(ROYAL GROUP LOGO)
EXHIBIT 1
FIRST QUARTER
REPORT
ENDED
DECEMBER 31
2002
MESSAGE TO SHAREHOLDERS
Royal's fiscal 2003 first quarter financial results were less than expected, as
a result of costs associated with the turn around of the Window Coverings
Division and unfavorable product mix. While we achieved sales of $421 million,
representing the high end of our guidance range, net earnings declined to $16
million in the quarter.
TURN AROUND OF WINDOW COVERINGS DIVISION
While we continued to post greater than expected losses in our US Window
Coverings operations during the first quarter, a series of performance improving
strategies began to be successfully implemented. These strategies include head
count reductions, transfer of some fabrication operations to Mexico, and
transfer of head rail production to the Dominican Republic.
We are expecting improvements to profitability in US Window Coverings operations
from new custom retail programs, as home improvement stores are now equipped
with our sample kits and displays. This store presence, coupled with an
aggressive advertising literature mailing campaign this quarter, should
stimulate significant volume increases throughout the remainder of this year.
These profit enhancing strategies have been devised and are being implemented by
a new management team, who foresee break-even earnings performance on a monthly
basis at the end of fiscal 2003.
IMPROVING CAPACITY UTILIZATION
We are making progress toward our goal of greater capacity utilization
throughout Royal Group. We operated with capacity utilization in the low 60%
range during 2002. Our goal is to return to 80% plus capacity utilization, which
will be key to attaining our historical EBITDA margins.
During 2003, we expect to realize sales of $1.95 billion to $2.05 billion, which
implies capacity utilization in the mid 60% range. We believe that our
infrastructure is capable of producing $3 billion in sales, with future
investments required primarily for new machinery, tooling and equipment.
We have initiated two further plant consolidations to improve capacity
utilization. These consolidations involve some custom profile and window
coverings plants located in both Canada and the USA. We will continue to pursue
actions that serve to increase the use of our assets and improve returns on
invested capital.
DEALING WITH RAW MATERIAL COST INCREASES
PVC resin costs rose during 2002 and are rising again this year. We are
mitigating the impact of rising raw material costs on margins through finished
product price increases. In addition to the finished product price increases
implemented in 2002, this year we have initiated price increases for pipe and
fittings as well as siding products.
PENETRATION OF NEW MARKETS
Historically, we have primarily targeted the renovation or home improvement
sector of the market for our products, as new home builders have historically
sought conventional materials to construct their homes. Today, in response to
ageing consumers who are demanding more durable and maintenance-free homes, home
builders are seeking alternative materials to those they have historically used.
In addition, builders are looking to differentiate themselves in an increasingly
competitive market.
Royal can offer today's home builders a series of attractive construction
products. These products include decorative interior and exterior moldings,
railings, siding, decorative columns, fencing and decking. We are continuing
with our program to create awareness of and interest in these products with
builders, believing that specification of our products will result in more
product being pulled through existing distribution channels. With over 1.7
million homes built in North America last year and our capability of supplying
many thousands of dollars of content for a home, this is a large opportunity for
Royal.
OUTLOOK
We continue to implement initiatives to generate free cash flow, repay debt and
improve returns on invested capital. These initiatives include curtailment of
capital expenditures, programs to reduce inventory and increasing capacity
utilization through plant consolidations. We expect that Royal will generate
significant free cash flow in 2003, enabling further repayment of debt.
We are increasingly focussed on development of markets and products that fully
utilize Royal's competitive advantages. With increasing strategic focus and
continuing fiscal discipline, we believe that Royal will deliver increasing
returns on invested capital over the next several years.
We appreciate your patience while we implement strategies that will allow us to
improve shareholder value. We look forward to updating you on our progress.
