(ROYAL GROUP TECHNOLOGIES LOGO)
SECOND QUARTER REPORT
ENDED MARCH 31, 2004
MESSAGE TO SHAREHOLDERS
In our second quarter, we continued to make progress with implementation of
strategies to turnaround Royal Group. However, our progress with these
initiatives was mollified by further escalation of material costs, the
continuing effect of exchange rates and excess capacity.
During the second quarter, we generated growth in sales dollars over the same
quarter last year, as well as sequential growth in sales dollars from the first
quarter of the current fiscal year. On a unit basis, we were able to achieve
sales growth of 13% over the previous year, reflecting our focus on sales and
marketing activities.
STRATEGIC FOCUS
In our 2003 Annual Report, we stated that we were reshaping Royal's strategic
focus, increasingly focusing on our core home improvement product businesses,
being custom profiles and exterior cladding, as well as certain niches in
consumer and construction products, such as outdoor products and pipe fittings.
Our sales results for the first six months of fiscal 2004 are reflective of our
strategic focus.
Our year to date sales results also evidence the areas of our business that we
are de-emphasizing. As you know, we exited some unprofitable retail window
covering programs last August. We have also backed away from some unprofitable
segments of our molded seasonal home furnishings business, but have aggressively
pursued healthier indoor storage product opportunities.
During our second quarter, we improved product mix over the previous year, which
helped us to attain a higher level of profitability than in the previous year.
We continue to be focused on generating the right kind of sales growth, not just
growth for growth's sake.
To facilitate growth of desirable sales, we are spending more time mobilizing
our custom profile salesforce and providing them with the tools and products
they require to become more successful. In late February, we held Royal's first
custom profile sales conference. The theme of the conference was "the dawn of a
new era". Our sales reps from across North America attended to learn about
complementary Royal products they can sell to our window profile customers, such
as columns and fencing, decking and railing products. This sales conference has
served to accelerate our cross-selling initiative, which is a strategic
cornerstone of our goal for optimal product mix.
CONFRONTING CHALLENGES
Escalating raw material costs continue to impact Royal's profitability. At the
outset of this year, we believed that PVC resin costs would average
approximately the same level in 2004 as they did in 2003. However, we now
believe that PVC resin costs will be higher on average in 2004, as a result of
tight market conditions and escalating energy costs. We are still of the belief
that PVC resin costs will fall during the latter part of the year, reflecting
its normal seasonal pattern and capacity additions in both North America and
Asia.
In response to this issue, we have increased prices for some finished products
and are currently assessing opportunities for price increases for additional
products. In addition, we continue to pursue material formulation improvements
to help soften the impact of rising costs.
As you have seen over the past few quarters, we are working at reducing
inventory levels. Through improved coordination of manufacturing operations
within the Group we continue to excel at customer service, but we are employing
less capital. With our extensive network of manufacturing plants across North
America and our service-oriented employees, we fully intend to remain a leader
with respect to customer service.
IMPROVING GOVERNANCE
The forensic audit conducted by Kroll Linquest Avey of transactions between
Royal and a St. Kitts Resort development is now complete, with certain details
disclosed in the attached Management's Discussion and Analysis and in our press
release dated April 29, 2004. While the Kroll forensic audit was time consuming,
costly and distracting, we have learned from it. Our systems and procedures
pertaining to related party transactions are now stronger.
Royal's corporate governance practices have been significantly enhanced since
the beginning of this fiscal year. We have added two new independent directors
to the board, such that we now have a majority of independent directors. We have
separated the Chairman's role from the role of the C.E.O., and have established
a lead director position to represent the independent directors' interests in
the establishment of agendas for board meetings and otherwise. Our audit
committee, compensation committee and nomination and governance committee are
each comprised entirely of independent directors.
These are just some of the enhancements that have been made since the outset of
the year. For additional particulars, I invite you to peruse the corporate
governance area of the investor relations section of the Company's web site,
www.royalgrouptech.com.
OUTLOOK
As I have said repeatedly over the past year, we believe that the financial
impact of strategies being implemented to turnaround Royal Group will begin to
be noticeable in the third and fourth quarters of this fiscal year.
