TRADING SYMBOL: Toronto Stock Exchange - GRO.UN
Sun Gro Horticulture Income Fund will hold a conference call and webcast
to discuss 2006 third quarter and nine-month results on November 7, 2006
at 7:30 am Pacific Time (10:30 am Eastern). The call can be accessed by
dialing: 1-800-814-4860 or 416-644-3417. A replay will be available
through November 21, 2006 at: 1-877-289-8525 or 416-640-1917. (Passcode:
21205830 followed by the number sign)
To access the live and archived webcast, please go to:
http://www.vcall.com/IC/CEPage.asp?ID(equal sign)109992 or to the fund's
website at: www.sungro.com.
VANCOUVER, Nov. 6 /CNW/ - Sun Gro Horticulture Income Fund (the "Fund")
today reported financial results for the three and nine-month periods ended
September 30, 2006. The three-month period represents the third quarter of its
2006 fiscal year.
For the third consecutive quarter, the Fund generated record
year-over-year distributable cash. In the three months ended September 30,
2006, it earned $7.1 million, or $0.32 per unit, of distributable cash, up
from $5.2 million, or $0.24 per unit, in the third quarter of 2005.
Distributable cash for the nine-month period totalled $19.8 million, or $0.90
per unit, up from $16.3 million, or $0.74 per unit, in 2005. Distributable
cash paid to unitholders was unchanged at $5.0 million, or $0.225 per unit,
for the quarter and $14.9 million, or $0.675 per unit, for the nine months in
both years. This represents an annualized distribution rate of $0.90 per unit.
"The sustained improvement in our distributable cash generation is
enabling us to reduce the Fund's payout ratio, which is one of our primary
goals," said Mitch Weaver, Sun Gro's President and CEO and a Trustee of the
Fund. "We are extremely pleased with our performance in this area and remain
confident of our ability to maintain distributions at the current rate."
<<
(in thousands of dollars For the For the For the For the
except per unit amounts) three three nine nine
months months months months
ended ended ended ended
Statement of distributable September September September September
cash 30, 2006 30, 2005 30, 2006 30, 2005
-------------------------------------------
Cash flows from operating
activities before change
in non-cash operating
working capital $ 6,324 $ 4,911 $ 17,780 $ 13,340
Adjustments
Realized gain on forward
currency contracts 1,538 1,382 4,074 4,164
Sustaining capital
expenditures (300) (984) (1,986) (2,207)
Proceeds from government
grant and loan 60 688 60 688
Repayment of government loan (50) (25) (150) (75)
Current income taxes
expected to seasonally
reverse in the current
fiscal year (482) (779) - 416
-------------------------------------------
Distributable cash $ 7,090 $ 5,193 $ 19,778 $ 16,326
-------------------------------------------
-------------------------------------------
Distributable cash per unit $ 0.32 $ 0.24 $ 0.90 $ 0.74
-------------------------------------------
-------------------------------------------
(1) Distributable cash is not an earnings measure recognized by Canadian
generally accepted accounting principles (GAAP) and does not have a
standardized meaning prescribed by GAAP. Refer to Management's
Discussion and Analysis of distributable cash for a description of
the calculation method used by the Fund.
>>
Three-Month Operating Results
In the third quarter of 2006, the Fund's wholly owned subsidiary, Sun Gro
Horticulture Canada ("Sun Gro", or the "company"), continued the trend of
gross margin improvement it began early in the year. For the three months,
gross margin improved by 3% year-over-year, from 50% in 2005 to 53% in 2006.
The gain was primarily due to the positive effect of Sun Gro's price increases
in offsetting the stronger Canadian dollar and improved peat harvest volumes
this year.
The company's third quarter revenues of $41.2 million were down by
$2.8 million, or 6%, from $44.0 million in the third quarter of 2005. Total
sales volumes for the quarter were down by 13% compared to a year ago, due in
part to wet weather during peat harvesting in New Brunswick, which reduced the
overall yield and limited the volumes of peat moss sold under a significant
supply agreement. The reduced contractual volumes accounted for over half of
the quarter's volume decrease.
To offset foreign exchange losses on the conversion of its US dollar
sales to Canadian dollars, and to help offset rising costs, Sun Gro has
implemented multiple price increases since mid-2004, the most recent taking
effect in this quarter. As a result, the company's average third quarter US
dollar prices for growing mixes were up by 9% and Canadian dollar revenue per
equivalent bale, or EB (10 cubic feet of peat), was unchanged from the same
period of 2005. Peat moss prices were up by 24% in US dollars and by 14% in
Canadian dollars, reflecting the lower share of contractual volumes.