/s/ Vic De Zen /s/ Douglas Dunsmuir
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Vic De Zen Douglas Dunsmuir
Chairman and C.E.O. President
February 27, 2003 February 27, 2003
CONSOLIDATED BALANCE SHEETS
(in thousands of Canadian dollars)
DEC. 31/02 Sept. 30/02 Dec. 31/01
----------- ----------- -----------
(UNAUDITED) (audited) (unaudited)
(restated (restated
note 2) note 2)
ASSETS
Current assets:
Accounts receivable $ 326,448 $ 390,332 $ 369,930
Inventories 540,058 495,710 465,799
Prepaid expenses 30,359 26,295 32,922
----------- ----------- -----------
896,865 912,337 868,651
Future income tax assets 8,824 8,824 24,047
Property, plant and equipment 1,624,742 1,637,049 1,692,446
Goodwill and other assets 277,627 275,757 282,870
----------- ----------- -----------
$ 2,808,058 $ 2,833,967 $ 2,868,014
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness $ 467,900 $ 383,785 $ 512,340
Accounts payable and accrued liabilities 211,774 257,324 219,764
Term debt due within one year 24,830 103,754 24,635
----------- ----------- -----------
704,504 744,863 756,739
Term debt 446,992 447,290 551,390
Future income tax liabilities 129,876 126,891 132,601
Minority interest 15,569 18,249 18,875
Shareholders' equity:
Capital stock 632,711 632,697 625,004
Retained earnings 916,078 900,141 795,848
Currency translation adjustments (37,672) (36,164) (12,443)
----------- ----------- -----------
1,511,117 1,496,674 1,408,409
----------- ----------- -----------
$ 2,808,058 $ 2,833,967 $ 2,868,014
=========== =========== ===========
See accompanying notes to consolidated financial statements.
On behalf of the Board:
/s/ Vic De Zen /s/ Ron Goegan
- -------------- --------------
Chairman and Director Director
Vic De Zen Ron Goegan
Chief Executive Officer Chief Financial Officer
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of Canadian dollars, except per share amounts)
3 MONTHS 3 months
ENDED ended
DEC. 31/02 Dec. 31/01
----------- -----------
(UNAUDITED) (unaudited)
Net sales $ 421,312 $ 384,220
Cost of sales and operating expenses (353,493) (305,920)
--------- ---------
Operating margin (EBITDA) 67,819 78,300
Amortization charges (31,963) (29,040)
Interest and financing charges (13,142) (13,709)
--------- ---------
Earnings before income taxes and minority interest 22,714 35,551
Income taxes (6,498) (10,665)
--------- ---------
Earnings before minority interest 16,216 24,886
Minority interest (279) (19)
--------- ---------
Net earnings $ 15,937 $ 24,867
========= =========
Earnings per share (note 4):
Basic $ 0.17 $ 0.27
Diluted $ 0.17 $ 0.27
========= =========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(in thousands of Canadian dollars)
3 MONTHS 3 months
ENDED ended
DEC. 31/02 Dec. 31/01
----------- -----------
(UNAUDITED) (unaudited)
Retained earnings, beginning of period $ 900,141 $ 775,229
Accounting policy change (note 2) -- (4,248)
Net earnings 15,937 24,867
--------- ---------
Retained earnings, end of period $ 916,078 $ 795,848
========= =========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars)
3 MONTHS 3 months
ENDED ended
DEC. 31/02 Dec. 31/01
--------- -----------
(UNAUDITED) (unaudited)
Cash provided by (used in):
Operating activities:
Earnings before minority interest $ 16,216 $ 24,886
Items not affecting cash 35,117 33,651
Change in non-cash working capital (27,131) (19,281)
--------- ---------
24,202 39,256
Financing activities:
Increase in bank indebtedness 84,115 106,973
Repayment of term debt (79,202) (222)
Change in minority interest (651) --
Proceeds from issuance of shares under
stock option plan 14 16,228
--------- ---------
4,276 122,979
Investing activities:
Acquisition of property, plant and equipment, net (25,691) (28,575)
Acquisitions of other businesses -- (149,250)
Proceeds from non-strategic assets -- 9,871
Increase in other assets (2,787) (200)
--------- ---------
(28,478) (168,154)
Effect of exchange rate changes -- 5,919
--------- ----------
Change in cash, being cash, end of period $ -- $ --
========= =========
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars)
1. CONSOLIDATED FINANCIAL STATEMENTS
These consolidated financial statements have been prepared by management in
accordance with Canadian generally accepted accounting principles, and include
the accounts of Royal Group Technologies Limited, its subsidiaries and its
proportionate share of its joint ventures.