/s/ Douglas Dunsmuir
Douglas Dunsmuir
President and Chief Executive Officer
May 26, 2004
CONSOLIDATED BALANCE SHEETS
(in thousands of Canadian dollars)
MAR. 31/04 Sept. 30/03 Mar. 31/03
----------- ----------- -----------
(UNAUDITED) (audited) (unaudited)
ASSETS
Current assets:
Cash $ 89,878 $ -- $ --
Accounts receivable 320,276 342,601 349,653
Inventories 445,577 401,619 567,832
Prepaid expenses 15,795 20,498 31,087
----------- ----------- -----------
871,526 764,718 948,572
Future income tax assets (note 5) 27,900 26,600 7,762
Property, plant and equipment 1,431,682 1,482,723 1,588,721
Goodwill and other assets 264,309 256,413 271,403
----------- ----------- -----------
$ 2,595,417 $ 2,530,454 $ 2,816,458
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness $ -- $ 355,080 $ 514,511
Accounts payable and accrued liabilities 249,954 258,592 220,349
Term debt due within one year 20,584 21,266 24,830
----------- ----------- -----------
270,538 634,938 759,690
Term debt (note 6) 779,025 383,332 424,017
Future income tax liabilities (note 5) 149,580 131,169 128,674
Minority interest 14,891 15,603 15,100
Shareholders' equity:
Capital stock 633,609 632,711 632,711
Contributed surplus 115 74 --
Retained earnings 855,071 841,930 921,599
Currency translation adjustments (107,412) (109,303) (65,333)
----------- ----------- -----------
1,381,383 1,365,412 1,488,977
----------- ----------- -----------
$ 2,595,417 $ 2,530,454 $ 2,816,458
=========== =========== ===========
See accompanying notes to consolidated financial statements.
On behalf of the Board:
/s/ Douglas Dunsmuir /s/ Ron Goegan
Douglas Dunsmuir Ron Goegan
Director, President Director, Senior V.P. and C.F.O.
and Chief Executive Officer
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of Canadian dollars, except per share amounts)
3 MONTHS 3 months 6 MONTHS 6 months
ENDED ended ENDED ended
MAR. 31/04 Mar. 31/03 MAR. 31/04 Mar. 31/03
----------- ----------- ----------- -----------
(UNAUDITED) (unaudited) (UNAUDITED) (unaudited)
Net sales $421,105 $412,283 $835,487 $833,595
Cost of sales and operating expenses 364,904 364,665 713,919 718,158
-------- -------- -------- --------
Earnings before the undernoted 56,201 47,618 121,568 115,437
Amortization charges 32,448 32,310 63,685 64,273
Interest and financing charges 10,916 12,502 22,237 25,644
-------- -------- -------- --------
Earnings before income taxes and minority interest 12,837 2,806 35,646 25,520
Income tax expense (recovery) (note 5) 3,329 (2,396) 23,166 4,102
-------- -------- -------- --------
Earnings before minority interest 9,508 5,202 12,480 21,418
Minority interest (93) 319 661 40
-------- -------- -------- --------
Net earnings $ 9,415 $ 5,521 $ 13,141 $ 21,458
======== ======== ======== ========
Earnings per share (note 4):
Basic $ 0.10 $ 0.06 $ 0.14 $ 0.23
Diluted $ 0.10 $ 0.06 $ 0.14 $ 0.23
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(in thousands of Canadian dollars)
3 MONTHS 3 months 6 MONTHS 6 months
ENDED ended ENDED ended
MAR. 31/04 Mar. 31/03 MAR. 31/04 Mar. 31/03
----------- ----------- ----------- -----------
(UNAUDITED) (unaudited) (UNAUDITED) (unaudited)
Retained earnings, beginning of period $845,656 $916,078 $841,930 $900,141
Net earnings 9,415 5,521 13,141 21,458
-------- -------- -------- --------
Retained earnings, end of period $855,071 $921,599 $855,071 $921,599
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars)
3 MONTHS 3 months 6 MONTHS 6 months
ENDED ended ENDED ended
MAR. 31/04 Mar. 31/03 MAR. 31/04 Mar. 31/03
----------- ----------- ----------- -----------
(UNAUDITED) (unaudited) (UNAUDITED) (unaudited)
(note 2) (note 2)
Cash provided by (used in):
Operating activities:
Earnings before minority interest $ 9,508 $ 5,202 $ 12,480 $ 21,418
Items not affecting cash 31,001 22,947 91,777 60,924
Change in non-cash working capital (37,379) (41,888) (27,370) (71,968)
--------- --------- --------- ---------
3,130 (13,739) 76,887 10,374
Financing activities:
(Decrease) increase in termed bank debt (note 6) (70,000) -- 430,000 --
Repayment of term debt (note 6) (22,706) (549) (26,945) (79,751)
Proceeds from issuance of shares under stock option plan -- -- 898 14
--------- --------- --------- ---------
(92,706) (549) 403,953 (79,737)
Investing activities:
Acquisition of property, plant and equipment (21,913) (24,818) (37,965) (50,509)
Acquisition of non-cash net assets of businesses -- (4,134) -- (4,134)
Change in investments (3,514) -- (3,514) --
Change in minority interest -- (3,313) -- (3,964)
Proceeds from the sale of non-strategic assets 6,291 -- 6,291 --
Change in other assets (69) 680 (69) (2,107)
--------- --------- --------- ---------
(19,205) (31,585) (35,257) (60,714)
Effect of foreign exchange rate changes on cash 80 (738) (625) (649)
--------- --------- --------- ---------
Increase (decrease) in cash during the period (108,701) (46,611) 444,958 (130,726)
Cash (bank indebtedness), beginning of period 198,579 (467,900) (355,080) (383,785)
--------- --------- --------- ---------
Cash (bank indebtedness), end of period $ 89,878 $(514,511) $ 89,878 $(514,511)
========= ========= ========= =========
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 March 31,
2004 and the results of operations and cash flows for the three month and six
month periods ended March 31, 2004.