Foreign exchange continued to exert a strong impact on Sun Gro's
primarily US dollar-denominated revenue during the third quarter. The value of
the Canadian dollar averaged US$0.90, compared to US$0.82 in the third quarter
of 2005. The difference in exchange rates effectively reduced revenue for the
period by 7%, compared to 2005.
Three-month operating income of $3.8 million increased by $1.6 million
from the $2.2 million recorded in the same period of 2005. The increase was
due mainly to improved pricing performance and the production efficiencies
that resulted from this year's larger peat harvest. The company also realized
truck loading efficiencies in its West and Central regions as dryer harvest
conditions enabled a greater number of pallets to be shipped per truck. Per-EB
distribution costs during the quarter were down by 8% from 2005.
Third quarter net earnings were $3.4 million, generating basic and
diluted earnings of $0.15 per unit. In the corresponding period of 2005, Sun
Gro generated basic and diluted earnings of $0.24 per unit on third quarter
net earnings of $5.3 million. The decrease was primarily due to differences in
unrealized gains on forward currency contracts.
Nine-Month Operating Results
For the nine months ended September 30, 2006, revenue of $151.5 million
was down by $5.4 million, or 3.6% from $156.9 million in the same period of
2005. As with the quarterly result, the decrease was mainly due to a
year-over-year reduction in sales volumes of Sun Gro's higher-priced
professional growing mix volumes. This was partially offset by increased sales
in other product categories and generally improved pricing performance.
Revenue was also affected by the continued strengthening of the Canadian
dollar. In the first nine months of 2006, the average US dollar exchange rate
was $0.88, compared to $0.82 in 2005.
Gross profit margin for the nine months increased to 49% from 47% in the
same period of 2005. Operating income rose to $14.0 million from $8.0 million
in the 2005 nine-month period. Net earnings increased to $15.4 million, or
$0.70 per unit, from $8.3 million, or $0.38 per unit, in the first nine months
of last year.
Recent Acquisition
On August 15, 2006, Sun Gro strengthened its long-term peat supply by
acquiring substantially all of the operating assets of Fort Frances, Ontario
peat moss producer Normiska Peat Inc. Funded through the company's existing
acquisition line of credit, the $3.4 million transaction gives Sun Gro an
expanded presence in Central Canada. The acquired assets included a peat
processing plant and related harvesting equipment, inventory on hand, and
1,440 acres of largely undeveloped professional grade peat bogs. The
acquisition will have only a modest effect on the company's sales in the
coming months. With planned expansion of the acquired bog over the coming
winter, it should begin to contribute to sales growth in the summer of 2007.
<<
FINANCIAL HIGHLIGHTS
Comparative Statements of Earnings
(In thousands of dollars except For the three For the three
per unit amounts and number months ended months ended
of units outstanding) September 30, 2006 September 30, 2005
(unaudited) (unaudited)
------------------ ------------------
Revenue $ 41,182 100% $ 43,987 100%
Cost of goods sold 19,346 47% 22,132 50%
------------ ------------
Gross profit 21,836 53% 21,855 50%
Distribution expenses 9,469 23% 10,876 25%
Selling expenses 3,971 10% 3,969 9%
General and administrative expenses 4,559 11% 4,856 11%
------------ ------------
Total operating expenses 17,999 44% 19,701 45%
------------ ------------
Operating income 3,837 9% 2,154 5%
Other income (expense), net (274) -1% 4,409 10%
Interest expense (1,025) -2% (662) -2%
------------ ------------
Earnings before income taxes 2,538 6% 5,901 13%
Income tax (provision) recovery
Current 640 2% 633 1%
Future 223 1% (1,213) -2%
------------ ------------
Income tax (provision) recovery, net 863 2% (580) -1%
------------ ------------
Net earnings for the period $ 3,401 8% $ 5,321 12%
------------ ------------
------------ ------------
Basic and diluted earnings per unit $ 0.15 $ 0.24
------------ ------------
------------ ------------
Weighted average number
of units outstanding 22,023,000 22,023,000
------------ ------------
------------ ------------
Selected supplemental revenue
information
Volume in thousands of EBs(1)
Growing Mixes 1,193 1,270
Peat Moss 1,670 2,023
Fertilizer and Minerals 68 76
------------ ------------
Total company sales 2,931 3,369
------------ ------------
------------ ------------
Average revenue per EB(1) (US $)
Growing Mixes $ 17.31 $ 15.91
Peat Moss 8.22 6.63
Fertilizer and Minerals 29.77 25.15
------------ ------------
Total company sales $ 12.42 $ 10.55
------------ ------------
------------ ------------
Average revenue per EB(1)
(Canadian $)
Growing Mixes $ 19.29 $ 19.31
Peat Moss 9.19 8.05
Fertilizer and Minerals 33.22 30.58
------------ ------------
Total company sales $ 13.86 $ 12.81
------------ ------------
------------ ------------
(1) An EB, or equivalent bale, is Sun Gro's standard unit of measure,
referring to 10 cubic feet of peat. Average revenue per EB
calculation does not include transportation-related surcharges.