In the opinion of management, the unaudited interim consolidated financial
statements reflect all adjustments, which consist only of normal and recurring
adjustments, necessary to present fairly the financial position at December 31,
2002 and the results of operations and cash flows for the three month period
ended December 31, 2002.
Currently the Company operates substantially in the North American
renovation, remodeling and construction markets, which are seasonal.
Accordingly, approximately three-fifths of the Company's net sales and
two-thirds of its net earnings occur in the last two fiscal quarters.
Furthermore, the Company's annual free cash flow is achieved substantially in
the last two quarters.
2. CHANGE IN ACCOUNTING POLICIES
Except as outlined below, the Company's accounting principles remain unchanged
from the most recent fiscal year ended September 30, 2002. For details, please
refer to note 1 on page 30 of the Company's 2002 Annual Report.
CICA Handbook Section 1650 with respect to foreign currency exchange gains
and losses was adopted for fiscal 2003. The standard requires separate
disclosure of exchange gains and losses on the income statement and the
elimination of deferral and amortization of unrealized gains and losses on
non-current foreign currency denominated monetary assets and liabilities, except
to the extent that they meet specified criteria for hedge accounting. With the
retroactive application of this change, net earnings would increase by $464
($.01 per share) in the three month quarter ending December 31, 2001.
Effective October 1, 2002, the Company adopted the new Recommendations of
the Canadian Institute of Chartered Accountants with respect to the accounting
for stock-based compensation and other stock-based payments. The new
Recommendations are applied prospectively to all stock-based payments to
non-employees, and to employee awards that are direct awards of stock, call for
settlement in cash or other assets, or are stock appreciation rights that call
for settlement by the issuance of equity instruments, granted on or after
October 1, 2002. Section 3870, requires additional disclosures for options
granted to employees, including disclosure of pro forma earnings and pro forma
earnings per share as if the fair value based accounting method had been used to
account for employee stock options issued on or after October 1, 2002. The
Company did not issue any stock options in the period from October 1, 2002 to
December 31, 2002.
Certain September 30, 2002 and December 31, 2001 figures have been restated
to conform with the financial statement presentation adopted in fiscal 2003.
3. SEGMENT REPORTING INFORMATION
Products Support Intra-
Segment Segment Group Consolidated
----------- ----------- ---------- ------------
For the quarter ended December 31, 2002
Net sales $ 418,262 $ 133,050 $ (130,000) $ 421,312
Operating margin 35,686 32,133 67,819
Amortization charges 23,702 8,261 31,963
Acquisition of property, plant and equipment 17,426 8,265 25,691
Property, plant and equipment 847,008 777,734 1,624,742
Total assets 1,777,544 1,030,514 2,808,058
For the quarter ended December 31, 2001
Net sales $ 368,790 $ 147,830 $ (132,400) $ 384,220
Operating margin 34,404 43,896 78,300
Amortization charges 20,303 8,737 29,040
Acquisition of property, plant and equipment 19,678 8,897 28,575
Property, plant and equipment 812,775 879,671 1,692,446
Total assets 1,668,848 1,199,166 2,868,014
Net sales by geographic region for the 3 months ending December 31, 2002 were
63% to the U.S. (2001 - 60%), 30% to Canada (2001 - 30%) and 7% to foreign
markets (2001 - 10%).
4. EARNINGS PER SHARE
Basic and diluted earnings per share have been calculated using the weighted
average and maximum dilutive number of shares outstanding for the three month
period of 93,218,367 (2001 - 91,514,713) and 93,538,893 (2001 - 93,675,448)
respectively. As at December 31, 2002, the Company had outstanding 15,935,444
multiple voting shares, 77,285,173 subordinate voting shares, and 9,267,766
options to acquire subordinate voting shares under the Company's employee stock
option plan.
