Hardwoods Distribution has Q1 net loss of C$701,000 down from C$569,000 profit a year ago on expenses from proposed corporation conversion; net sales up 7.3% to C$52M on improving non-residential construction market

LANGLEY, British Columbia , May 5, 2011 (press release) – 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.

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



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.


Forestweb Editor's Note: In an omitted table, Hardwood Distribution recorded Q1 net loss of US$701,000.  For the same period a year ago, the company reported net income of US$569,000.  

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