Comparative Statements of Earnings
(In thousands of dollars except For the nine For the nine
per unit amounts and number months ended months ended
of units outstanding) September 30, 2006 September 30, 2005
(unaudited) (unaudited)
------------------ ------------------
Revenue $ 151,527 100% $ 156,930 100%
Cost of goods sold 77,132 51% 83,869 53%
------------ ------------
Gross profit 74,395 49% 73,061 47%
Distribution expenses 34,234 23% 37,440 24%
Selling expenses 11,651 8% 12,458 8%
General and administrative expenses 14,555 9% 15,114 10%
------------ ------------
Total operating expenses 60,440 40% 65,012 42%
------------ ------------
Operating income 13,955 9% 8,049 5%
Other income (expense), net 3,309 2% 1,099 1%
Interest expense (3,250) -2% (2,084) -2%
------------ ------------
Earnings before income taxes 14,014 9% 7,064 4%
Income tax (provision) recovery
Current (1,312) -1% (1,118) -1%
Future 3,178 2% 2,371 2%
------------ ------------
Income tax (provision) recovery, net 1,866 1% 1,253 1%
------------ ------------
Net earnings for the period $ 15,880 10% $ 8,317 5%
------------ ------------
------------ ------------
Basic and diluted earnings per unit $ 0.72 $ 0.38
------------ ------------
------------ ------------
Weighted average number
of units outstanding 22,023,000 22,023,000
------------ ------------
------------ ------------
Selected supplemental revenue
information
Volume in thousands of EBs(1)
Growing Mixes 4,565 5,108
Peat Moss 4,924 4,829
Fertilizer and Minerals 264 279
------------ ------------
Total company sales 9,753 10,216
------------ ------------
------------ ------------
Average revenue per EB(1) (US $)
Growing Mixes $ 17.95 $ 16.43
Peat Moss 8.32 7.31
Fertilizer and Minerals 28.80 22.47
------------ ------------
Total company sales $ 13.38 $ 12.28
------------ ------------
------------ ------------
Average revenue per EB(1)
(Canadian $)
Growing Mixes $ 20.38 $ 20.15
Peat Moss 9.42 8.94
Fertilizer and Minerals 32.70 27.53
------------ ------------
Total company sales $ 15.18 $ 15.05
------------ ------------
------------ ------------
(1) An EB, or equivalent bale, is Sun Gro's standard unit of measure,
referring to 10 cubic feet of peat. Average revenue per EB
calculation does not include transportation-related surcharges.
>>
Outlook
The information contained in "Outlook" is forward-looking information.
Please see "Forward-Looking Statements" below for a discussion of the risks
and uncertainties in connection with forward-looking information.
For the fourth quarter, Sun Gro expects that overall sales volumes should
be consistent with 2005 levels. The company is proceeding with a number of
initiatives designed to increase sales of its growing mixes, including the
introduction of a new line of lighter-weight Metro-Mix(R) products to support
sales growth in the bark-based segment of the professional growing mix market.
Sun Gro's efforts to grow sales of all its products over the balance of
the year will continue to be supported by its successful 2006 peat moss
harvest, which started earlier than the 2005 harvest and yielded 9% more
volume overall. Although the company's eastern Canadian harvest was below
historical levels due to wetter than normal weather, its harvest volumes in
Manitoba were better than historical averages. Across the industry, supply is
expected to be tight until the 2007 harvest begins.