MANAGEMENT'S DISCUSSION AND ANALYSIS
QUARTER ENDED DECEMBER 31, 2002, AS COMPARED TO THE QUARTER ENDED DECEMBER 31,
2001
Consolidated net sales for the first quarter grew by 10% to $421 million,
compared to $384 million the previous year. Products Segment sales for the
quarter, including Marley, increased $49 million or 13% to $418 million. Home
Improvement Products increased $51 million or 26% to $245 million. Both Custom
Profiles and Exterior Cladding sales grew organically by 9%. Consumer Products
sales declined by 6% reflecting our Window Coverings difficulties and a soft
consumer goods market. The decline was led by an 11% decrease in Window Covering
sales. Offsetting this decline was a 1% sales increase for both Outdoor Products
and Housewares & Furniture. Construction Product sales
MANAGEMENT'S DISCUSSION AND ANALYSIS
increased 13% overall primarily due to strong new construction markets which
resulted in a 12% increase in Pipe & Fittings sales. Royal Building Systems and
Foreign Operations sales decreased 6%, mainly due to the softening of South
American sales.
Support Segment sales for the quarter decreased $15 million or 10% to $133
million. Sales in the Support Segment are largely eliminated on consolidation
due to the nature of the Group's vertical integration. Sales of Materials grew
2% reflecting volume growth in the Products Segment offset by inventory
retention of the Support Segment level. Sales in Machinery & Tooling declined
31% to $12 million, as the Group's capacities currently require less in the way
of equipment additions. As anticipated, sales in the Services category decreased
35% to $21 million as the wind-up and sale of certain plant construction and
related businesses occurred during fiscal 2002.
During the quarter, sales to non-Canadian customers including foreign based
sales and exports from Canadian operations increased to $296 million or 70% of
total sales consistent with $269 million or 70% for the prior year. The change
in non-Canadian sales was primarily due to the Marley acquisition and increased
exports to the United States, offset by a decrease in South American sales.
Operating margin or earnings before interest, taxes, depreciation,
amortization and minority interest (EBITDA) is a widely used term in the
financial markets but is not a recognized measure under Canadian generally
accepted accounting principles. Management believes that EBITDA is a valuable
supplemental measure as it provides investors with an indication of cash
available for distribution prior to debt service, capital expenditures, income
taxes and minority interest. It should also be noted that the Group's method of
calculating EBITDA may differ from other companies and therefore may not be
comparable to EBITDA used by other companies. Royal's overall EBITDA for the
quarter ended December 31, 2002, decreased by $10 million or 13% to $68 million
compared to $78 million last year. EBITDA as a percentage of sales was 16.1%
compared to 20.4% last year. The decrease in EBITDA was due to higher material
costs and the inclusion of a full quarter of Marley's activity. Marley's EBITDA
margins traditionally had been much lower than Royal's, though, with the benefit
of the Group's capabilities, Marley's EBITDA margins have increased since
acquisition.
Raw material costs increased to 44.3% of sales from 42.1% last year, due to
higher material costs incurred in the Window Coverings Division and a shift in
product mix towards more material intensive products. Labor costs and other
manufacturing costs increased slightly as a percentage of sales to 14.8% and
12.6%, as compared to 14.0% and 12.0% respectively last year. The increase in
labor costs was due to higher staffing levels as the Group was converting
Products Segment goods into finished goods inventory for the busier season. In
doing so, the requirements for additional machine capacities and related
overtime should lessen during the peak season. The increase in other
manufacturing costs was primarily due to margins from the current product mix
not providing anticipated absorption of fixed costs. It is expected that there
will be an improvement in lowering other manufacturing costs as management has
combined certain of Royal's operations and is continuously reviewing existing
capacities with its goal to increase capacity utilization. Selling and
distribution costs increased to 12.8% of sales compared to 12.1% last year due
to increased volumes shipped into the in-store, sales oriented market. General
and administration costs as a percent of sales increased slightly from 6.9% to
7.0%.
