PCI-v : Perlite Canada – catering to recession proof demand

[tara]

Perlite caters mainly to the horticulture industry (cultivating plants, flowers, fruits and vegetables, peat/sward). Food is a basic necessity and farmers need perlite and vermiculite in their operations. Thus, the core need for their product cannot vanish in a recession.


Perlite Canada 2008 annual report is out. Here is what I gather as the topics of interests going forward

2008 was impacted by:
• start up costs of the new St-Pacome plant
• loss of sales due to delays in starting St-Pacome plant
• price war with competitor VIL Vermiculite in Lachine which translated into loss of income (but now that they acquired them, it’s no longer an issue and prices can be readjusted)
• acquisition costs incurred to acquire VIL Vermiculite
• abnormal sea transportation costs due to historical highs of oil prices;

=> all the above resulted in a loss of only 329k in 2008


Positive aspects looking forward
• all the St-Pacome start-up costs are history, and will not reappear in 2009
• loss of sales to clients due to delayed St-Pacome start-up have been re-established
• now that VIL has been acquired, there is no more price war and Perlite Canada can reset the prices to more normal levels, which will increase income
• VIL has been acquired and acquisition costs won’t be an issue going forward
• worldwide lower sea transport volume is causing a transportation price drop; price of oil has reduced significantly, which also serves to lower the price of sea transportation (boat fuel)
• acquisition of VIL provides increased purchase power, logistic cost reduction opportunities and overhead reduction opportunities
• VIL acquistion doubles sales immediately, without incurring dilution; Perlite Canada emerges as the clear leader in Eastern Canada
• cash flow impact: look carefully at the inventory level, it is 1.6M$ plus the inventory acquired from VIL. All this inventory is paid for. This means when they sell their products in the coming months, there will be cash inflow but very little cash outflow, because the majority of their underlying cost is raw material, which has already been paid and accounted for in 2008.


Sensitivity analysis
With 10.8M shares outstanding, every +100k of net earnings will translate into .01$/share EPS.


P.S. The above is simply my personal understanding and not to be construed as investment advice. I’m not a broker, promoter, director, manager or employee of the aforementioned company, just a shareholder. Do your own due diligence.

[Deepglue]

Perlite Canada Inc. Announces Its Results for Its Third Quarter of 2009

10:47 AM ET, September 29, 2009

MONTREAL, QUEBEC, Sep 29, 2009 (MARKETWIRE via COMTEX) -- Perlite Canada inc. (the "company")(TSX VENTURE: PCI) announces hereby the results of its third quarter 2009.
The Company generated revenues of $1,947,906 during the third quarter ended July 31, 2009 (the "3rd Quarter 2009) compared to $950,131 as at July 31, 2008, being an increase of approximately 105%. For the nine month period ended July 31, 2009, total sales were $5,632,818 compared to $2,922,596 for the same period in 2008, which represent an increase of approximately 93%. This increase is principally attributable to the acquisition of the Lachine Plant in November 2008.

The Company recorded an income before taxes of $38,018 during the 3rd Quarter 2009 compared to a loss before taxes of $151,965 for the third quarter of 2008. For the nine month period ended July 31, 2009, the company generated a loss before taxes of $411,807 compared to a loss before taxes of $314,143 for the same period in 2008.

The Company generated a net loss of $23,451 as at July 31, 2009 compared to a net loss of $103,306 for the same period in 2008. This net loss for the 3rd Quarter 2009 is explained by a future income taxes provision of $71,353. For the nine month period ended July 31, 2009 the Company posted a net loss of $378,012 compared to a net loss of $213,997 for the same period in 2008.

The management will work to complete the integration of the Lachine Plant to its activities in order to maximize the synergies and ensure the optimal use of the Company's resources.

Perlite Canada inc. specializes in the processing, distribution and sale of perlite and vermiculite, two minerals used in industry and horticulture.