Currently the Company operates predominantly in the seasonal North American
renovation and new construction markets. As such, sales, net earnings and cash
flow have historically been significantly different on a by-quarter basis as
compared to an annualized amount or rate.
2. CHANGE IN ACCOUNTING POLICIES
The Company's accounting principles remain unchanged from the most recent fiscal
year ended September 30, 2003. For details, please refer to note 1 on page 30 of
the Company's 2003 Annual Report.
Certain figures for the three months and six months ended March 31, 2003
have been reclassified to conform with the financial statement presentation
adopted in fiscal 2004.
3. SEGMENT REPORTING DATA
Products Support
Segment Eliminations Segment Eliminations Consolidated
---------- ------------ ---------- ------------ ------------
For the 3 months ended March 31, 2004
Net sales $ 394,202 $ (4,954) $ 161,508 $(129,651) $ 421,105
Operating margin 23,552 32,649 56,201
Amortization charges 23,280 9,168 32,448
Acquisition of property, plant and equipment
and goodwill 18,045 3,868 21,913
Property, plant and equipment 707,871 723,811 1,431,682
Goodwill 181,641 35,635 217,276
Total assets 1,600,130 995,287 2,595,417
For the 6 months ended March 31, 2004
Net sales $ 812,230 $ (17,490) $ 302,343 $(261,596) $ 835,487
Operating margin 62,228 59,340 121,568
Amortization charges 45,773 17,912 63,685
Acquisition of property, plant and equipment
and goodwill 32,772 5,193 37,965
Property, plant and equipment 707,871 723,811 1,431,682
Goodwill 181,641 35,635 217,276
Total assets 1,600,130 995,287 2,595,417
For the 3 months ended March 31, 2003
Net sales $ 389,799 $ (3,395) $ 148,904 $(123,025) $ 412,283
Operating margin 16,668 30,950 47,618
Amortization charges 22,876 9,434 32,310
Acquisition of property, plant and equipment
and goodwill 13,876 10,942 24,818
Property, plant and equipment 807,989 780,732 1,588,721
Goodwill 186,812 35,695 222,507
Total assets 1,761,669 1,054,789 2,816,458
For the 6 months ended March 31, 2003
Net sales $ 808,061 $ (13,993) $ 281,954 $(242,427) $ 833,595
Operating margin 52,354 63,083 115,437
Amortization charges 46,578 17,695 64,273
Acquisition of property, plant and equipment
and goodwill 31,302 19,207 50,509
Property, plant and equipment 807,989 780,732 1,588,721
Goodwill 186,812 35,695 222,507
Total assets 1,761,669 1,054,789 2,816,458
Net sales by geographic region for the 3 months ended March 31, 2004 were 59% to
the US (2003 - 65%), 30% to Canada (2003 - 27%) and 11% to foreign markets (2003
- - 8%) and for the 6 months ended March 31, 2004 were 59% to the US (2003 - 64%),
32% to Canada (2003 - 28%) and 9% to foreign markets (2003 - 8%).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars)
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 93,345,781 (2003 -93,220,617) and 93,345,781 (2003 - 93,269,201) and
for the six month period of 93,324,900 (2003 - 93,219,331) and 93,324,900 (2003
- -93,427,597) respectively. As at March 31, 2004, the Company had outstanding
15,935,444 multiple voting shares, 77,410,726 subordinate voting shares, and
7,902,414 options to acquire subordinate voting shares under the Company's
employee stock option plan.
5. INCOME TAXES
In November 2003, the Ontario government repealed the previously enacted
provincial income tax rate reductions. In accordance with the Company's
accounting policy for income taxes, future income tax assets and liabilities
were revalued utilizing the substantively enacted rate of 34.12%. The
revaluation resulted in a $13,000 charge to income tax expense in the first
quarter of fiscal 2004.
6. BANK INDEBTEDNESS AND TERM DEBT
In October 2003, the Company converted its debt drawn under the unsecured bank
credit facility to a non-revolving, non-amortizing term loan in the amount of
$500,000. The costs of borrowings under the term-out remain unchanged from the
previous amounts drawn on the revolving facility. During the second quarter, the
Company prepaid its non-revolving, non-amortizing term loan by $70,000, such
that $430,000 is repayable on the maturity date of April 28, 2005. Additionally,
the Company purchased for cancellation $22,500 of its medium term notes
outstanding, bringing the year to date purchases for cancellation to $26,500.
7. CHANGE IN YEAR END
The Company has changed its fiscal year end from September 30 to December 31.