Products Segment EBITDA, for the quarter ended December 31, 2002 increased
to $36 million compared to $34 million last year. EBITDA as a percentage of
sales decreased to 8.5% from 9.3% last year. The decrease was due to a change in
sales mix for the quarter to lower margin products together with more material
intensive manufacturing. Higher Pipe & Fitting sales, Exterior Cladding sales
shift towards lower margin Canadian sales, and a full quarter of Marley sales,
all contributed to the decrease in EBITDA as a percentage of sales. Support
Segment EBITDA for the quarter ended December 31, 2002, decreased by $12 million
to $32 million compared to $44 million last year. EBITDA as a percentage of
sales decreased to 24.2% from 29.7% due primarily to higher feedstock costs
experienced in the Materials category and lower third-party activity in our
Italian equipment manufacturing facility.
Amortization expense for the quarter increased by $3 million to $32 million
from $29 million reflecting last year's capital expenditures and a full quarter
of Marley's amortization. In the Products Segment, amortization as a percentage
of sales was 5.7%, which increased from 5.5% last year. In the Support Segment,
amortization expense as a percentage of sales was 6.2%, which increased from
5.9% last year. Interest and financing charges decreased by $1 million to $13
million, due to a lower level of debt compared to the same quarter last year.
Commencing in January 2003, the Group's cost of borrowing will increase by
approximately fifty basis points per annum as its public debt rating was
downgraded. Based on anticipated debt levels, this should increase interest
costs by roughly $0.5 million per quarter. Effective October 1, 2002, the Group
adopted Section 1650, of the CICA Handbook regarding Foreign Currency
Translation (see note two to the accompanying financial statements). The change
in accounting policy resulted in no deferred foreign exchange losses being
amortized this quarter, whereas $0.5 million of amortization was recorded for
the quarter ended December 31, 2001.
During the quarter the income tax rate decreased to 29% from 30% last year.
The rate is slightly higher than the Group's overall anticipated effective tax
rate for fiscal 2003 of 27% to 28%. Net earnings during the quarter decreased
$9.0 million to $15.9 million or 3.8% of sales, from $24.9 million or 6.5% of
net sales last year. On a diluted basis, earnings per share for the period was
$0.17 compared to $0.27 for the same period in the prior year. The average
number of shares outstanding for the quarter on a diluted basis was 93.5 million
or approximately 0.2 million lower than prior year.
LIQUIDITY AND CAPITAL RESOURCES
Free cash flow (cash flow from operations less change in non-cash working
capital, less acquisition of property, plant and equipment) use during the
quarter was $1.5 million, representing a decrease of $12.2 million over the
prior year's cash flow source of $10.7 million. Due to the seasonal nature of
the Building Products Industry, the first and second quarters are traditional
periods of working capital buildup, predominately finished goods inventory, for
spring demand. Working capital was $192 million at December 31, 2002 compared to
$168 million as at September 30, 2002 and $112 million at December 31, 2001. Due
to the continuous efforts and focus on monitoring collections, days receivable
outstanding had significantly improved to 64 days as compared to last year's 78
days. However, at December 31, 2002, days inventory outstanding increased to 149
days from last year's 143 days. The increase in inventory was due to lower than
anticipated Consumer Product sales. First quarter capital expenditures were $26
million compared to the prior year's $29 million. This year's expenditures were
primarily for tooling and equipment to be used in the Products Segment, and
additional capacities in the Materials division.
At December 31, 2002, approximately $468 million was drawn on the bank
credit facility and Royal's commercial paper program. The Group's $700 million
bank credit facility, which also acts as backup credit to its commercial paper
outstanding, was effectively 67% utilized. The funded debt to total
capitalization ratio was 38.1%, compared to 38.0% at September 30, 2002 and
43.1% at December 31, 2001. Management believes that the Group's anticipated
operating cash flow and available credit under its existing financing
arrangements are sufficient to meet its working capital and capital spending
requirements, as well as debt service requirements, including the seasonal
nature of the Group's operation.
