TRADING SYMBOL: Toronto Stock Exchange - GRO.UN
Sun Gro Horticulture Income Fund will hold a conference call and webcast
to discuss its 2006 first quarter results on May 3, 2006 at 7:30 am
Pacific Time (10:30 am Eastern). The call can be accessed by dialing:
1-866-249-2165 or 416-644-3416. A replay will be available through
May 18, 2006 at: 1-877-289-8525 or 416-640-1917. (Passcode: 21187172
followed by the number sign) The live and archived webcast can be
accessed at: http://www.vcall.com/IC/CEPage.asp?ID(equal sign)104350
VANCOUVER, May 2 /CNW/ - Sun Gro Horticulture Income Fund (the "Fund")
today reported financial results for the three-month period ended March 31,
2006, which represents the first quarter of the Fund's 2006 fiscal year.
Sun Gro also announced today the appointment of John Zaplatynsky to the
board of directors of Sun Gro Horticulture Canada Ltd. ("Sun Gro", or the
"company"), the Fund's wholly owned subsidiary. Mr. Zaplatynsky's appointment
as a director of Sun Gro is effective May 2, 2006. He replaces Rod Senft, who
resigned from the board effective April 24, 2006.
Operating Results
For the three months ended March 31, 2006, Sun Gro recorded revenue of
$58.3 million, down by 2% from the $59.6 million recorded in the first quarter
of 2005. The $1.3 million revenue difference was primarily due to a reduction
in professional growing mix sales volumes, offset by increased professional
peat moss sales volumes and generally improved pricing performance.
Sun Gro's first quarter growing mix volumes, as measured in equivalent
bales (or EBs, the company's standard unit of volume measurement, referring to
10 cubic feet of peat), decreased by 10% while professional peat moss volumes
were up by 4%. During the quarter, one of Sun Gro's larger professional
growing mix customers purchased greater volumes of peat moss and less mix. In
certain other large Sun Gro accounts, order patterns reduced the first quarter
mix volume due to customers' inventory levels. At the same time, a few of the
company's significant peat moss customers made large, additional peat
purchases.
Despite the lower volumes, Sun Gro recorded its highest ever quarterly
operating income, due mainly to significantly lower distribution expenses. As
in the final quarter of 2005, Sun Gro reduced its cross-regional shipments to
customers normally served from its operations in Manitoba, where the company
has experienced a harvest shortfall in each of the last two years. With
certain volumes being shipped shorter distances, per-unit transportation costs
were down by 7% year-over-year.
Throughout the first three months of 2006, Sun Gro continued to
experience the negative effects of the stronger Canadian dollar on its
primarily US dollar-denominated sales. The value of the Canadian dollar
averaged US$0.87, compared to US$0.82 in the first quarter of 2005. The
difference in exchange rates effectively reduced first quarter revenue by 6%
over 2005.
To offset foreign exchange losses on the conversion of its US dollar
sales to Canadian dollars, as well as steadily increasing distribution and
production costs, Sun Gro has implemented multiple price increases since mid-
2004. The most recent of these took effect in January 2006. As a result,
average first quarter US dollar prices for growing mixes and peat moss were up
by 9% and 8%, respectively, year-over-year, while Canadian dollar revenue per
EB increased by 2% in both product categories. This improved pricing
performance helped to drive Sun Gro's first quarter gross margin up to 47%
from 45% in 2005.
Net earnings for the period were $4.1 million, generating basic and
diluted earnings of $0.19 per unit. In 2005, the Fund generated basic and
diluted earnings of $0.07 per unit on first quarter net earnings of
$1.4 million. The increase was primarily due to the improved gross profit and
lower operating expenses, offset by differences in future taxes, and
differences in realized and unrealized gains on forward currency contracts.
