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EXHIBIT 1
Third Quarter - Fiscal 2001
Report to Shareholders
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[ ROYAL GROUP TECHNOLOGIES LOGO ]
QUARTERLY REPORT
THIRD QUARTER ENDED JUNE 30 2001
MESSAGE FROM THE CHAIRMAN
During our third quarter, we experienced accelerating sales growth, in spite of
an economic environment that continues to challenge our industry. Royal achieved
sales of $507 million during the quarter, up 10% from $460 million during the
same period last year. We achieved growth as a result of successful execution of
strategies to gain market share and the introduction of new products.
As anticipated, profitability in the third quarter was restrained by higher
costs, which are expected to improve as volume increases. Royal achieved net
earnings of $50 million or $0.54 per share on a fully diluted basis, compared to
$57 million or $0.64 per share last year.
POSITIONED FOR IMPROVING RETURNS
In June, we completed construction of our new, four million square foot
industrial complex in Woodbridge. The complex, in conjunction with recent
expansions in various other outlying plants, provides us sufficient
manufacturing space to expand sales to $3 billion. It also provides us with
opportunities to improve operating efficiency, as we increase volume throughput
in the facilities.
Capital expenditures declined during the third quarter of fiscal 2001 to
$44 million, from $100 million during the same period last year, evidencing the
completion of our manufacturing expansion program. We now anticipate that fiscal
2001 capital expenditures will be well within our target of $200 million and in
2002 will be approximately $125 million. Fiscal 2000 capital expenditures were
$374 million.
We were also successful in reducing inventory days outstanding by 10 days
to 147 days, during the three months ended June 30, 2001. It is Management's
intention to continue to improve inventory turnover to levels appropriate for
each product line, recognizing the seasonal nature of sales activity.
Improvements will be achieved through a combination of increasing sales,
utilization of a more flexible manufacturing organization given recent
manufacturing expansion and the staged introductions of enterprise resource
management systems. In addition, raw material costs are declining, presenting
potential for lower inventory valuation over time.
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It is important to remember that Royal is a very vertically integrated
company, producing its own PVC resin, chemical additives and compounds. Our
unique level of vertical integration provides us superior profitability and
ability to serve our customers, but necessitates that we carry upstream
inventories. Our inventory levels have always been higher than non-integrated
competitors', but our margins and strategic prowess have always been superior.
The decline in capital expenditures, combined with the inventory reduction
program, position Royal for greater free cash flows, reduced debt levels and
improving returns on invested capital.
COMPETITIVE EDGE
During the current economic slowdown, we have worked hard to service our
existing customers, to introduce ourselves to potential new customers and to
introduce new products. Our goal has been to outperform competitors that have
been weakened by the slowdown. These initiatives have all served to increase our
customer base and position us for accelerating growth as the economy stabilizes.
These strategies are not new to us, as we have employed them successfully in
previous economic downturns.
Over the past few years, we have significantly increased the range of yard
products sold through an ever-expanding number of retail home improvement
stores. Maintenance-free outdoor storage, fencing, decking, patio furniture,
gazebos and garages are now marketed to today's busy homeowners. The stores we
sell through are pleased that they can source these innovative products from a
single source and consumers are pleased that they can improve their entire yard
with products manufactured by a name they can trust.
Approximately a year ago, we introduced roof tiles that look like slate
through our siding distributor network. The response to this product, named
DuraSlate(TM), has been great. Some of our existing siding distributors have
been able to increase their sales with this product and we have added new
distributors who have desired access to the roof tile.
OUTLOOK
We continue to see signs that our markets are improving. These signs include
recent high levels of home resale activity, which typically precede robust
renovation and home improvement levels. We are also seeing a healthy order book.
Accordingly, we believe we can achieve 10% sales growth in fiscal 2001. We
foresee accelerating growth and improving profitability in 2002, given a more
stable economic environment.
Thank you for your support as we have positioned Royal for accelerating
sales growth, improving profitability and increasing returns.
/s/ Vic De Zen
- -----------------------------
Vic De Zen
Chairman, President and C.E.O.