The transition year shall consist of a fifteen month period, commencing October
1, 2003 and concluding on December 31, 2004.
8. RELATED PARTY TRANSACTIONS
During the quarter, related party transactions to companies related to the
controlling shareholder totaled $341, bringing the year to date amount to $496.
The transactions were in the normal course of the Company's business relating to
products typically manufactured by it and sold at prices and terms consistent
with those to third party customers.
MANAGEMENT'S DISCUSSION AND ANALYSIS
QUARTER ENDED MARCH 31, 2004, AS COMPARED TO THE QUARTER ENDED MARCH 31, 2003
OVERVIEW
Royal Group Technologies Limited ("the Group") is substantially engaged in the
manufacture and distribution of polymer-based home improvement, consumer and
construction products for sale primarily in the North American renovation,
remodeling and new construction industries. The Group is a vertically
integrated, innovative, technology-based growth company and strives to be a low
cost producer within its industry.
Currently the Group operates predominantly in the seasonal North American
renovation and new construction markets. As such, sales, net earnings and cash
flow have historically been significantly different on a by-quarter basis as
compared to an annualized amount or rate.
NON-GAAP FINANCIAL MEASURES
For the purposes of the following discussion the terms "EBITDA" (earnings before
interest, tax, depreciation, amortization and minority interest) and "operating
margin" are used interchangeably (being earnings before the undernoted as
reported within the body of our financial statements). EBITDA is not a
recognized measure under Canadian generally accepted accounting principles
(GAAP). Management believes that in addition to net earnings, EBITDA is a useful
supplementary measure as it provides investors with an indication of cash
available for distribution prior to debt service, capital expenditures, income
taxes and minority interest. Investors should be cautioned, however, that EBITDA
should not be construed as an alternative to (i) net earnings determined in
accordance with GAAP as an indicator of the Group's performance or (ii) cash
flow from operating, investing and financing activities as a measure of
liquidity and cash flow. The Group's method of calculating EBITDA may differ
from other companies and, accordingly, the Group's EBITDA may not be comparable
to measures used by other companies. Free cash flow (earnings before minority
interest adjusted for items not affecting cash, changes in non-cash working
capital items, less acquisition of property, plant and equipment and change in
investments) is not a recognized measure under Canadian GAAP. It is therefore
unlikely to be comparable to similar measures presented by other issuers.
Management believes free cash flow to be an important indicator of the financial
strength and performance of our business because it shows how much cash is
available to repay debt and to reinvest in our company. Net funded debt to total
capitalization ratio is not a recognized measure under Canadian GAAP. The chart
on the next page provides a calculation of free cash flow and net funded debt to
total capitalization:
MANAGEMENT'S DISCUSSION AND ANALYSIS
3 MONTHS 3 months 6 MONTHS 6 months
ENDED ended ENDED ended
(in thousands of Canadian dollars) MAR. 31/04 Mar. 31/03 MAR. 31/04 Mar. 31/03
- ---------------------------------- ---------- ---------- ---------- ----------
Earnings before minority interest $ 9,508 $ 5,202 $ 12,480 $ 21,418
Items not affecting cash 31,001 22,947 91,777 60,924
Change in non-cash working capital (37,379) (41,888) (27,370) (71,968)
Acquisition of property, plant and equipment (21,913) (24,818) (37,965) (50,509)
Change in investments (3,514) -- (3,514) --
-------- -------- -------- --------
Free cash flow (use) $(22,297) $(38,557) $ 35,408 $(40,135)
======== ======== ======== ========
(in thousands of Canadian dollars) MAR. 31/04 Sept. 30/03 Mar. 31/03
- ---------------------------------- ---------- ----------- ----------
Bank indebtedness $ -- $ 355,080 $ 514,511
Long-term debt (including portion due within one year) 799,609 404,598 448,847
Cash (89,878) -- --
---------- ---------- ----------
Net funded debt 709,731 759,678 963,358
Minority interest 14,891 15,603 15,100
Shareholder's equity 1,381,383 1,365,412 1,488,977
---------- ---------- ----------
Total capitalization $2,106,005 $2,140,693 $2,467,435
========== ========== ==========
Net funded debt to total capitalization 33.7% 35.5% 39.0%
========== ========== ==========
RESULTS FROM OPERATIONS
The following discussion has been prepared by management and is a review of the
Group's operating results and financial position for the three and six month
periods ended March 31, 2004 and is based upon accounting principles generally
accepted in Canada. All amounts are in Canadian dollars unless specified
otherwise. This discussion and analysis of the Group's operations have been
derived from and should be read in conjunction with the accompanying unaudited
interim consolidated financial statements for the three month and six month
periods ended March 31, 2004 and the audited consolidated financial statements
for the year ended September 30, 2003, which are both prepared in accordance
with Canadian GAAP.