Cash Distributions
The Fund maintained its level of distributions to unitholders in the
first quarter of 2006, declaring monthly cash distributions of $0.075 per unit
for each of January, February and March. In total, the Fund earned
$6.5 million of distributable cash, or $0.30 per unit, and distributed
$5.0 million, or $0.225 per unit, to unitholders. By comparison, in the first
quarter of 2005, the Fund earned $5.5 million of distributable cash, or
$0.25 per unit, and distributed $5.0 million, or $0.225 per unit, to
unitholders.
"The year is off to a solid start, thanks in large part to our continued
progress in implementing our pricing strategy and managing our distribution
costs," said Mitch Weaver, Sun Gro's President and CEO, and a Trustee of the
Fund. "In addition to our record operating income, we achieved our highest
ever quarterly distributable cash flow, while supporting expanded capital
expenditures. What's more, even with our lower sales volumes and a less
favourable exchange rate, we were able to reverse the year-over-year gross
margin erosion we experienced in each of the first three quarters of 2005."
<<
(in thousands of dollars For the three For the three
except per unit amounts) months ended months ended
March 31, March 31,
Statement of distributable cash 2006 2005
---------------------------
Cash flows from operating activities before
change in non-cash working capital $ 7,155 $ 5,297
Adjustments
Sustaining capital expenditures (1,014) (677)
Repayment of government loan (50) (25)
Current income taxes expected to seasonally
reverse in the current fiscal year 450 900
---------------------------
Distributable cash $ 6,541 $ 5,495
---------------------------
---------------------------
Distributable cash per unit $ 0.30 $ 0.25
---------------------------
---------------------------
Financial Highlights
Comparative Statements of Earnings For the three For the three
(In thousands of dollars except months ended months ended
per unit amounts and number March 31, March 31,
of units outstanding) 2006 2005
(unaudited) (unaudited)
------------------- -------------------
Revenue $ 58,255 100% $ 59,632 100%
Cost of goods sold 30,780 53% 32,799 55%
------------- -------------
Gross profit 27,475 47% 26,833 45%
Distribution expenses 12,720 22% 14,231 24%
Selling expenses 3,780 6% 4,220 7%
General and administrative expenses 5,005 9% 5,417 9%
------------- -------------
Total operating expenses 21,505 37% 23,868 40%
------------- -------------
Operating income 5,970 10% 2,965 5%
Other income, net (292) 0% (1,313) -2%
Interest expense (1,049) -2% (654) -1%
------------- -------------
Earnings (loss) before income taxes 4,629 8% 998 2%
Income tax recovery (provision)
Current (1,085) -2% (1,139) -2%
Future 555 1% 1,578
------------- ------------- 2%
Net earnings (loss) for the year $ 4,099 7% $ 1,437 2%
------------- -------------
------------- -------------
Basic and diluted earnings (loss)
per unit $ 0.19 $ 0.07
------------- -------------
------------- -------------
Weighted average number of
units outstanding 22,023,000 22,023,000
------------- -------------
------------- -------------
Selected supplemental revenue
information
Volume in thousands of EBs(1)
Growing Mixes 1,844 2,042
Peat Moss 1,460 1,404
Fertilizer and Minerals 103 116
------------- -------------
Total company sales 3,407 3,562
------------- -------------
------------- -------------
Average revenue per EB(1) (US $)
Growing Mixes $ 18.34 $ 16.80
Peat Moss 8.54 7.88
Fertilizer and Minerals 28.44 20.01
------------- -------------
Total company sales $ 14.44 $ 13.39
------------- -------------
------------- -------------
Average revenue per EB(1)
(Canadian $)
Growing Mixes $ 21.09 $ 20.61
Peat Moss 9.82 9.66
Fertilizer and Minerals 32.73 24.51
------------- -------------
Total company sales $ 16.61 $ 16.42
------------- -------------
------------- -------------
(1) An EB, or equivalent bale, is Sun Gro's standard unit of measure,
referring to 10 cubic feet of peat.
