Foremost Income Fund ("Foremost" or the "Fund") announces the financial results for the three months ended March 31, 2017.
The Fund is an unincorporated open end mutual fund trust conducting its business through two operating segments, Foremost Energy Equipment ("FEE") and Foremost Mobile Equipment ("FME"). FEE's overall business is focused on the oil and gas industry and includes activity from six manufacturing sites throughout Alberta. FME manufactures off‐highway large wheeled and tracked vehicles, hydrovac and vacuum trucks, equipment for custom drilling, construction, water wells, and mining sectors. FME has three manufacturing facilities located in Alberta.
Message to Unitholders
2017 arrived at Foremost quietly, but the start of the year has been promising for a few reasons. The improving conditions in primary markets for Foremost including the Western Canadian energy and the US energy and construction/utilities markets being the most important. The US infrastructure and utilities markets picked up a lot of steam as consumer and business confidence improved substantially from the previous periods. In the Western Canadian markets the price of oil stabilized, allowing drillers and service companies to increase spending on new activity.
First quarter revenue came in at $31.0 million, almost squarely in line Q4 2016, but $4.8 million lower than the same quarter in 2016. While revenue is stable gross margin is slowly rising coming in at 11% in Q1 vs 7% in Q4 2016 and 10% in the same quarter in 2016. This rise can be attributed to better margins in vacuum trucks, an increased share of revenue from higher margin mobile equipment and mining tools, and a lower inventory allowance provision. SG&A costs were controlled for Q1 at $2.9 million, lower than the full year 2016 average of $3.0 million. Net loss for the first quarter was $0.6 million as the EBIDTA of $0.3 million was insufficient to cover non‐cash expenses. The balance sheet remains in a strong position with a cash balance of $43.4 million and no debt. Cash has decreased from previous quarters as inventory starts to get depleted and new materials are purchased.
The outlook for 2017 is stable with growth in vacuum truck sales in the US and Canada, continued strong sales of the dual rotary drills and mining tools being the bright spots. The new Rival truck is seeing excellent growth and market acceptance. The demand in the Western Canadian energy markets does continue to strengthen but margins are very poor as the industry struggles with overcapacity.
The keys to success in 2017 are to increase and maintain a high production rate of vacuum trucks, a strong sales and marketing push for Mobile Equipment in the US to take advantage of the exchange rate and the bullish economy, and a continued organizational push within Energy Equipment to find efficiencies and to protect market share particularly in Western Canada.
Q1 2017 Highlights:
Trust Unit Redemptions and Distributions
The Fund redeemed 27,160 Trust Units during the three months ended March 31, 2017, through its normal redemption program resulting in promissory notes payable of $0.2 million. During the first quarter of 2016 the Fund redeemed 5,000 Trust Units resulting in promissory notes payable equal to $0.03 million.
The Trustees have determined that, as of May 10, 2017, the Fund will redeem tendered Trust Units at tangible book value of $5.75 per unit.
Temporary Reduction of Monthly Limit for Fund Unit Redemptions Pursuant to Section 6.4(ii)(A) and (B) of the Deed of Trust
Pursuant to section 6.4(ii)(A) and (B) of the Deed of Trust of the Fund dated November 12, 2005 as amended (the "Deed of Trust"), the Trustees of the Fund have discretion, in any calendar month, to reduce the monthly limit for cash redemptions of units of the Fund due to a material change, or concerns as to the current working capital or debt of the Fund. The exercise of such discretion may result in all or a portion (on a pro rata basis, depending on notices of redemption received) of the amount payable for units redeemed being paid by unsecured promissory notes in accordance with section 6.5 of the Deed of Trust.
As disclosed by prior press releases, effective May 1, 2014 and applying to all notices of redemption received in the months of May through October 2014, inclusive, and February 2015, through April 2017, inclusive, the Trustees of the Fund exercised their discretion pursuant to section 6.4(ii)(B) to reduce the monthly limit for cash redemptions from $1,500,000.00 to $0.00, and to $500,000.00 for the months of November and December, 2014, and January 2015 (in each case the subject redemptions being payable by the end of the following month). The Trustees undertook to review the revised monthly limit in respect of the month of May 2017 no later than May 15, 2017.
With respect to the month of May 2017, the Trustees have determined that the monthly limit for cash redemptions will be set at $0.00 due to concerns as to current working capital and debt of the Fund, having regard to the Board's views on the potential impact of current and expected market conditions on the Fund's performance. The Trustees have undertaken to review the revised monthly limit in respect of the month of June 2017 no later than June 15, 2017.
In accordance with the Deed of Trust, unitholders that submit or have submitted notices of redemption during the month of May 2017, such that the Fund is obligated to pay the redemption price in respect of the subject units on or before June 30, 2017, will be contacted individually and provided with the opportunity to elect to withdraw all or any part of such notices of redemption. Any unitholders not electing to withdraw their redemption notices, in whole or in part, will be paid the redemption price in respect of the units that they submit for redemption by unsecured promissory notes.
SOURCE: Foremost Income Fund
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