[tara]

Perlite Canada (PCI.v): 0.10$ 2010-07-03
Q2 EPS = +.005$/share


• Raw materials and products sold are non-perishable, not subject to fashion changes or upgrades like the electronics world.
• The machinery is long lasting and the process is fairly simple, using ovens and conveyors.
• The process is quite automated and not labour intensive.
• A substantial portion of their sales respond to primary needs (agriculture ie. growing fruits and vegetables).
• The products sold offer very few alternatives, if any.
• Sales are recurring, with very little marketing efforts/staff required to maintain a stable backlog.
• The business model is simple with decades of proven history.

Costs are kept under control and management has demonstrated over the years that this public entity is self sustaining when acquisition is not a factor. Having doubled their sales going forward with the VIL integration, the restructuring (Baie-du-Febvre plant closure and head office lease termination) now returns staffing to pre-acquisition level. By digging into historical financial statements on SEDAR, gross margin of 25% stands out as a representative figure. With this order of magnitude, gross margin should cover the underlying loan, while providing meaningful net earnings and depict and undervalued state.


To better illustrate, here is a draft of the overall picture:

- before VIL acquisition, Perlite had about 30 active employees, 2 plants, product sales were hovering around 3.5 to 4M$;
- once VIL was acquired, Perlite had 3 running plants to sustain(fixed costs), about 45 employees, with expected sales level in the 7 to 10M$;
- with restructuring efforts announced, Perlite once again has 2 plants(reduced fixed costs), about 35 employees, but double the sales level, excluding new ventures and organic growth attempts;
- Baie-du-Febvre plant was powered using oil (high energy costs), whereas Lachine and St-Pacome are mainly powered by natural gas. Therefore, on a go forward basis, raw material processing should provide energy savings on the bottom line;
- The company now exhibits a logistical advantage (product distribution), with access to railroad directly behind the VIL plant, increased buying power from the business combination, making it the largest player in Eastern Canada.
- Starting this month, the formerly separate head office will be closed and relocated into the VIL Lachine plant, reducing overhead one notch further on a go forward basis.


Management has done an excellent job in the crisis, doubling sales and eliminating their strongest competitor while avoiding dilution; the company has recently offered an appetizer of the return to profitability mode. Final stages of the asset/manpower combination are happening and as depicted in the annual presentation, the company has infrastructure for sale which should serve to reduce the debt absorbed for the VIL acquisition, and further enhance profitability and cash generation going forward.




The above is only my personal interpretation, not to be confused with that of company officials. It is simply my personal understanding and not to be construed as investment advice. I’m not a broker, promoter, director, manager or employee of the aforementioned company, just a shareholder. Some typos could have occurred. Do your own due diligence.

[tara]

PCI.v (Perlite Canada): a bit of history


Normiska has a long history dating back to the 1800s. Their facility in Lachine (VIL) had been in operation for over 40 years. VIL Lachine and Perlite Canada were by far the two largest processors in Eastern Canada. In 2007, Normiska and their VIL Lachine plant, started a price war with Perlite Canada. In 2008, when the financial crisis hit, Normiska finally gave up the battle and sold the VIL plant to Perlite Canada, but with an order book of low priced products, and lots of low grade perlite processed ore, because their perlite transformation system was not efficient.

Nov 2008, Perlite takes over VIL with intentions to combine the companies and make synergy gains. Perlite begins restructuring, relocating equipment and strategizes on customer service. The VIL plant has since been revamped, showing increased efficiency, and the bothersome low grade ore flushed out of the inventories. VIL is strategically located next to a train track, and running on cheap natural gas. The recently closed Baie-du-Febvre plant was powered by oil, far more expensive than natural gas.

Before the acquisition of VIL, Perlite clientele were mostly large customers concentrated in Quebec, for a volume of sales varying from 3-5M$/year. PCI.v sales were dominant on perlite but rather weak on the vermiculite front.

