TRADING SYMBOL: Toronto Stock Exchange - GRO.UN
Sun Gro Horticulture Income Fund will hold a conference call and webcast to discuss 2007 first quarter results on May 4, 2007 at 7:30 am Pacific Time (10:30 am Eastern). The call can be accessed by dialing: 1-866-249-1964 or 416-644-3422. A replay will be available through May 19, 2007 at: 1-877-289-8525 or 416-640-1917. (Passcode: 21230978 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)116583 or to the fund's website at: www.sungro.com.
VANCOUVER, May 3 /CNW/ - Sun Gro Horticulture Income Fund today reported financial results for the three months ended March 31, 2007, which represents the first quarter of its 2007 fiscal year.
Distributable Cash
In the first three months of 2007, the Fund generated distributable cash of $6.6 million, or $0.30 per unit. This compares to $6.5 million, or $0.30 per unit, in the first quarter of 2006. Distributable cash paid to unitholders was consistent in both quarters at $5.0 million, or $0.225 per unit.
"We have made a solid start to our seasonally stronger first half of the year," said Mitch Weaver, president and CEO of the Fund's wholly owned subsidiary, Sun Gro Horticulture Canada (Sun Gro, or the company) and a Trustee of the Fund. "We are pleased with Sun Gro's performance and remain confident in our ability to continue to generate sufficient distributable cash to meet the current rate of distributions, as well as provide for other corporate requirements."
(in thousands of dollars except
per unit amounts) For the three For the three
Months ended Months ended
Statement of distributable cash March 31, 2007 March 31, 2006
-------------------------------
Cash flows from operating activities
before change in non-cash operating
working capital $ 7,072 $ 6,664
Adjustments:
Realized gain (loss) on foreign
currency contracts (111) 491
Sustaining capital expenditures (621) (1,014)
Repayment of government loans (55) (50)
Current income taxes expected to
seasonally reverse in the current
fiscal year 340 450
-------------------------------
Distributable cash $ 6,625 $ 6,541
-------------------------------
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Distributable cash per unit $ 0.30 $ 0.30
-------------------------------
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Distributions declared per unit $ 0.225 $ 0.225
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Operating Results
Revenues for the three months ended March 31, 2007 set a new quarterly record at $66.7 million, up by $8.8 million, or 15%, from $57.9 million in the first quarter of 2006. Sales of Sun Gro's higher-priced growing mixes accounted for $47.0 million of the revenue, also a quarterly record. Sales volumes, as measured in equivalent bales (10 cubic feet of peat), increased by 5% over the first quarter of 2006. The volume growth was driven mainly by Sun Gro's recently acquired California operations, which added significant retail growing mix sales in the first quarter. As previously reported, in January 2007 the company purchased the outstanding shares of Sun-Up Horticulture in Sacramento and the operating assets of Kellogg-Rich Grow, LLC in Santa Maria. The two transactions added three peat-mixing plants and a bark-processing plant to Sun Gro's North America-wide production network, considerably enhancing the company's ability to increase its share of both the professional and retail growing mix markets in California.
Combined professional and retail growing mix volumes for the quarter increased by 17% over the first quarter of 2006, while peat moss volumes decreased by 9%. As a result of the increased proportion of lower-margin retail growing mix products in the company's sales mix, Sun Gro's gross margin declined slightly to 46% from 47% in the first quarter of 2006.
The company's primarily US dollar-denominated sales revenues were positively impacted by the strengthening of the US dollar. During the first three months of 2007, the average value of the Canadian dollar weakened to $0.85 from $0.87 in the same period of 2006. The difference in exchange rates effectively increased Sun Gro's first quarter revenue by about 2% over 2006.
Operating income reached a new quarterly record at $6.7 million, up by $0.7 million from $6.0 million in the first quarter of 2006. The gain was primarily due to this year's improved product prices and higher sales volumes.
Due in part to the growth of Sun Gro's business, the company experienced generally increased expenses during the first three months of 2007. Cost of goods sold for the quarter was up by 17% over 2006, as a result of both the increase in overall sales volume and proportionate volume shift toward higher-cost growing mixes. Distribution costs were up by 10% over last year, due mainly to the combined effects of the increased sales volumes and generally higher freight costs across North America. General and administrative expenses as a percentage of revenue were slightly higher than in the first quarter of 2006, due to the business growth, as well as increased variable compensation expense and costs associated with Sun Gro's California acquisitions.