August 27, 2001
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CONSOLIDATED
STATEMENTS OF EARNINGS
(in thousands of Canadian dollars, except per share amounts)
3 MONTHS 3 months 9 MONTHS 9 months
ENDED ended ENDED ended
JUNE 30/01 June 30/00 JUNE 30/01 June 30/00
------------ ----------- ----------- ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net sales $ 506,949 $ 459,835 $ 1,194,640 $ 1,114,471
Cost of sales and operating expenses (391,832) (339,905) (974,901) (843,290)
------------ ----------- ----------- ------------
Earnings before the undernoted 115,117 119,930 219,739 271,181
Amortization charges (26,998) (21,416) (77,218) (62,687)
Interest and financing charges (14,712) (11,868) (41,953) (32,105)
------------ ----------- ----------- ------------
Earnings before income taxes and minority interest 73,407 86,646 100,568 176,389
(Income taxes) (23,192) (29,441) (32,182) (60,274)
------------ ----------- ----------- ------------
Earnings before minority interest 50,215 57,205 68,386 116,115
Minority interest (342) (438) (922) (205)
------------ ----------- ----------- ------------
Net earnings $ 49,873 $ 56,767 $ 67,464 $ 115,910
============ =========== =========== ============
Basic earnings per share (note 4) $ 0.55 $ 0.66 $ 0.74 $ 1.35
============ =========== =========== ============
Diluted earnings per share (note 4) $ 0.54 $ 0.64 $ 0.72 $ 1.30
============ =========== =========== ============
CONSOLIDATED STATEMENTS
OF RETAINED EARNINGS
(in thousands of Canadian dollars)
3 MONTHS 3 months 9 MONTHS 9 months
ENDED ended ENDED ended
JUNE 30/01 June 30/00 JUNE 30/01 June 30/00
---------- ---------- ---------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
(restated,
Note 2)
Retained earnings, beginning of period:
As previously reported $ 675,383 $ 547,817 $ 657,792 $ 492,374
Adjustment for implementation for future income taxes -- -- -- (3,700)
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As restated 675,383 547,817 657,792 488,674
Net earnings 49,873 56,767 67,464 115,910
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Retained earnings, end of period $ 725,256 $ 604,584 $ 725,256 $ 604,584
========== ========== ========== ===========
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CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars, except per share amounts)
3 MONTHS 3 months 9 MONTHS 9 months
ENDED ended ENDED ended
JUNE 30/01 June 30/00 JUNE 30/01 June 30/00
----------- ----------- ----------- ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Cash provided by (used in):
Operating activities:
Earnings before minority interest $ 50,215 $ 57,205 $ 68,386 $ 116,115
Items not affecting cash 30,519 22,965 111,542 68,121
Change in non-cash operating working capital (11,426) (51,990) (112,781) (181,631)
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69,308 28,180 67,147 2,605
Financing activities:
Increase (decrease) in bank indebtedness (15,993) (18,023) 106,448 5,932
Term debt proceeds -- 86,923 -- 236,202
Term debt repayments (124) (102) (344) (453)
Issuance of shares under stock option plan 287 1,688 1,613 1,747
----------- ----------- ----------- ------------
(15,830) 70,486 107,717 243,428
Investing activities:
Acquisition of property, plant and equipment, net (44,068) (99,955) (167,278) (240,105)
Acquisition of other businesses -- -- (641) (816)
Increase in investments -- (1,209) (1,034) (2,281)
Increase in other assets (236) (456) (1,283) (456)
----------- ----------- ----------- ------------
(44,304) (101,620) (170,236) (243,658)
Effect of exchange rate changes (9,174) 2,954 4,628 (2,375)
----------- ----------- ----------- ------------
Change in cash, being cash, end of period $ -- $ -- $ -- $ --
Cash flow, being earnings before minority interest
plus items not affecting cash $ 80,734 $ 80,170 $ 179,928 $ 184,236
=========== =========== =========== ============
Basic cash flow per share $ 0.89 $ 0.93 $ 1.98 $ 2.14
=========== =========== =========== ============
Diluted cash flow per share $ 0.87 $ 0.90 $ 1.93 $ 2.07
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CONSOLIDATED
BALANCE SHEETS
(in thousands of Canadian dollars)
JUNE 30/01 Sept. 30/00 June 30/00
----------- ----------- -----------
(unaudited) (audited) (unaudited)
(Restated,
Note 2)
ASSETS
Current assets:
Accounts receivable $ 392,812 $ 363,939 $ 353,850
Inventories 446,425 428,305 414,348
Prepaid expenses and deposits 25,241 22,082 15,333
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864,478 814,326 783,531
Property, plant and equipment 1,578,487 1,455,027 1,345,243
Future income tax assets 20,826 20,826 --
Goodwill and other assets 245,970 248,857 237,847
----------- ----------- -----------
$ 2,709,761 $ 2,539,036 $ 2,366,621
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness $ 436,994 $ 330,546 $ 176,246
Accounts payable and accrued liabilities 268,168 286,297 254,494
Term debt due within one year 479 479 494
----------- ----------- -----------
705,641 617,322 431,234
Term debt 548,568 547,210 813,152