On the contrary, VIL Lachine had far more customers, mostly small and concentrated in Ontario. VIL sales were much stronger on the vermiculite side compared to their perlite sales. As one can understand, the combination of both entities is a perfect match. Now PCI.v is a strong seller in vermiculite and perlite, with the large and small customer base of Eastern Canada. Due to their plant locations, they have a quasi monopoly, because their closest competitors(USA) can hardly outbid them due to transportation costs.

Having consolidated the equipment slate of 3 plants into two (i.e. now having 2 energy efficient plant), with concurrent staff reductions, one can imagine the possibilities of EPS generation based on 2004-2006 metrics, but understanding they now have double the sales. One should never forget that sales are recurring with very little sales staff required to maintain the backlog., as vegetables and plant growers need their products, with no known substitutes.



To properly grasp what has happened, a summary below has been created (by me, not the company officials). Let’s look at the numbers from a bird’s eye view, and then we’ll go into details.



• 2004 EPS = +.02$/share ; 2004 sales = 4.6M$, 2 plants + head office
• 2005 EPS = + 03$/share ; 2005 sales = 4.8M$, 2 plants + head office
• 2006 EPS = +.05$/share ; 2006 sales = 4.9M$, 2 plants + head office


• 2007 EPS = +.02$/share ; 2007 sales = 4.7M$, 2 plants but in transition mode

Special events in 2007 which need consideration:- price war began with their largest and only significant competitor: Normiska which owned the VIL Lachine plant
- Perlite begins St-Pacome plant construction to satisfy the 10 year supply agreement with Tourbieres Lambert and winds down the Lameque plant in New Brunswick, which affected sales.
- Several hundred thousand dollars in the 2007 revenue figure were for a non-recurring contract (consultation and installation of infrastructure for a client)



• 2008 EPS = -.03$/share ; 2008 sales = 3.5M$, 2 plants + head office

Special events in 2008:- price war with Normiska/VIL still ongoing
- financial crisis
- delays in setting-up St-Pacome which affected sales



• 2009 EPS = -.04$/share ; 2009 sales = 6.8M$, 3 plants and a separate head office, which are labor intensive and increases fixed costs

Special events in 2009 :
- the financial crisis effect
- Normiska/VIL capitulates and sells VIL Lachine to Perlite Canada for 3.3M$, making Perlite Canada the largest player in Easter Canada, with a transportation cost advantage that gives it a quasi-monopoly
- Perlite Canada begins to reestablish pricing and restructure after the acquisition



• 2010 highlights thus far
- Perlite has doubled the sales with VIL acquisition, but runs 3 plants and a separate head office till march 2010, which is expensive (fixed cost and labor);
- Perlite closes Baie-du-Febvre in march 2010 (which was powered with oil and more costly to operate)
- Perlite however relocates the Baie-du-Febvre processing equipment in the remaining 2 plants, maintains capacity while reducing the cost structure, thus paving the way for significant profitability.
- Perlite further enhances cost saving by relocating its head office into the VIL Lachine plant in july 2010, eliminating rent and various related expenses.
- In Q2, Perlite already shows a glimpse of profitability after running only 2 months with 2 plants.



Next, we will look at the long term debt and its accelerated reduction possibilities, the book value, and a predictable/calculable net earnings draft.



The above is only my personal interpretation, not to be confused with that of company officials. It is simply my personal understanding and not to be construed as investment advice. I’m not a broker, promoter, director, manager or employee of the aforementioned company, just a shareholder. Some typos could have occurred. Do your own due diligence.

[tara]

Perlite Canada: Analysis of the long term debt


Where does the 3.1M$ LTD come from? From two events
- event 1: building the new St-Pacome plant in 2007/2008, which was a pre-requisite for signing a 10 year supply agreement with Tourbieres Lambert (see press release dated oct 31 2006)
- event 2: acquiring their primary competitor VIL Lachine, entailing a 3M$ loan
- thus, both of the above can be considered like an hypotec backed by hard assets, with practically no goodwill


How can the long term debt payment be accelerated?
- Perlite Canada now has 2 plants/land up for sale, which can be sold to pay down the debt faster. The first plant is in New Brunswick/Lameque, a facility which was shut down when the St-Pacome plant was built. This facility is currently rented until a buyer is found.
- The second is Baie-du-Febvre, which was shut down march 2 2010. This building, silo and corresponding landmark can be sold or rented. Monetizing these hard assets could make a dent in the remaining long term debt, which currently stands at about 3M$.