Net sales for the second quarter increased to $421 million, from $412
million in the previous year. Products Segment sales were $389 million for the
quarter as compared to $386 million in the previous year. Custom Profiles sales
grew organically by 7%, reflecting strong economic conditions, increased sales
and marketing initiatives and increased sales in our Polish and Chinese
operations. Exterior Claddings sales grew organically 2%. Home Furnishings,
which includes window coverings and housewares, declined 18%, reflecting our
exit from certain of our window coverings businesses in the prior year and a
tough consumer products market. Outdoor Products/RBS, which includes fencing,
decking, railings, patio furniture, sheds and Royal Building Systems, decreased
3%, however we continue to experience increased penetration of our Outdoor
Products into this rapidly expanding segment, particularly into the USA.
Pipe/Fittings/Other Construction, which includes commercial doors, increased
10%, reflecting continued strong construction activity as well as progress in
our fittings market penetration.
Support Segment sales for the quarter, before eliminations for sales to the
Products Segment, increased to $162 million, from $149 million in the previous
year. Sales in the Support Segment are largely eliminated on consolidation due
to the nature of the Group's vertical integration. Sales of Materials grew 1%.
The increase in material requirements due to the Products Segment's growth were
offset by production difficulties and shortfalls in our resin facilities during
the quarter, which resulted in the temporary need to source additional resin
from third party suppliers. Sales in Machinery & Tooling increased 72% to $32
million from $19 million in the previous year, as a result of the completion of
a significant third party project, which had been in progress for the past year.
Sales in the Services category decreased 10% to $19 million, consistent with our
quarterly average over the past several quarters.
During the quarter, sales to non-Canadian customers including foreign based
sales and exports from Canadian operations decreased to $294 million or 70% of
total sales as compared to $301 million or 73% for the prior year. The change in
non-Canadian sales was due to the impact of foreign exchange, reflecting a lower
exchange rate at which US denominated sales were converted into Canadian
dollars, offset by the completion of the significant third party project in our
Italian plant during the current quarter.
The Group's overall EBITDA for the quarter ended March 31, 2004 increased
to $56.2 million, from $47.6 million last year. EBITDA as a percentage of sales
was 13.3% compared to 11.5% last year. The increase in EBITDA was due to the
continuing recovery of our Window Coverings business, particularly as compared
to a year ago, improving results in our foreign operations and in our pipe
fitting business and increased volumes in our home improvement products, offset
by the adverse effect of the foreign exchange movement in the Canadian dollar
against the US dollar and the $2.1 million in costs incurred relating to the
Ontario Securities Commission investigation.
Raw material costs decreased to 45.6% of sales from 46.9% last year. The
improvement from last year is due to the exit of nonprofitable resale items in
our Window Coverings business, a shift in product mix towards Custom Profiles
growth and increased sales in fittings, where our material costs are lower.
These factors are offset by higher raw material costs incurred during the
quarter, production difficulties in our resin plant, resulting in a need to
source additional resin from third party suppliers, and the negative impact on
our margins of sales of certain inventories which were written down to net
realizable value in fiscal 2003 that recover only costs rather than include any
profits. The Group expects margins over the next several quarters to be
negatively impacted by the sale of inventories written down to net realizable
value in fiscal 2003. Labor costs are 14.9% for the quarter and the previous
year. The Group anticipates that raw material costs (PVC resin costs in
particular) will be higher on average in 2004 as a result of tighter market
conditions and escalating energy costs but expects PVC resin costs will fall
during the latter part of fiscal 2004, reflecting normal seasonal patterns and
capacity additions in North America and Asia.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Other manufacturing costs decreased slightly as a percentage of sales to
12.7% as compared to 12.8% last year. Gains experienced through improved
efficiencies and capacity utilization improvements are offset by lower
absorption of costs into goods manufactured due to our continuing focus on
restraining inventory levels as well as the costs associated with the takeouts
of certain existing capacities, which are being fully expensed. As the Group
continues to review existing operations and capacities, maintains tight controls
over capital expenditures, implements best practices in operations and increases
sales volumes, it is expected that there will be an improvement in our fixed
cost absorption, thus lowering other manufacturing costs as a percentage of
sales. Selling and distribution costs decreased to 13.7% of sales as compared to
13.9% last year. We have leveled off our use of funds for sales and marketing
activities as we focus more on cross-selling and related initiatives with our
core products and existing channels. General and administration costs as a
percent of sales decreased from 7.8% to 7.5% as we continue to monitor our
overhead costs.
Products Segment EBITDA, for the quarter ended March 31, 2004 increased to
$23.6 million as compared to $16.7 million last year. EBITDA as a percentage of
sales increased to 6.0% from 4.3% last year. The increase reflects the
continuing recovery of our window coverings business, improving results from our
foreign operations and in our pipe fittings business, increased volumes in our
home improvement products, offset by higher raw material costs and the adverse
effect of the foreign exchange movement in the Canadian dollar against the US
dollar.