Future income tax liabilities 118,023 118,816 78,991
Minority interest 20,549 19,466 18,062
Shareholders' equity:
Capital stock 607,325 605,712 452,455
Retained earnings 725,256 657,791 604,584
Currency translation adjustments (15,601) (27,281) (31,857)
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1,316,980 1,236,222 1,025,182
----------- ----------- -----------
$ 2,709,761 $ 2,539,036 $ 2,366,621
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On behalf of the Board:
/s/ Vic De Zen /s/ Gary Brown
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Director Director
Vic De Zen Gary Brown
Chairman, President & C.E.O. Executive Vice President & C.F.O.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars, except per share amounts)
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 June 30, 2001
and the results of operations and cash flows for the three month and nine month
periods ended June 30, 2001.
Currently the Company operates substantially in the North American
renovation, remodeling and construction markets, which are seasonal.
Accordingly, approximately three-fifths of Company's net sales and operating
margin and two-thirds of its net earnings occur in the last two fiscal quarters.
2. ACCOUNTING CHANGE
Except as outlined below, the Company's accounting principles remain
unchanged from the most recent fiscal year ended September 30, 2000. For details
please refer to note 1 of the Company's 2000 annual report.
During the current fiscal year, the Company adopted revised Section 3500 of
the CICA Handbook, Earnings Per Share. The new section requires a change to the
treasury method for calculating fully diluted earnings per share. The change in
accounting was accounted for on a retroactive basis with the effect of reducing
the prior quarter ended and year-to-date June 30, 2000 diluted earnings per
share by $nil to $0.64 and $0.04 to $1.30 respectively.
As previously reported, the Company adopted Section 3465 of the CICA
Handbook, Income Taxes. Section 3465 requires a change from the deferred method
to the asset and liability method of accounting for income taxes. The cumulative
effect of this change in accounting for income taxes of $3,700 is determined as
of October 1, 1999 and is reported separately as a restatement of the opening
balance of retained earnings for the 9 months ended June 30, 2000.
3. SEGMENT REPORTING DATA
Home
improvement,
consumer and Materials,
and machinery
construction & real Intra -
products estate Group Consolidated
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For the quarter ended June 30, 2001
Net sales $ 482,047 $ 140,902 $ (116,000) $ 506,949
Earnings before amortization and interest 74,385 40,732 115,117
Amortization charges 18,483 8,515 26,998
Total assets 1,508,461 1,201,300 2,709,761
Property, plant and equipment 715,350 863,137 1,578,487
Acquisition of property, plant and equipment 27,281 16,787 44,068
For the 9 months ended June 30, 2001
Net sales $ 1,153,541 $ 493,099 $ (452,000) $ 1,194,640
Earnings before amortization and interest 109,250 110,489 219,739
Amortization charges 53,322 23,896 77,218
Total assets 1,508,461 1,201,300 2,709,761
Property, plant and equipment 715,350 863,137 1,578,487
Acquisition of property, plant and equipment 96,185 71,093 167,278
For the quarter ended June 30, 2000
Net sales $ 442,358 $ 190,217 $ (172,740) $ 459,835
Earnings before amortization and interest 85,172 34,758 119,930
Amortization charges 15,193 6,223 21,416
Total assets 1,360,343 1,006,278 2,366,621
Property, plant and equipment 601,823 743,420 1,345,243
Acquisition of property, plant and equipment 23,230 76,725 99,955
For the 9 months ended June 30, 2000
Net sales $ 1,072,392 $ 532,579 $ (490,500) $ 1,114,471
Earnings before amortization and interest 178,330 92,851 271,181
Amortization charges 44,409 18,278 62,687
Total assets 1,360,343 1,006,278 2,366,621
Property, plant and equipment 601,823 743,420 1,345,243
Acquisition of property, plant and equipment 90,529 149,576 240,105
4. EARNINGS PER SHARE
Basic and fully diluted net earnings per share have been calculated using the
weighted average and maximum dilutive number of shares outstanding for the three
month period of 90,891,119 (2000 - 86,181,345) and 92,995,484 (2000 -
89,061,466) and for the nine month period of 90,828,667 (2000 - 86,155,843) and
93,107,940 (2000 - 88,888,164) respectively. As at June 30, 2001, the Company
had outstanding 15,935,444 multiple voting shares, 74,997,634 subordinate voting
shares, and 10,103,760 options to acquire subordinate voting shares under the
Company's employee stock option plan.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
QUARTER ENDED JUNE 30, 2001, AS COMPARED TO THE
QUARTER ENDED JUNE 30, 2000
Consolidated net sales for the third quarter were $507 million, up 10% from $460
million recorded during the same period in 2000. The Company was able to
generate sales growth during the quarter across all product lines in the
Products segment, with the exception of window coverings. Acquisitions and
divestitures had no effect during the quarter.