In section 8 of the latest financials, it says long term debt payments for the next 5 years hovers around 600k, if this debt is not repaid in an accelerated fashion. In 2006, there was practically no long term debt and they declared +.05$/share. So how are they going to meet and beat these numbers with a 3M$ debt to service? A good question which can be answered with the following accounting statements:Fixed cost reductions will serve to repay the debt. Fixed costs were reduced by closing Baie-du-Febvre, closing the head office and reducing the energy bill because the remaining plants are gas powered (instead of oil).

Here are some numbers to prove it:
- Q2 2009 sales = 2 343 452 $
- Q2 2009 manuf. Costs + SG&A = 2 465 747$

- Q2 2010 sales = 2 316 293$
- Q2 2010 manuf. Costs + SG&A = 2 246 196$

Just about the same sales level, but we can see a savings of about 200k. This mostly comes from fixed cost reduction of the Baie-du-Febvre plant closure for 2 out of the 3 months pertaining to this quarter. As of July 2010, the head office closure will be added on top of it. If we extrapolate this quarterly saving to an annual sales level of 7M$, savings range from 567k to 850k on the fixed costs, which is plenty to cover the 600k/year of long term debt payments.

And of course, if they sell the Lameque plant/land and the Baie-du-Febvre plant/land, the long term can be paid off far quicker, reduce interest payments, paving the way for far better performance than EPS+.05$/share declared in 2006. Remember in 2006, they had 2 plants and about 5M$ in sales.

Once this 3M$ long term debt is repaid, the forward looking scenario is very enticing. The G&A reductions should flow directly to the bottom line (based on 10,8M shares). The additional sales and gross margin stemming for VIL acquisition will also convert into additional earnings per share, when compared to 2006 EPS +.05$/share, since the company will have a comparable infrastructure setting…


Next, we will look at book value, price to sales and a more definite earnings per share prediction.


The above is only my personal interpretation, not to be confused with that of company officials. It is simply my personal understanding and not to be construed as investment advice. I’m not a broker, promoter, director, manager or employee of the aforementioned company, just a shareholder. Some typos could have occurred. Do your own due diligence.

[tara]

Book value analysis of the company PCI.v


1.1 Book value of Perlite Canada prior to VIL acquisition

Refer to the 2008 annual report ( last filing prior to acquisition of VIL for 3.3M$)
http://www.sedar.com/GetFile.do?lang=EN ... 08FS_t.pdf

From this report, we find
• 2.7M$ of shareholder equity with no goodwill
• 10.8M shares outstanding
This translates into 0.25$/share. Long term debt was about 800k due to hypothec for constructing the St-Pacome plant. When the hypothec will be repaid, this will bring the book value of the original business to 3.5M$ or 0.32$/share. And we know they have (2) plants/landmark for sale, which can be used to repay long term debt.

Thus, enterprise value prior to the VIL acquisition was between 25 to 32 cents per share.



1.2 Value of the VIL acquisition:

The VIL Lachine plant was bought November 14 2008 for 3.3M$ (in the heart of the financial crisis), with about 276k of goodwill/intangible. Normiska had previously bought this facility for 3M$ in February 2000. When Perlite Canada made the acquisition, the VIL Lachine 2008 sales figure was 3 to 4M$/year (2008). Thus, the transaction price tag was close to 1x sales, amidst the financial crisis.