Outlook
Sun Gro anticipates that its sales volumes for the second quarter of the
year will remain relatively flat compared to 2005, assuming the 2006 harvest
commences in line with historical experience, but expects to see an
improvement in US dollar sales revenues as a result of its recent price
increases. In the second half of the year, assuming normal harvest levels are
achieved, the company anticipates a return to more normal, historical sales
volume growth.
With approximately 40% of its operating expenses incurred in US dollars,
Sun Gro enjoys a natural hedge against some of the impact of foreign exchange.
To manage its remaining US dollar exposure, the company continues to hold
forward exchange contracts to offset a portion of the impact of any further
strengthening of the Canadian dollar. For the remainder of 2006, Sun Gro has
entered into forward exchange contracts with a blended rate of $1.22 that will
hedge approximately 80% of its expected Canadian dollar purchases. For 2007,
Sun Gro has now entered into forward exchange contracts with a blended rate of
$1.15 that will hedge approximately 60% of its expected net US dollar cash
flows.
"We remain optimistic about the outlook for our business, and confident
in our ability to continue to manage our foreign exchange exposure through
pricing adjustments and currency hedging," said Weaver. "We believe that our
current cash distribution level is sustainable, and we will continue to seek
new ways of enhancing the value we deliver to our unitholders over the long
term."
Forward-Looking Statements
This news release contains forward-looking statements. These statements
relate to future events or future performance and reflect Sun Gro's
expectations regarding its growth, results of operations, performance,
business prospects, opportunities or industry performance or trends. These
forward-looking statements reflect management's current internal projections,
expectations or beliefs and are based on information currently available. In
some cases, forward-looking statements can be identified by terminology such
as "may", "will", "should", "expect", "intend", "plan", "anticipate",
"believe", "predict", "potential", "continue" or the negative of these terms
or other comparable terminology. A number of factors could cause actual events
or results to differ materially from those discussed in the forward-looking
statements. Important factors that could cause actual results to differ
materially from Sun Gro's expectations include, among other things,
fluctuations in currency exchange rates, the impact of adverse weather
conditions on harvesting operations, an increase in freight rates, and the
impact of an increase in fuel costs. Readers should specifically consider
these factors, including the risks and uncertainties described in the Fund's
most recent annual information form for the year ended December 31, 2005. In
addition, the Fund's ability to make distributions to unitholders is entirely
dependent on Sun Gro's performance. Although management believes that the
forward-looking statements contained in this news release are based on
reasonable assumptions, readers cannot be assured that actual results will be
consistent with such statements. Forward-looking statements are made as of the
date of this news release and Sun Gro assumes no obligation to update or
revise them to reflect new events or circumstances.
Income Fund Profile
Sun Gro Horticulture Income Fund was launched with the completion of an
Initial Public Offering of 22,023,000 trust units on March 27, 2002. The Fund
is dependent on Sun Gro's operations, with monthly distributions to its
unitholders based entirely on Sun Gro's performance.
Company Profile
Sun Gro was founded in 1929 in Vancouver, BC and has grown to become
North America's largest producer of sphagnum peat, and the largest distributor
of peat moss and peat and bark-based growing media to professional plant
growers in the US and Canada. Sun Gro sells its professional products
primarily to greenhouse, nursery and specialty crop growers, as well as to
golf course developers and landscapers. Sun Gro also sells peat moss and peat-
based growing mixes to retail customers, either by way of private label
partnerships or under its own brand names. Approximately 80% of the company's
sales volume goes to the US.