Products segment sales for the third quarter increased $39.7 million or 9%
to $482 million. Building system sales increased 52% due to higher volumes sold
in Mexico and Canada, outdoor storage increased 27% and indoor storage and patio
furniture increased 19% due to higher volumes sold to new and existing
customers. These sales increases were partially offset by lower sales in window
coverings, which decreased $4.6 million or 6% to $74 million for the third
quarter due to lower volumes sold to the fabrication base as a result of some
economic softness in this sector.
Support segment sales for the third quarter decreased $49.3 million or 26%
to $141 million, while third party sales increased $7 million to $25 million,
primarily due to higher volumes sold by the machinery division.
Sales to non-Canadian customers, including foreign based sales and exports
from Canadian operations, increased to 61.1% or $310 million of total sales from
59.9% or $276 million for the same period last year. The increase was primarily
due to higher volumes of building systems and outdoor storage products sold in
foreign markets.
The Group's overall operating margin (or "EBITDA") for the quarter ended
June 30, 2001 decreased by $4.8 million or 4% to $115.1 million compared to
$119.9 million last year. EBITDA as a percentage of sales decreased to 22.7%
from 26.1% last year.
Raw material costs as a percentage of sales were 42.8% compared with 41.9%
last year and resulted from higher cost inventory moving through the operating
cycle. Labor costs as a percentage of sales were 13.4% compared to 12.6% last
year. This increase was due to lower unit volumes sold in window coverings and
machinery and a higher level of employees to support the anticipated increase in
sales. Other manufacturing costs as a percentage of sales increased to 8.9% from
8.2% last year. This increase was due to higher amortization costs as a result
of the capital expenditure program. Selling, general, and administration cost as
a percentage of sales increased to 17.5% from 15.8% last year due to higher
freight and warehousing costs.
Product segment EBITDA for the quarter ended June 30, 2001 decreased to
$74.4 million from $85.2 million last year. EBITDA as a percentage of sales
decreased to 15.4 % from 19.3% last year. The decrease was primarily due to
higher raw material and labour costs. Support segment EBITDA for the quarter
ended June 30, 2001, increased by $5.9 million to $40.7 million from $34.8
million last year. EBITDA as a percentage of sales increased to 28.9% from 18.3%
due to slightly lower raw material costs in this segment and higher third party
sales.
Amortization expense increased to $27 million for the quarter, up by $5.6
million from $21.4 million last year. As a percentage of sales amortization
expense is 5.3% versus 4.7% last year. Products segment amortization as a
percentage of sales was 3.8%, which increased from 3.4% last year. This increase
is due to added capacity in custom profiles and window coverings. Support
segment amortization expense as a percentage of sales was 6.0%, which increased
from 3.3% last year. This increase is also due to added capacities in material
and real estate.
Interest and financing charges increased as a percentage of sales to 2.9%
from 2.6% last year. Interest expense increased by $2.8 million from $11.9
million due to higher level of loan utilization for working capital and capital
spending purposes. Approximately $2 million of interest expense was capitalized
to assets under construction during the quarter.
During the quarter income tax expense as a percentage of earnings before
income taxes decreased to 31.6% from 34% last year. The rate reduction is due to
favorable provincial tax legislation passed in June 2001 and is consistent with
the Group's overall expected effective rate for Fiscal 2001.