CORPORATE DIRECTORY
CORPORATE OFFICE: TRANSFER AGENTS AND REGISTRARS: SHAREHOLDER INQUIRIES
Royal Group Technologies Limited Computershare Trust Company of Canada Responses to shareholder inquiries as
1 Royal Gate Blvd., 100 University Avenue, 9th Floor well as information published by the
Woodbridge, Ontario Toronto, Ontario M5J 2Y1 Company for its shareholders and others,
Canada L4L 8Z7 Tel: 1-800-663-9097 or (416) 981-9633 including annual reports, quarterly
Telephone: (905) 264-0701 Facsimile: (416) 981-9507 reports and annual information forms may
Facsimile: (905) 264-0702 E-mail: caregistryinfo@computershare.com be obtained from:
Web site: www.royalgrouptech.com
SHARES LISTED ("RYG"): Co-Transfer Agent (U.S.A.) Investor Relations
Toronto Stock Exchange, Computershare Trust Company, Inc. Royal Group Technologies Limited
New York Stock Exchange 12039 W. Alameda Parkway, Site 2-2 1 Royal Gate Blvd.,
Lakewood, CO 80228 Woodbridge, Ontario L4L 8Z7
INDEX LISTINGS Tel: (303) 956-5400 Telephone: (905) 264-0701
S&P/TSX60 Index Fax: (303) 986-2444 Facsimile: (905) 264-0702
S&P/TSX Composite Index E-mail: info@royalgrouptech.com
Web site: www.royalgrouptech.com
TRADING DATA
High Low Close Volume
(TSX) (TSX) (TSX) (in 000's)
TSX+NYSE
----- ----- ----- ----------
Fiscal 2002
Q1 29.49 21.90 29.38 17,216
Q2 32.40 28.05 30.15 14,460
Q3 32.20 28.67 31.48 16,953
Q4 31.97 13.06 13.70 25,607
Fiscal 2003
Q1 17.50 13.02 15.21 19,095
DEBT RATINGS
Rating Commercial Medium
Agency Paper Term
Notes
- ------ ----------- --------
DBRS R-2 (high) BBB (high)
(effective Jan 2003) (effective Jan 2003)
S&P n/a BBB
FORWARD LOOKING STATEMENTS:
The information in this document contains certain forward-looking statements
with respect to Royal Group Technologies Limited, its subsidiaries and
affiliates. These statements are often, but not always made through the use of
words or phrases such as "expects", "should continue", "believes",
"anticipates", "estimated" and "intends" or similar formulations. By their
nature, these forward-looking statements involve known and unknown risks,
uncertainties and other factors affecting Royal specifically or its industry
generally that could cause actual performance and financial results to differ
materially from those contemplated by the forward-looking statements. These
risks and uncertainties include fluctuations in the level of renovation,
remodeling and construction activity, changes in product costs and pricing, an
inability to achieve or delays in achieving savings related to the cost
reductions, or revenues related to sales price increases, consolidation and
restructuring programs, changes in product mix, the growth rate of the markets
into which Royal's products are sold, market acceptance and demand for Royal's
products, changes in availability or prices for raw materials, pricing pressures
resulting from competition, difficulty in developing and introducing new
products, failure to penetrate new markets effectively (particularly markets in
developing countries), the effect on foreign operations of currency
fluctuations, tariffs, nationalization, exchange controls, limitations on
foreign investment in local business and other political, economic and
regulatory risks, difficulty in preserving proprietary technology, changes in
environmental regulations, currency risk exposure and other risks described from
time to time in publicly filed disclosure documents and securities commission
reports of Royal Group Technologies Limited and its subsidiaries and affiliates.
In view of these uncertainties we caution readers not to place undue reliance on
these forward-looking statements. Statements made in this document are made as
of February 27, 2003 and Royal disclaims any intention or obligation to update
or revise any statements made herein, whether as a result of new information,
future events or otherwise.
(ROYAL GROUP LOGO)