Support Segment EBITDA for the quarter ended March 31, 2004, increased to
$32.6 million as compared to $31.0 million last year. EBITDA as a percentage of
sales decreased slightly to 20.2% from 20.8% last year. The contribution from
the increased sales in our Machinery and Tooling operations was more than offset
with the costs associated with the Ontario Securities Commission investigation
incurred in the quarter.
Amortization expense for the quarter was $32.4 million compared to $32.3
million in the prior year. Amortization expense is anticipated to level off,
reflecting our restraint on capital expenditures over the last several quarters
as we continue to focus on increasing our utilization of our existing
manufacturing assets. Capital expenditures for the quarter were $21.9 million
and are expected to remain below our quarterly amortization charges for the next
several quarters. In the Products Segment, amortization as a percentage of sales
was 5.9% for the quarter and the previous year. In the Support Segment,
amortization as a percentage of sales was 5.7% for the quarter as compared to
6.3% for the prior year. Interest and financing charges decreased from $12.5
million to $10.9 million, due to a lower level of funded debt as compared to the
same quarter last year, partially offset by the effect of the negative carry on
the reinvestment rates on our deposit position as compared to that charged on
our drawn bank lines. All interest costs were expensed in the current quarter,
whereas $0.7 million was capitalized to assets under construction during the
same quarter last year. Approximately $1.4 million in costs associated with
certain business amalgamations were incurred during the quarter and it is
expected that an additional $1.0 million will be incurred in the next quarter
relating to identified business combinations, severances and lease terminations.
The income tax rate for the quarter was 26%. This is slightly lower than
the percentage expected for the full year as a result of the amount of the
permanent differences which have a more pronounced effect in quarters with lower
pre-tax earnings. Excluding the effect of the $13 million non-cash charge to
future income tax expense recorded in the first quarter, the Group's overall
effective tax rate for fiscal 2004 is expected to be between 28% to 30%. In the
second quarter of the prior year, the Group recorded a net income tax recovery
of $2.4 million.
Net earnings during the quarter increased to $9.4 million from $5.5 million
last year. On a diluted basis, earnings per share for the period was $0.10 as
compared to $0.06 for the same period in the prior year. The average number of
shares outstanding for the quarter on a diluted basis was 93.3 million.
As previously reported, the Company established a special committee in late
December 2003 as a result of the Company being advised that the Ontario
Securities Commission was conducting a regulatory investigation of the Company.
The special committee was asked by the board of directors to conduct an
independent inquiry into the principal subject matter of the investigation -
being the transactions between the Company and the St. Kitts resort development
project. The St. Kitts project is controlled by the Company's majority
shareholder and its investors include another significant shareholder of the
Company and the Company's Chief Executive Officer. The special committee
consisted solely of independent directors who retained independent legal counsel
who retained forensic auditors to assist in the inquiry. The forensic auditors
investigated the transactions between the Company and the St. Kitts project and
concluded that it found no evidence of conduct or actions calculated to
improperly shift costs to the Company from the project. It also found no
evidence of any pattern of deliberate non-billing or under billing of costs by
the Company to the project. The forensic auditors did point out that certain
conduct, such as collusion with a supplier to invoice the Company for costs
related to the St. Kitts project, is difficult to uncover without specific focus
or allegations. Based on all information, including in particular, the results
of the forensic auditors' investigation, the special committee recommended that
no further investigative actions be taken as of April 21, 2004. Notwithstanding
the foregoing, the Commission has advised the Company that the RCMP continues
its previously announced investigation and that the investigation may produce
results which are material to the Company, most specifically in relation to its
past financial disclosure and certain trading. Accordingly, the Commission
retains an investigative interest in the St. Kitts project. The Commission has
also indicated, as the Company has previously disclosed, that it is
investigating the Company with respect to disclosure records, financial affairs
and trading in the shares of the Company. The Company believes such matters are
not material, and that it has not breached any statutory requirements or
offended any public interest concerns in respect of such matters. Additional
details are disclosed in the Company's press release of April 29, 2004. The
Company currently believes that the approximate $2.1 million in costs incurred
[to date] in connection with the investigations represents the bulk of the
expenses to be incurred in that connection. However, the Company has no control
over the investigation process and accordingly cannot predict the amount of any
additional costs that may be incurred in the future.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter, the Group recorded a free cash flow use of $22.3 million as
compared to a use in the prior year of $38.6 million. The Group's focus on
restraining capital expenditures and working capital investment will continue to
positively affect free cash flow, contain invested capital and ultimately lead
to improved returns. Working capital was $601 million at March 31, 2004 compared
to $130 million at September 30, 2003 and $189 million at March 31, 2003. The
increase at March 31, 2004 is due largely to the reclassification of the $430
million drawn under the bank credit facility to long-term debt, as this is now a
non-revolving, non-amortizing term loan repayable on April 28, 2005.
Due to our continuing efforts and focus on monitoring collections, days
receivable outstanding has improved to 61 days from 70 days last year. Days
inventory outstanding has also improved to 112 days from last year's 154 days.