Net earnings during the quarter were $49.9 million or 9.8% of sales versus
$56.8 million or 12.3% of net sales for the prior quarter. Earnings for the
third quarter of the fiscal year were negatively impacted by higher variable
costs and lower fixed cost adsorption, higher raw material costs working through
the system and higher depreciation and interest financing costs related to the
capital expansion program. On a fully diluted basis, earnings per share for the
period were $0.54 compared to $0.64 in the prior quarter. The average number of
shares outstanding for the quarter on a fully diluted basis was approximately 93
million, or approximately 3.9 million higher than the prior year.
LIQUIDITY AND CAPITAL RESOURCES
During the period the Group generated cash flow of $80.7 million or $0.87 per
share, an increase of $0.5 million or 1% over the $80.2 million or $0.90 per
share for the previous year. Cash flow from operations of $69.3 million was used
to finance capital spending of $44 million and reduce operating loans by $16
million. Working capital was $159 million at June 30, 2001 compared to $138
million as at March 31, 2001. 86% of inventory as at June 30, 2001 can be
attributed to the Products Group and 14% can be attributed to the Support Group,
primarily representing materials in the PVC resin, chemical additive and
compound operations inherent with Royal's high degree of vertical integration.
On June 30, 2001, approximately $450 million was drawn on the Group's $700
million bank credit facility, representing 64% utilization, while the funded
debt to capital ratio was 42.4% compared to 43.4% as at March 31, 2001.
Management believes that the Company's anticipated cash flow from operations and
available credit is sufficient to meet its needs.
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CORPORATE DIRECTORY
CORPORATE OFFICE: TRANSFER AGENTS AND REGISTRARS: FOR FINANCIAL INFORMATION CONTACT:
Royal Group Technologies Limited Montreal Trust Company of Canada Gary Brown,
1 Royal Gate Blvd., c/o Computershare Investor Services Inc. Corporate Office
Woodbridge, Ontario 100 University Avenue, 11th Floor Executive Vice President and Chief
Canada L4L 8Z7 Toronto, Ontario M5J 2Y1 Financial Officer
Tel: 1-800-663-9097 or (416) 981-9633
Telephone: (905) 264-0701 Facsimile: (416) 981-9507 FOR FURTHER INFORMATION CONTACT:
Facsimile: (905) 264-0702 E-mail: faq@montrealtrust.com Mark Badger,
Corporate Office
SHARES LISTED ("RYG"): Co-Transfer Agent (U.S.A.) Vice President, Corporate
Toronto Stock Exchange, Computershare Trust Company, Inc. Communications
New York Stock Exchange 12039 W. Alameda Parkway, Site 2-2
Lakewood, CO 80228
Tel: (303) 956-5400
Fax: (303) 986-2444
Additional investment information is available on Royal Group's website at
www.royalgrouptech.com under the "Investment Information" section.
TRADING DATA
High Low Close Volume
(TSE) (TSE) (TSE) (in 000's)
--------- -------- -------- ----------
Fiscal 2000
Q1 $C35.20 $C24.75 $C30.75 10,596 *
Q2 32.90 26.00 31.50 9,380 *
Q3 36.50 28.00 35.20 8,309 *
Q4 36.15 28.50 30.00 10,437 *
--------- -------- -------- --------
Fiscal 2001
Q1 31.40 16.10 18.75 12,740 *
Q2 27.20 18.55 23.25 12,135 *
Q3 29.50 20.00 27.95 12,739 *
* TSE, NYSE
FORWARD LOOKING STATEMENTS:
The information in this document contains forward-looking statements with
respect to Royal Group Technologies Limited, its subsidiaries and affiliates. 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 construction
activity, changes in product costs and pricing, an ability to achieve or delays
in achieving savings related to the cost reduction, 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, the effect on foreign operations of currency
fluctuations, tariffs, nationalization, exchange controls, limitations on
foreign investment in local business, and other political, economical and
regulatory risks, difficulty in developing and introducing new products, failure
to penetrate new markets effectively (particularly markets in developing
countries), difficulty in preserving proprietary technology, changes in
environmental regulations 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. Statements made
in this document are made as of August 27, 2001 and Royal assumes no
responsibility for updating such statements.
[ ROYAL GROUP TECHNOLOGIES LOGO ]