Canada: Lakeport Brewing Income Fund reported 3Q 2006 gross sales were up 27.6% reaching CA$50.1 million

Lakeport Brewing Income Fund, an Ontario-based brewer of value-priced, quality beer, announced November 08 that it continued to achieve remarkable growth through the 2006 third quarter in its volume, market share, gross sales, and earnings per unit (figures in CA$ unless stated).

The Fund also announced that it is increasing its monthly distributions by 7.7 percent, or one cent, from $0.13 to $0.14 effective with the payment on December 15, 2006 to unitholders of record on November 30, 2006. At that time, the Fund also will make a special cash distribution of $0.05 per unit as the result of excess distributable cash generated by Lakeport's outstanding financial performance through the first nine months of 2006. This is the fourth increase in monthly distributions that the Fund has approved since completing its initial public offering (IPO) in June 2005, when the monthly distribution was set at $0.0896 per unit for September 2005, representing more than a 56 percent increase. In addition, the Fund has previously paid out special distributions of excess cash that it has generated amounting to $0.29 per unit for 2005 and $0.24 per unit paid in October, 2006.

"Lakeport's outstanding third-quarter performance extends the leadership that we have established in Ontario's brewing industry and particularly in the growing value segment that we have played a pivotal role in creating," said Teresa Cascioli, Chair and Chief Executive Officer.

"Our growth reflects both the success of the marketing initiatives in new packaging, new channels, and new formats that we launched in 2005 and 2006 and of the tremendous loyalty we have earned from our growing legion of customers. We are especially excited that we are able to pass this success along to our investors as increases in our monthly distributions and special payouts."

"As has been the case in each quarter since the Fund completed its IPO, Lakeport's growth particularly reflects increased demand for our proprietary brands within the growing value-priced segment of Ontario's beer market," said George Croft, the Fund's President and Chief Operating Officer. "In particular, sales of our three leading brands through The Beer Store - Lakeport Honey Lager, Lakeport Pilsener, and Lakeport Light - were up approximately 20 percent from a year earlier, while Lakeport Ice and Lakeport Strong also enjoyed excellent growth."

Lakeport's market share of TBS's total sales to home consumers continued to grow, exceeding 12 percent in the 2006 third quarter, an impressive increase from the 2005 third quarter when its share first exceeded 10 percent; in the 2004 third quarter, Lakeport's market share of TBS's sales was approximately 5 percent.

In addition, Lakeport's sales through the LCBO almost quadrupled from a year earlier. "We are very appreciative of the terrific support that the LCBO has given us," Mr. Croft said.

Through 2006, Lakeport has launched a number of initiatives, including in the third-quarter the introduction of Lakeport Ice in a 24-can pack and new graphics for Lakeport Ice in bottles and for Lakeport Strong six-bottle cartons.

"As in the 2006 second quarter, a major reason for our third-quarter growth was the huge success of our introduction earlier this year of Lakeport Honey Lager, Lakeport Pilsener, and Lakeport Light in cans. Lakeport Pilsener has now soared to the number 8 spot on the TBS Top 10 list and Lakeport Honey Lager continues to be the leading honey beer in Ontario and remains the 9th largest selling brand in the province," said Mr. Croft.

"Overall, industry volume of beer sold in cans grew impressively. Lakeport's can volume growth, however, easily surpassed the industry's gain as we recorded about a six-fold increase from our level in the 2005 third quarter. At the same time, while industry bottle volume sales declined, Lakeport continued to grow compared with our level of a year ago."

Lakeport completed its IPO on June 21, 2005. However, to provide meaningful information, the Fund's third-quarter and nine-month results ending September 30, 2006 are compared with the respective 2005 periods, inclusive of when Lakeport was privately owned.

Successful Introduction of Lakeport's Leading Brands in Cans Drives

Third-Quarter Growth

Third-quarter gross sales were $50.1 million, a 27.6 percent increase compared with $39.2 million in the 2005 period. The growth is primarily attributable to increased sales of Lakeport's family of proprietary brands, particularly in cans, as well as price increases on smaller package formats and the impact of reduced GST.

Gross profit margin improved to 47.6 percent in the 2006 third quarter, nearly 8 points better than in the 2005 period. The improvement reflects Lakeport's ability to continue to realize increased operating efficiencies as it achieves higher volumes, reduced costs resulting from its investment in cash-flow enhancing capital projects, higher pricing on smaller package sizes, and higher net revenues resulting from the timing of an excise tax rate change. Lakeport continues its razor focus on managing its costs.

Selling, general, and administrative (SG&A) expenses were 10.9 percent higher in the 2006 quarter to $2.2 million, compared with a year earlier, mainly reflecting additions to personnel to accommodate the growth in Lakeport's business. As a percentage of net revenue, SG&A declined to 10.5 percent from 12.3 percent in the 2005 third quarter.

Accounting Change - Gifted Unit Compensation Expense

As described in the Prospectus issued for the Fund's June 2005 IPO, Teresa Cascioli, the principal shareholder in Lakeport Brewing Corporation (the former private company) at that time indirectly contributed 300,000 units of holdings in the Fund to establish a Gifted Unit Plan to thank key members of the management team for their past efforts, including the successful completion of the IPO.