Inventory levels, comparing amounts after the write-downs recorded in fiscal
2003, have declined in both dollar terms and unit levels as we continue to focus
on further inventory containment. In addition, difficulties in our resin
facility during the quarter resulted in lower material inventory levels in our
Support Segment than is typically the case. Second quarter capital expenditures
were $21.9 million compared to the prior year's $24.8 million. For the second
quarter of fiscal 2004, $18 million was incurred primarily for tooling and
equipment to be used in the Products Segment, and $3.9 million for additional
capacities in the Support Segment, principally for our Materials plants, and
primarily for the completion of our new acrylics plant at our chemical facility.
Proceeds from the disposal of certain non-strategic real estate assets in the
second quarter were $6.3 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS
At March 31, 2004, $430 million was drawn on the bank credit facility. As
noted above, the amount drawn on the bank credit facility was converted to a
non-revolving, non-amortizing term loan repayable on April 28, 2005. The net
funded debt to total capitalization ratio at March 31, 2004 was 33.7%, compared
to 35.5% at September 30, 2003 and 39.0% at March 31, 2003. Our term debt rating
from DBRS remains at BBB (high), being recently removed from Under Review, while
our term debt rating from S&P is BBB, under Credit Watch with negative
implications. Management believes that until April 28, 2005 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. The Company intends to arrange for new
debt facilities prior to April 28, 2005 in order to satisfy its long term
financing requirements.
RISKS AND UNCERTAINTIES
The Group operates in many markets each of which involves various risks,
uncertainties and other factors affecting the Group specifically, its industry
or the markets generally. The Group's future performance, achievements and
financial results could be affected by these factors, which in some cases have
affected, and which in the future could affect, the Group's actual results and
could cause the Group's actual results for fiscal 2004 and beyond to differ
materially from those expressed in any forward-looking statements made by or on
behalf of the Group. These risks and uncertainties include fluctuations in the
level of renovation, remodeling and construction activity; changes in the
Group's product costs and pricing; an inability to achieve or delays in
achieving savings related to cost reductions or revenues related to sales price
increases; the sufficiency of restructuring activities, including the potential
for higher actual costs to be incurred in connection with restructuring
activities compared to the estimated costs of such actions; the ability to
recruit and retain qualified employees; the level of the Group's outstanding
debt and current debt ratings; the ability to meet the financial covenants in
the Group's credit facilities; changes in the Group's product mix; the growth
rate of the markets in which the Group's products are sold; market acceptance
and demand for the Group'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; 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; adverse resolution of litigation,
investigations, administrative and regulatory matters, intellectual property
disputes and similar matters; and changes in environmental regulation and
currency risk exposure. Certain of these risks and uncertainties are described
in more detail below:
o The Group's business is substantially related to the North American
renovation, remodeling and construction markets, both residential and
industrial/commercial. Therefore, the demand for the products manufactured
and distributed by the Group is affected by changes in the general state of
the North American economy, including renovation and remodeling, new
housing starts and the level of construction activity in general.
o The price and availability of raw materials, and in particular PVC resin,
represents a substantial portion of the cost of manufacturing the Group's
products. Historically, there have been fluctuations in these raw
materials' prices and in some instances price movements have been volatile
and affected by circumstances beyond the Group's control. There can be no
assurance that the Group can pass on increases from normal market
fluctuations in the price of PVC resin and other raw materials to its
customers through increases in selling price, or otherwise absorb such
costs increases without significantly affecting its margins. In addition,
the Group has occasionally found certain raw materials to be in short
supply. The Group could experience materially adverse circumstances if the
availability of either PVC or VCM became restricted due to market
conditions, or issues particular to the Company.
o As previously reported, the Company established a special committee in late
December 2003 as a result of the Company being advised that the Ontario
Securities Commission was conducting a regulatory investigation of the
Company. The special committee was asked by the board of directors to
conduct an independent inquiry into the principal subject matter of the
investigation - being the transactions between the Company and the St.
Kitts resort development project. The St. Kitts project is controlled by
the Company's majority shareholder and its investors include another
significant shareholder of the Company and the Company's Chief Executive
Officer. The special committee consisted solely of independent directors
who retained independent legal counsel who retained forensic auditors to
assist in the inquiry. The forensic auditors investigated the transactions
between the Company and the St. Kitts project and concluded that it found
no evidence of conduct or actions calculated to improperly shift costs to
the Company from the project. It also found no evidence of any pattern of
deliberate non-billing or under billing of costs by the Company to the
project. The forensic auditors did point out that certain conduct, such as
collusion with a supplier to invoice the Company for costs related to the
St. Kitts project, is difficult to uncover without specific focus or
allegations. Based on all information, including in particular, the results
of the forensic auditors' investigation, the special committee recommended
that no further investigative actions be taken as of April 21, 2004.