Taking the raw VIL hard asset price of 3M$ on 10.8M shares outstanding, we obtain an additional 0.28$/share of hard asset book value. Of course, this is biased because it was financed, but once the debt is eliminated, it provides an idea of the rock bottom value for this new division, without including intangibles related to synergies of both entities, which provides a quasi-monopoly in Eastern Canada.

One must also remember the 3.3M$ price tag was in the heart of the financial crisis, with a depressed order book and depressed selling prices, due to the price war they engaged with Perlite Canada. And the VIL plant had perlite processing equipment which was not running efficiently; this was remedied by Perlite management in the restructuring. Also, additional processing equipment was relocated from Baie-du-Febvre to VIL, increasing significantly the output capacity of VIL, thus increasing its market value as well.



1.3 Total rough order magnitude for book value of PCI.v after the VIL acquisition

• 25 to 32 cents for the original business
• 28 cents for the VIL plant business
• Total = 53 to 60 cents/share (about 6M$)
• Current market cap = 1M$ (0.10$/share)

Please notice that the aforementioned calculation invokes no intangibles, which is absolutely unfair, because after combining both entities, Perlite Canada is the unquestionable dominant player in Eastern Canada, and holds a quasi-monopoly. A fair value analysis would provide guidance on this intangible value which would arise in a takeover, but I won’t try to peg a number here. Needless to say, the stock is currently trading far below its obvious hard asset book value. As the long term debt is eliminated, hopefully faster by selling both unused plant/land(Baie-du-Febvre and Lameque), the company’s book value will be more obvious to all.



Stay tuned, price to sales and EPS ratio is next…and yes, the underlying poster clearly understands that if management of Perlite doesn’t make an effort to communicate the merit of company, the stock price could linger. However, should the board of directors address only a few prominent players, knowing the float is tightly held, a definite stock price adjustment could and should materialize.


The above is only my personal interpretation, not to be confused with that of company officials. It is simply my personal understanding and not to be construed as investment advice. I’m not a broker, promoter, director, manager or employee of the aforementioned company, just a shareholder. Some typos could have occurred. Do your own due diligence.

[tara]

PCI.v - Price to sales ratio analysis


Remember VIL was acquired for about 1x sales(3.3M$) in the crisis(nov 14 2008), which provides an idea of rock bottom price to sales ratio for this type of business.

• Perlite Canada projected sales = 7 to 8M$.
a) When purchased, VIL had about 3.5M$ of sales, understand this was during the crisis and with a depressed order book from the price war with Perlite.
b) Perlite’s original business generated from 3.5M$ to 5M$ in the recent years prior to acquisition

• Current market cap = about 1M$

• Price to sales is about 0.15x, again pointing in the undervalued direction, even with imperfections embedded in the analysis. Especially when VIL was bought in the crisis at rock bottom prices of 1x sales. Shareholders and onlookers will have no trouble doing the math on price appreciation potential based on this criterion.


The combined entity only bears about 3M$ of long term debt, with hard asset value far exceeding this amount. Any large player with their own management team could very well swallow this company, gaining access to a:
- restructured company after combining the two largest player in Eastern Canada, providing a quasi-monopoly with decades of history and recurring sales;
- (2) efficient processing plant and long term agreements with suppliers;
- the large and small clientele of Eastern Canada, with some long term agreements in place(Tourbieres Lambert for example, 10 year supply agreement);


From a takeover point of view, Perlite is attractive and it’s no wonder they have announced a poison pill. Should this act as a deterrent for potential buyers, then management of the company will have no choice but to look at other options to increase value, which is addressing the share price. Management holds a significant portion of the float and their interest is well aligned with the stock price. Perhaps now that they acquired their largest competitor, doubled sales and completed the restructuring, they will think about a long awaited price correction, by getting the story out to potential investors…


Next up, we'll look at earnings per share.



The above is only my personal interpretation, not to be confused with that of company officials. It is simply my personal understanding and not to be construed as investment advice. I’m not a broker, promoter, director, manager or employee of the aforementioned company, just a shareholder. Some typos could have occurred. Do your own due diligence.