Since the IPO, however, as a result of the quantum of the appreciation in the price of the Fund's units, the gifting is far more significant than contemplated and, at the request of Lakeport's new auditors, management examined the accounting treatment and have concluded that the Gifted Unit Plan be treated as a compensation expense with an offsetting increase to the Fund's equity for the value of the Units sold to fund this item.

This is an accounting change only and has absolutely no impact on distributable cash, the business or operations of the Fund.

The September 30, 2006 unaudited interim financial statements have been adjusted to reflect the impact of this accounting change, including a restatement of the financial results for the periods ending September 30, 2005 and December 31, 2005. The information regarding the restatement is unaudited. Lakeport will file restated audited 2005 annual financial statements reflecting these adjustments as soon as practicable. At the time of filing our interim financial statements for the first and second quarter of 2007, we will restate our results for the comparable period in 2006. Until these restatements are complete, Lakeport's previously published annual and quarterly financial statements should not be relied upon. Lakeport believes that this accounting change is the result of a unique non-cash transaction.

The impact of these changes is described in Note 4 of the unaudited interim consolidated financial statements for the period ended September 30, 2006.

Adjusted EBITDA (earnings before non-controlling interest, interest, taxes, depreciation, and amortization expense adjusted for Gifted Unit compensation expense) was $7.8 million in the 2006 third quarter, up 73.9 percent from adjusted EBITDA of $4.5 million in the 2005 period.

Adjusted EBITDA in the 2006 and 2005 third quarters reflects non-cash adjustments of $0.5 million and $0.1 million, respectively for the Gifted Unit compensation expense.

Third-quarter 2006 net earnings were $5.0 million, or $0.91 per unit (basic and diluted). The inclusion of the Gifted Unit compensation expense reduced net earnings by $0.6 million ($0.07 per unit).

Distributable cash for the quarter amounted to $7.0 million ($0.98 per unit), exceeding the distributions declared during the quarter of $0.61 per unit, or $4.4 million. Distributable cash was not impacted by the accounting adjustment. The results of the quarter should not be considered representative of a 12-month period of distributable cash, particularly as Lakeport's business is somewhat subject to seasonality with sales building up through the second quarter and generally reaching peak levels in the third.

Nine-Month Results

Gross sales for the first nine months of 2006 increased 22.2 percent to $122.8 million, compared with $100.4 million in the 2005 period. Gross profit was $22.4 million or 43.3 percent of net revenue, up from $16.7 million, or 39.3 percent of net revenue in the nine-month 2005 period. SG&A expenses were $7.0 million, a 23.5 percent increase compared with $5.6 million in the 2005 period. The increases in the first nine months of 2006 are the result of the factors described for the third quarter of 2006.

Adjusted EBITDA for the nine-month 2006 period was $15.5 million, up 39.5 percent from Adjusted EBITDA of $11.1 million a year ago. Including the charge for the Gifted Unit compensation expense in the 2006 and 2005 nine-month period, EBITDA was $13.7 million and still a considerable improvement of $2.8 million over the prior-year amount.

Net earnings were $8.4 million or $1.52 per basic and fully diluted unit in the first nine months of 2006. The effect of the Gifted Unit compensation expense was to reduce net earnings by $1.8 million (comprised of $0.5 million for Q1 2006, $0.7 million for Q2 2006 and $0.6 million for this quarter) or $0.25 per unit. Distributable cash amount to $12.9 million in the nine-month 2006 period, or $1.79 per unit, and actual distributions were $8.8 million or $1.22 per unit. Distributable cash was not impacted by the accounting adjustment.

"At this time, we remain confident that Lakeport will continue to grow through the balance of the year," Ms. Cascioli said. "We now are focusing on our planning to generate further sales growth next year and on measures that will enable us to continue to tightly manage our expenses and to continue to explore cash-flow enhancing capital opportunities."

Lakeport believes EBITDA and Adjusted EBITDA (EBITDA adjusted for the Gifted Unit compensation expense) are important measures as they allow management to assess operating performance of the Fund's business. These terms do not have any standardized meaning prescribed by Canadian generally accepted accounting principals. Management cautions investors that EBITDA and Adjusted EBITDA should not replace net earnings or loss as an indicator of performance, or cash flows from operating, investing, and financing activities as a measure of the Fund's liquidity and cash flows. The Fund's method for calculating this information may differ from that used by other issuers and, accordingly, this information may not be comparable to measures used by other issuers.

Distributable cash is a non-GAAP measure generally used by Canadian income funds as an indicator of financial performance. The method of calculating the Fund's distributable cash may differ from computations as reported by similar entities and, accordingly, may not be comparable to distributable cash as reported by such entities.

E-malt.com, the global information source for the brewing and malting industry professionals. The bi-weekly E-malt.com Newsletters feature latest industry news, statistics in graphs and tables, world barley and malt prices, and other relevant information. Click here to get full access to E-malt.com. If you are a Castle Malting client, you can get free access to E-malt.com website and publications. Contact us for more information at marketing@castlemalting.com .