First quarter net earnings were $4.8 million, generating basic and diluted earnings of $0.22 per unit. In the corresponding period of 2006, the company generated basic and diluted earnings of $0.19 per unit on first quarter net earnings of $4.1 million. The difference is primarily attributable to Sun Gro's higher sales volumes and revenue in 2007.
Financial Highlights
Comparative Statements of Earnings
(In thousands of dollars
except per unit amounts, For the three For the three
number of units outstanding months ended months ended
and EBs) March 31, 2007 March 31, 2006
(unaudited) (unaudited)
--------------------- ---------------------
Revenue $ 66,666 100% $ 57,897 100%
Cost of goods sold 36,147 54% 30,780 53%
--------------- ---------------
Gross profit 30,519 46% 27,117 47%
Distribution expenses 13,956 21% 12,720 22%
Selling expenses 4,211 6% 3,780 7%
General and administrative
expenses 5,671 9% 4,647 8%
--------------- ---------------
Total operating expenses 23,838 36% 21,147 37%
--------------- ---------------
Operating income 6,681 10% 5,970 10%
Other income (expenses), net 272 0% (292) 0%
Interest expense (1,175) -2% (1,049) -2%
--------------- ---------------
Earnings before income taxes 5,778 8% 4,629 8%
Income tax (provision) recovery
Current (1,457) -2% (1,085) -2%
Future 448 1% 555 1%
--------------- ---------------
Income tax (provision)
recovery, net (1,009) -1% (530) -1%
--------------- ---------------
Net earnings for the period $ 4,769 7% $ 4,099 7%
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--------------- ---------------
Basic and diluted earnings
per unit $ 0.22 $ 0.19
--------------- ---------------
--------------- ---------------
Weighted average number
of units outstanding 22,023,000 22,023,000
--------------- ---------------
--------------- ---------------
Selected supplemental
revenue information
Volume in thousands of EBs (1)
Growing Mixes 2,164 1,844
Peat Moss 1,333 1,460
Fertilizer and Minerals 94 103
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Total company sales 3,591 3,407
--------------- ---------------
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Average revenue per EB (1)
(US $)
Growing Mixes $ 18.22 $ 18.34
Peat Moss 9.78 8.54
Fertilizer and Minerals 38.00 28.44
--------------- ---------------
Total company sales $ 15.60 $ 14.44
--------------- ---------------
--------------- ---------------
Average revenue per EB (1)
(Canadian $)
Growing Mixes $ 21.51 $ 21.09
Peat Moss 11.53 9.82
Fertilizer and Minerals 44.80 32.73
--------------- ---------------
Total company sales $ 18.41 $ 16.61
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--------------- ---------------
Income Tax Matters
In March 2007, as previously announced, Sun Gro reached the basis of a settlement with the US internal Revenue Service (IRS) regarding the proposed adjustment of the interest rate charged between the Fund's Canadian and US subsidiaries on $18.2 million of inter-company notes established at the Fund's inception. The IRS proposed to reduce the deductible portion of the interest rate on the notes from 13% to approximately 7%. Sun Gro agreed with the IRS to settle the matter at an interest rate of 10.5% and has recorded an accrual in its 2006 financial statements based on the settlement.
Also as previously announced, through an internal review of tax matters in the first quarter of 2007, Sun Gro determined that it had filed an income tax return for 2002 that incorrectly carried back operating losses in that year to a prior period. This resulted in an income tax refund of $1.1 million that was received in 2003. The operating losses should have been carried forward to offset taxable income in subsequent years. The company reached an agreement with Canada Revenue Agency to repay the $1.1 million plus $0.3 million of accrued interest. The benefit of these operating losses will be available to offset taxes payable in future years.
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 remainder of 2007, assuming that the new harvest commences in line with last year's and that normal harvest levels are achieved, Sun Gro anticipates that its overall sales volumes will continue to be slightly higher than in 2006.
"We expect to benefit from both the availability of additional bog acreage and the four new US production sites we added in California," said Weaver. "We are optimistic about the outlook for our business and confident of our ability to continue to build on the value we deliver to our unitholders over the long-term."
Weaver added that Sun Gro continues to assess the strategic and economic issues arising from the Canadian federal government's proposed changes to the way in which income trusts are taxed.
The company remains strategically focused on the higher-margin professional grower mix market and is continuing to implement a number of initiatives aimed at boosting sales of its growing mixes, while also increasing its share of the bark-based segment of the market. These include the introduction of new products and the expansion of its production capabilities. The company began installation of a new growing mix line at its recently-acquired McFarland, California site during the first quarter, targeted for completion this summer.