"We are continuing to see the benefit of our acquisitions of the last
several years. These strategic transactions have both strengthened the
geographic diversity of our peat resources and allowed us to expand our
product offerings to our core professional grower market," said Weaver. "As a
result, we are better equipped to sustain and enhance the value we deliver to
our unitholders over the long term."
Sun Gro holds forward currency contracts to manage the near-term impact
of any further strengthening of the Canadian dollar. For the remainder of
2006, it has entered into forward currency contracts with a blended rate of
$1.21 (US$0.83) that will offset approximately 80% of its expected net US
dollar cash flows. For 2007, Sun Gro has thus far entered into forward
currency contracts with a blended rate of $1.14 (US$0.87) that will offset
approximately 70% of its expected net US dollar cash flows.
Subsequent Proposed Tax Change
On October 31, 2006, the federal Minister of Finance announced a proposal
that, if enacted, would tax publicly-traded income trusts on distributions of
income to their unitholders. Existing publicly-traded income trusts would not
be subject to the proposed tax until their 2011 taxation years.
The rate of the proposed tax on distributions of income would approximate
the combined federal and provincial tax rate applicable to income earned by
Canadian public corporations. The applicable rate in 2011 would be based on
tax rates at that time. Currently, based on information released by the
federal Department of Finance in conjunction with the announcement of the
proposed tax, the rate in 2011 would be 31.5%, but this is subject to changes
in tax rates between now and 2011.
Draft legislation implementing this proposal has not yet been released.
It is not possible at this time for the Fund to determine whether the proposal
will be enacted as proposed, or at all, and, if enacted, what impact this
proposal would have on the Fund or its unitholders. The Fund is continuing to
assess the strategic and economic issues arising from this proposal.
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, changes in tax laws, the impact of
adverse weather conditions on harvesting operations, an increase in freight
rates, and the impact of an increase in fuel costs. You 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.
Non-GAAP Measures
Distributable cash is not an earnings measure recognized by GAAP and does
not have a standardized meaning prescribed by GAAP. Therefore, the
distributable cash of the Fund may not be comparable to the distributable cash
measures presented by other issuers. However, distributable cash is commonly
used by Canadian open-ended trusts as an indicator of financial performance
and the Fund believes that distributable cash is a useful supplemental measure
that may assist in assessing the potential return on an investment in the
Fund.
The calculation of distributable cash is based on cash flows from
operating activities before changes in non-cash operating working capital,
adjusted for sustaining capital expenditures, realized gains from forward
currency contracts, government grants and loans, and such reserves as the
Board of Directors and Trustees of the Fund may consider appropriate. Certain
expenditures that are incurred as part of earnings-enhancing capital projects
and acquisitions are excluded from the determination of distributable cash
flow if the project or acquisition is funded by term debt or equity financing.
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 Sheet
(in thousands of dollars)
(unaudited)
As at As at
September 30, December 31,
Assets 2006 2005
------------- -------------
Current assets
Cash and cash equivlents $ 487 $ -
Accounts receivable 41,098 46,310
Inventories 34,069 29,856
Unrealized gain on forward currency contracts 2,589 3,041
Prepaid expenses and other assets 2,319 3,844
------------- -------------
80,562 83,051
Property, plant and equipment 124,211 126,727
Intangible assets 34,144 35,616
Goodwill 11,202 11,202
------------- -------------
$ 250,119 $ 256,596
------------- -------------
------------- -------------
Liabilities and Unitholders' Equity
Current liabilities
Bank indebtedness $ - $ 1,053
Operating line (note 4) 34,721 38,329
Accounts payable and accrued liabilities 15,338 16,059
Current portion of long-term debt (note 4) 216 200
Distribution payable to unitholders (note 3) 1,652 1,652
------------- -------------
51,927 57,293
Other liabilities 4,396 4,175
Long-term debt (note 4) 27,167 24,261
Future income taxes 15,896 19,051
------------- -------------
99,386 104,780
Unitholders' equity
Capital contributions 209,733 209,733