Notwithstanding the foregoing, the Commission has advised the Company that
the RCMP continues its previously announced investigation and that the
investigation may produce results which are material to the Company, most
specifically in relation to its past financial disclosure and certain
trading. Accordingly, the Commission retains an investigative interest in
the St. Kitts project. The Commission has also indicated, as the Company
has previously disclosed, that it is investigating the Company with respect
to disclosure records, financial affairs and trading in the shares of the
Company. The Company believes such matters are not material, and that it
has not breached any statutory requirements or offended any public interest
concerns in respect of such matters. Additional details are disclosed in
the Company's press release of April 29, 2004. The Company currently
believes that the approximate $2.1 million in costs incurred [to date] in
connection with the investigations represents the bulk of the expenses to
be incurred in that connection. However, the Company has no control over
the investigation process and accordingly cannot predict the amount of any
additional costs that may be incurred in the future.
o As the Group carries out a significant portion of its activities in foreign
markets (including the US), it is exposed to the risk of foreign exchange
fluctuations. The Group uses an exchange rate of $1.33 or inversely $0.75
to the US dollar, for planning purposes for fiscal 2004. The Group attempts
to minimize risks associated with currency fluctuations through matching of
the currency of debt financing and the currency of certain raw material
purchases, sales or asset acquisitions. This, however, is not always
economically practical and the Group may not be able to offset any or all
of its foreign market risks. While the Group has not entered into
significant market instruments with respect to foreign exchange hedging in
the past, it may, if deemed necessary, do so in a prudent fashion, in the
future. The Group does not purchase derivative instruments beyond those
needed to hedge foreign currency requirements.
o The Group faces a high level of competition in most product categories and
geographic regions. Low cost foreign competitors continue to be a threat to
the Group's cost structure, particularly in its consumer product lines. The
Group attempts to minimize risks associated with this by striving to reduce
costs when feasible and/or offer enhanced customer services. In addition,
the Group may compete in some product categories and regions with larger,
better capitalized companies which may be better positioned to respond to
shifts in the marketplace.
CORPORATE DIRECTORY
CORPORATE OFFICE:
Royal Group Technologies Limited
1 Royal Gate Blvd.,
Woodbridge, Ontario
Canada L4L 8Z7
Telephone: (905) 264-0701
Facsimile: (905) 264-0702
Web site: www.royalgrouptech.com
SHARES LISTED ("RYG"):
Toronto Stock Exchange,
New York Stock Exchange
INDEX LISTINGS:
S&P/TSX Composite Index
S&P/TSX 60 Index
TRANSFER AGENTS AND REGISTRARS:
Computershare Trust Company of Canada
100 University Avenue, 9th Floor
Toronto, Ontario M5J 2Y1
Telephone: 1-800-564-6253 or (514) 982-7270
Facsimile: 1-888-453-0330 or (416) 263-9394
E-mail: caregistryinfo@computershare.com
Co-Transfer Agent (U.S.A.)
Computershare Trust Company, Inc.
303 Indiana Street, Suite 800
Golden, Colorado 80401
Telephone: (303) 262-0600
Facsimile: (303) 262-0700
SHAREHOLDER INQUIRIES
Responses to shareholder inquiries as well as information published by the
Company for its shareholders and others, including annual reports, quarterly
reports and annual information forms may be obtained from:
Investor Relations
Royal Group Technologies Limited
1 Royal Gate Blvd.,
Woodbridge, Ontario L4L 8Z7
Telephone: (905) 264-0701
Facsimile: (905) 264-0702
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 2004
Q2 $17.40 $11.99 $14.38 25,895
Q1 12.70 8.60 12.30 26,710
Fiscal 2003
Q4 $12.71 $ 9.51 $12.10 20,083
Q3 10.69 6.60 9.63 33,877
Q2 16.79 6.57 6.85 30,163
Q1 17.50 13.02 15.21 19,095
DEBT RATINGS
Rating Agency Medium Term Notes
- ------------- -----------------
DBRS BBB (high)
S&P 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 "expect", "should continue", "continue", "believe",
"anticipate", "estimate", "contemplate", "target", "plan", "budget", "may",
"will", "schedule" and "intend" or similar formulations. By their nature, these
forward-looking statements are necessarily based upon a number of estimates and
assumptions that, while considered reasonable by management, are inherently
subject to significant, known and unknown, business, economic, competitive and
other risks, uncertainties and other factors affecting Royal specifically or its
industry generally that could cause actual performance, achievements 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; the sufficiency of our restructuring activities, including the
potential for higher actual costs to be incurred in connection with
restructuring activities compared to the estimated costs of such actions; the
ability to recruit and retain qualified employees; the level of outstanding debt
and our current debt ratings; the ability to meet the financial covenants in our
credit facilities; 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; 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; adverse resolution of litigation, investigations, administrative and
regulatory matters, intellectual property disputes, and similar matters; 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 May 26, 2004 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 TECHNOLOGIES LOGO)