Sun Gro continues to hold forward currency contracts to help manage the near-term impact of any further strengthening of the Canadian dollar. For 2007, the company has entered into forward currency contracts with a blended rate of $1.14 (US$0.88) that will offset approximately 70% of its expected net US dollar cash flows.
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, 2006. 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 March As at December
Assets 31, 2007 31, 2006
--------------- ----------------
Current assets
Accounts receivable $ 61,524 $ 38,338
Inventories 29,712 33,874
Prepaid expenses and other assets 3,606 3,522
--------------- ---------------
94,842 75,734
Property, plant and equipment 122,793 122,459
Intangible assets 35,911 33,653
Goodwill 12,924 11,202
Other assets 465 442
--------------- ---------------
$ 266,935 $ 243,490
--------------- ---------------
--------------- ---------------
Liabilities and Unitholders' Equity
Current liabilities
Bank indebtedness $ 772 $ 649
Operating line 42,664 31,146
Accounts payable and accrued
liabilities 21,581 15,781
Unrealized loss on foreign currency
contracts 322 824
Current portion of long-term debt 683 221
Distribution payable to Unitholders 1,652 1,652
--------------- ---------------
67,674 50,273
Other liabilities 4,662 4,561
Long-term debt 34,648 27,511
Future income taxes 13,230 13,678
--------------- ---------------
120,214 96,023
Unitholders' equity
Capital contributions 209,733 209,733
Cumulative translation account (16,276) (15,717)
Cumulative earnings 62,164 57,395
Cumulative distributions declared (108,900) (103,944)
--------------- ---------------
146,721 147,467
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$ 266,935 $ 243,490
--------------- ---------------
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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 three For the three
months ended months ended
March 31, 2007 March 31, 2006
-------------------------------
Revenue $ 66,666 $ 57,897
Cost of goods sold 36,147 30,780
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Gross profit 30,519 27,117
Distribution expenses 13,956 12,720
Selling expenses 4,211 3,780
General and administrative expenses 5,671 4,647
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Total operating expenses 23,838 21,147
-------------------------------
Operating income 6,681 5,970
Other income (expenses), net 272 (292)
Interest expense (1,175) (1,049)
-------------------------------
Earnings before income taxes 5,778 4,629
Income tax (provision) recovery
Current (1,457) (1,085)
Future 448 555
-------------------------------
Income tax (provision) recovery, net (1,009) (530)
-------------------------------
Net earnings for the period 4,769 4,099
Cumulative earnings - beginning of period 57,395 41,448
-------------------------------
Cumulative earnings - end of period $ 62,164 $ 45,547
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-------------------------------
Basic and diluted earnings per unit $ 0.22 $ 0.19
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Weighted average number of units
outstanding 22,023,000 22,023,000
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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, 2007 March 31, 2006
-------------------------------
Cash flows from operating activities
Net earnings for the period $ 4,769 $ 4,099
Items not affecting cash
Depreciation, depletion and
accretion 2,591 2,381
Amortization of intangible assets 561 491
(Gain) loss on foreign currency
contracts (392) 250
Gain on disposal of property,
plant and equipment (9) (2)
Future income tax recovery (448) (555)
-------------------------------
7,072 6,664
Change in non-cash operating working
capital (13,041) (11,690)
-------------------------------
(5,969) (5,026)
Cash flows from investing activities
Acquisitions (6,340) -
Realized (loss) gain on foreign
currency contracts (111) 491
Additions to property, plant and
equipment (733) (1,014)
Proceeds from disposal of property,
plant and equipment 44 2
-------------------------------
(7,140) (521)
Cash flows from financing activities
Distributions paid to Unitholders (4,956) (4,956)
Proceeds from term loans 6,435 -
Increase in operating line 11,518 11,411
Repayment of government loan (55) (50)
-------------------------------
12,942 6,405
Effect of exchange rate changes on cash 44 123
-------------------------------
(Increase) decrease in bank indebtedness (123) 981
Bank indebtedness - beginning of period (649) (1,053)
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Bank indebtedness - end of period $ (772) $ (72)
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-------------------------------
Supplemental cash flow information
Interest paid $ 1,045 $ 759
Income taxes paid $ 60 $ 292
Acquisitions - Note payable to seller $ 1,386
%SEDAR: 00017490E