Sun Gro Horticulture Income Fund
Consolidated Balance Sheets
(in thousands of dollars)
(unaudited)
As at As at
March 31, December 31,
Assets 2006 2005
------------- -------------
Current assets
Accounts receivable $ 64,517 $ 46,310
Inventories 25,690 29,856
Unrealized gain on foreign currency
contracts 2,300 3,041
Prepaid expenses and other assets 2,816 3,844
------------- -------------
95,323 83,051
Property, plant and equipment 125,680 126,727
Intangible assets 35,125 35,616
Goodwill 11,202 11,202
------------- -------------
$ 267,330 $ 256,596
------------- -------------
------------- -------------
Liabilities and Unitholders' Equity
Current liabilities
Bank indebtedness $ 72 $ 1,053
Operating line 49,740 38,329
Accounts payable and accrued liabilities 17,107 16,059
Current portion of long-term debt 200 200
Distribution payable to unitholders 1,652 1,652
------------- -------------
68,771 57,293
Other liabilities 4,257 4,175
Long-term debt 24,253 24,261
Future income taxes 18,541 19,051
------------- -------------
115,822 104,780
Unitholders' equity
Capital contributions 209,733 209,733
Cumulative translation account (14,696) (15,245)
Cumulative earnings 45,547 41,448
Cumulative distributions declared (89,076) (84,120)
------------- -------------
151,508 151,816
------------- -------------
$ 267,330 $ 256,596
------------- -------------
------------- -------------
Sun Gro Horticulture Income Fund
Consolidated Statements of Earnings (Loss) and Cumulative Earnings
(in thousands of dollars except per unit amounts and
number of units outstanding)
(unaudited)
For the three For the three
months ended months ended
March 31, March 31,
2006 2005
---------------------------
Revenue $ 58,255 $ 59,632
Cost of goods sold 30,780 32,799
---------------------------
Gross profit 27,475 26,833
Distribution expenses 12,720 14,231
Selling expenses 3,780 4,220
General and administrative expenses 5,005 5,417
---------------------------
Total operating expenses 21,505 23,868
---------------------------
Operating income 5,970 2,965
Other expense, net (292) (1,313)
Interest expense (1,049) (654)
---------------------------
Earnings before income taxes 4,629 998
Income tax (provision) recovery
Current (1,085) (1,139)
Future 555 1,578
---------------------------
Earnings for the period 4,099 1,437
Cumulative earnings - beginning of period 41,448 44,908
---------------------------
Cumulative earnings - end of period $ 45,547 $ 46,345
---------------------------
---------------------------
Basic and diluted earnings per unit $ 0.19 $ 0.07
---------------------------
---------------------------
Weighted average number of units outstanding 22,023,000 22,023,000
---------------------------
---------------------------
Sun Gro Horticulture Income Fund
Consolidated Statements of Cash Flows
(in thousands of dollars)
(unaudited)
For the three For the three
months ended months ended
March 31, March 31,
2006 2005
------------- -------------
Cash flows from operating activities
Net earnings (loss) for the year $ 4,099 $ 1,437
Items not affecting cash
Depreciation, depletion and accretion 2,381 2,342
Amortization of intangible assets 491 605
Unrealized (gain) loss on foreign
exchange contracts 741 2,508
Loss (gain) on disposal of property,
plant and equipment (2) (17)
Future income taxes (555) (1,578)
------------- -------------
7,155 5,297
Change in non-cash operating working capital (11,690) (11,181)
------------- -------------
(4,535) (5,884)
Cash flows for investing activities
Acquisitions - (3,250)
Additions to property, plant and equipment (1,014) (677)
Proceeds from disposal of property, plant
and equipment 2 17
------------- -------------
(1,012) (3,910)
Cash flows for financing activities
Distributions paid to unitholders (4,956) (4,956)
Proceeds from term loan - 3,250
Increase in operating line 11,411 11,383
Repayment of government loan (50) (25)
------------- -------------
6,405 9,652
Effect of exchange rate changes on cash 123 112
------------- -------------
Decrease (increase) in bank indebtedness 981 (30)
Bank indebtedness - beginning of the period (1,053) (162)
------------- -------------
Bank indebtedness - end of the period $ (72) $ (192)
------------- -------------
------------- -------------
Supplemental cash flow information
Interest paid $ 759 $ 520
Income taxes paid $ 292 $ 96
>>
%SEDAR: 00017490E
