, compared to $1.2 million in Q1 2010. The $0.6 million decrease in EBITDA reflects the higher operating expenses, partially offset by increased gross profit. The Fund also reported a first quarter loss of $0.7 million, which reflects the $0.6 million reduction in EBITDA, a $0.6 million increase in net finance expense, and a $0.1 million increase in income tax expense.

For the three months ended March 31, 2011 the Fund and its subsidiaries generated Distributable Cash of $0.5 million, or $0.030 per unit. By comparison, the Fund reported Distributable Cash of $1.0 million or $0.055 per unit in the first quarter of 2010. 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 first quarter of 2010 and 2011. The $0.5 million reduction in Distributable Cash is largely due to the impact of expenses related to the Fund's proposed conversion to a corporation of $0.3 million and the absence of a one-time $0.3 million recovery from a lawsuit settlement that helped the Fund's 2010 first quarter results. Factoring out these unusual impacts, the Fund's first quarter Distributable Cash performance would have improved by 25% as demonstrated in the table below.

Selected Unaudited Consolidated Financial Information
(in thousands of dollars)

3 months ended
March 31,
2011
  3 months ended
March 31,
2010
Distributable Cash as reported $ 537   $ 992
Add (deduct):          
  Corporate conversion expenses   300     -
  Proceeds received from litigation settlement   -     (320)
Adjusted Distributable Cash $ 837   $ 672

Outlook

While market conditions continue to gradually improve, the Fund's outlook remains cautious. In the US, the pace of residential construction activity remains far below the 1.2 million units per annum that economists consider healthy. Meanwhile, non-residential construction segments of the US market continue to make a slow recovery from the recession.

In Canada, industry forecasts continue to call for a slight dip in Canadian housing starts in 2011 compared to 2010. The stronger Canadian dollar is also having a negative impact on the competitiveness of Canadian manufacturers selling finished products into the US, while also reducing Hardwoods' own selling prices for US-sourced lumber and panels.

Despite these challenges, the Fund expects to achieve continued performance improvements in 2011 as it implements its new business strategy. The strategy focuses on:

  1. Increasing end-market diversification with a stronger focus on the commercial and institutional construction markets;
  2. Leveraging of the company's successful import program to grow sales and build market share; and
  3. Achieving increased market share with a sharpened focus on larger, high-potential geographic markets.

Operating expenses are expected to trend somewhat higher in 2011 as Hardwoods implements these strategies and supports increased sales activity. The Fund also anticipates that it will incur an additional $0.3 million in expenses in the second quarter of 2011 related to the proposed conversion to a corporation.

Overall, the Fund anticipates a positive year for Hardwoods in 2011, with strategy implementation and continued tight management of the business helping to overcome the lingering impacts of the economic recession.

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 months ended March 31, 2011. Results are reported in Canadian dollars unless otherwise stated, and have been prepared in accordance with International Financial Reporting Standards ("IFRS") applicable to the preparation of interim financial statements, including IAS 34 "Interim Financial Reporting" and IFRS 1 "First Time Adoption of IFRS." For comparative purposes all financial amounts related to the quarter ended March 31, 2010 and the year ended December 31, 2010 have been restated in accordance with IFRS. All other periods remain unchanged from the numbers originally reported under Canadian generally accepted accounting principles. The MD&A will be posted, along with the Fund's condensed consolidated interim financial statements on SEDAR (www.sedar.com) and on the Fund's website http://www.hardwoods-inc.com on or before May 6, 2011.

About the Fund

Hardwoods Distribution Income Fund is an unincorporated, open-ended, limited purpose trust established to hold, indirectly, securities which represent an 80% ownership interest in Hardwoods.

About Hardwoods

Hardwoods is one of North America's largest distributors 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 centers 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, where interest is defined as net finance expense as per the Fund's consolidated statement of comprehensive income.  In addition to profit 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 and cash income taxes, 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 profit 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 International Financial Reporting Standards ("IFRS") and they do not have a standardized meaning prescribed by IFRS. Investors are cautioned that EBITDA should not replace profit or loss (as determined in accordance with IFRS) 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 profit or loss as determined in accordance with IFRS, and for reconciliation between Distributable Cash and net cash provided by operating activities as determined in accordance with IFRS, please refer to the Fund's Management's Discussion and Analysis (MD&A) for the three months ended March 31, 2011 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 months ended March 31, 2011 which will be posted on SEDAR (www.sedar.com) and on the Fund's website http://www.hardwoods-inc.com .

Forward-Looking Statements

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

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 completion of the conversion of the Fund from an income trust structure to a publicly traded corporation; the intention to institute a quarterly dividend upon conversion to a corporation, with the new dividend expected to commence with a dividend of $0.02 per share in the third quarter of 2011; the Fund's perspective that while market conditions continue to gradually improve, the Fund's outlook remains cautious;  the Fund's belief that the stronger Canadian dollar is having a negative impact on the competitiveness of Canadian manufacturers selling finished products into the US, while also reducing Hardwoods' own selling prices for US-sourced lumber and panels; the Fund's belief that despite these challenges, the Fund expects to achieve continued performance improvements in 2011 as it implements its new business strategy; the Fund's expectation that operating expenses are will trend somewhat higher in 2011 as Hardwoods implements these strategies and supports increased sales activity; the Fund's belief that it will incur an additional $0.3 million in expenses in the second quarter of 2011 related to the proposed conversion to a corporation;  the Fund's belief that its strategy implementation and continued tight management of the business will help to overcome the lingering impacts of the economic recession.

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: national and local business conditions; political or economic instability in local markets; competition; consumer preferences; spending patterns and demographic trends; legislation or governmental regulation.

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.

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.


 

 

 

 

 

 

SOURCE Hardwoods Distribution Income Fund

For further information:

Rob Brown 
Chief Financial Officer
Phone: (604) 881-1990
Fax: (604) 881-1995
Email: robbrown@hardwoods-inc.com
Websitehttp://www.hardwoods-inc.com

Organization Profile

Hardwoods Distribution Income Fund

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