Cumulative translation account (17,340) (15,245)
Cumulative earnings 57,328 41,448
Cumulative distributions declared (98,988) (84,120)
------------- -------------
150,733 151,816
------------- -------------
$ 250,119 $ 256,596
------------- -------------
------------- -------------
Sun Gro Horticulture Income Fund
Consolidated Statements of Earnings and Cumulative Earnings
(in thousands of dollars except per unit amounts and
number of units outstanding)
(unaudited)
For the For the For the For the
three three nine nine
months months months months
ended ended ended ended
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
------------------------------------------------
Revenue $ 41,182 $ 43,987 $ 151,527 $ 156,930
Cost of goods sold 19,346 22,132 77,132 83,869
------------------------------------------------
Gross profit 21,836 21,855 74,395 73,061
Distribution expenses 9,469 10,876 34,234 37,440
Selling expenses 3,971 3,969 11,651 12,458
General and
administrative expenses 4,559 4,856 14,555 15,114
------------------------------------------------
Total operating expenses 17,999 19,701 60,440 65,012
------------------------------------------------
Operating income 3,837 2,154 13,955 8,049
Other income (expense),
net (274) 4,409 3,309 1,099
Interest expense (1,025) (662) (3,250) (2,084)
------------------------------------------------
Earnings before
income taxes 2,538 5,901 14,014 7,064
Income tax (provision)
recovery
Current 640 633 (1,312) (1,118)
Future 223 (1,213) 3,178 2,371
------------------------------------------------
Income tax recovery, net 863 (580) 1,866 1,253
------------------------------------------------
Net earnings for the
period 3,401 5,321 15,880 8,317
Cumulative earnings -
beginning of period 53,927 47,904 41,448 44,908
------------------------------------------------
Cumulative earnings -
end of period $ 57,328 $ 53,225 $ 57,328 $ 53,225
------------------------------------------------
------------------------------------------------
Basic and diluted
earnings per unit $ 0.15 $ 0.24 $ 0.72 $ 0.38
------------------------------------------------
------------------------------------------------
Weighted average
number of units
outstanding 22,023,000 22,023,000 22,023,000 22,023,000
------------------------------------------------
------------------------------------------------
Sun Gro Horticulture Income Fund
Consolidated Statements of Cash Flows
(in thousands of dollars) (unaudited)
For the For the For the For the
three three nine nine
months months months months
ended ended ended ended
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
------------------------------------------------
Cash flows from operating
activities
Net earnings for the
period $ 3,401 $ 5,321 $ 15,880 $ 8,317
Items not affecting cash
Depreciation,
depletion and
accretion 2,469 2,306 7,239 7,077
Amortization of
intangible assets 491 603 1,473 1,813
Loss (gain) on forward
currency contracts 200 (4,504) (3,622) (1,430)
Loss (gain) on disposal
of property, plant
and equipment (14) (32) (12) (70)
Future income tax
recovery (223) 1,217 (3,178) (2,367)
------------------------------------------------
6,324 4,911 17,780 13,340
Change in non-cash
operating working
capital 742 (4,322) 865 (2,934)
------------------------------------------------
7,066 589 18,645 10,406
Cash flows from investing
activities
Acquisitions (note 2) (3,366) - (3,366) (3,250)
Realized gain on forward
currency contracts 1,538 1,382 4,074 4,164
Additions to property,
plant and equipment (300) (984) (1,986) (2,207)
Proceeds from disposal
of property, plant
and equipment 14 39 16 460
------------------------------------------------
(2,114) 437 (1,262) (833)
Cash flows from financing
activities
Distributions paid to
unitholders (note 3) (4,956) (4,956) (14,868) (14,868)
Proceeds from term loans 3,350 - 3,350 3,250
Increase (decrease)
in operating line (1,571) 4,867 (3,608) 1,790
Proceeds from government
grants and loans 165 138 165 138
Repayment of government
loan (50) (25) (150) (75)
------------------------------------------------
(3,062) 24 (15,111) (9,765)
Effect of exchange rate
changes on cash (251) (263) (732) 135
------------------------------------------------
Increase in bank
indebtedness 1,639 787 1,540 (57)
Bank indebtedness -
beginning of period (1,152) (1,006) (1,053) (162)
------------------------------------------------
Cash and cash equivalents
(Bank indebtedness) -
end of period $ 487 $ (219) $ 487 $ (219)
------------------------------------------------
------------------------------------------------
Supplemental cash flow
information
Interest paid $ 673 $ 523 $ 2,973 $ 2,001
Income taxes paid $ 229 $ 134 $ 612 $ 312
>>
%SEDAR: 00017490E
