TRADING SYMBOL: Toronto Stock Exchange - GRO.UN
Sun Gro Horticulture Income Fund will hold a conference call and webcast
to discuss 2007 fourth quarter and full-year results on March 27, 2008 at
7:30 am Pacific Time (10:30 am Eastern). The call can be accessed by
dialing: 1-800-731-5319 or 416-644-3421.
A replay will be available through April 10, 2008 at: 1-877-289-8525 or
416-640-1917. Passcode: 21263433 followed by the pound sign
To access the live and archived webcast, please go to:
http://www.investorcalendar.com/IC/CEPage.asp?ID(equal sign)126151 or to
the fund's website at: www.sungro.com.
VANCOUVER, March 26 /CNW/ - Sun Gro Horticulture Income Fund (the Fund) today reported financial results for the three and 12 months ended December 31, 2007. The three-month period represents the final quarter of its 2007 fiscal year. During 2007, the Fund's wholly-owned subsidiary, Sun Gro Horticulture Canada Ltd. (Sun Gro, or the company) delivered strong revenue growth, reflecting the company's progress in expanding its manufacturing presence into key US horticultural markets. However, the Fund's distributable cash flow was severely eroded by the rapid strengthening of the Canadian dollar in the fourth quarter and by the effect of the collapse in US housing starts on the nursery segment of Sun Gro's business. This erosion is continuing into 2008. Accordingly, the Fund has announced a temporary 50% reduction in its monthly cash distributions to unitholders to $0.0375 per unit, effective with the April 2008 distribution, payable in mid-May 2008. Sun Gro's trustees believe it is prudent to maintain a payout ratio of 85% to 90% and Sun Gro's recent performance does not support the current rate of distribution.
"Over 80% of our sales are to customers in the US and, despite achieving a 9% year-over-year increase in our average fourth quarter US dollar prices, excluding our acquired businesses in California and Florida, we simply were not able to keep our product pricing in step with the weakening of the US dollar," said Mitch Weaver, Sun Gro's President and CEO, and a Trustee of the Fund. "In light of the year-over-year decline in our fourth quarter financial performance, our growing concerns about housing starts in some of our key US markets and about our ability to raise prices in the short-term due to current economic conditions in the US, the trustees have determined that a temporary reduction in our distribution level is necessary," said Weaver.
Weaver noted that in 2007, the average value of the Canadian dollar was 17% higher in the fourth quarter and nearly 5% higher for the full year, effectively reducing Sun Gro's Q4 revenue by $5.4 million ($0.24 per unit) and its annual revenue by $6.4 million ($0.29 per unit), when compared to 2006.
Weaver emphasized that trustees and management are working diligently to improve Sun Gro's performance so that distributions can be restored to the previous level as soon as possible. "The weakening of the US dollar has prompted us to thoroughly review how we operate Sun Gro and we are aggressively responding to the current market conditions with a renewed focus on our cost structure, including:
- overhead reduction, including a 10% cut in compensation for senior
management and directors, and a freeze on staff salaries and new
hiring,
- rationalization of production facilities, including the already
completed closure of our Kennetcook, Nova Scotia peat production
facility,
- further integration of our recent acquisitions to maximize
manufacturing and logistic design,
- reduction in our capital spending, and
- a refinancing of our term debt facility into US dollars to reduce
exposure to currency fluctuations and extend its maturity.
The Kennetcook production equipment will be redeployed to help reduce the cost structure at two of our other facilities," Weaver stated.
Distributable Cash
In the three months ended December 31, 2007, the Fund generated distributable cash of $1.0 million, or $0.04 per unit. This compares to $4.5 million, or $0.21 per unit, in the fourth quarter of 2006. For the 12-months ended December 31, 2007, distributable cash totalled $18.1 million, or $0.82 per unit, compared to $24.3 million, or $1.10 per unit, in 2006. Distributable cash paid to unitholders was unchanged at $5.0 million, or $0.225 per unit, for the quarter and $19.9 million, or $0.90 per unit, for the year. This represented a full-year payout ratio of 110%, compared to 82% in fiscal 2006. The $1.8 million difference between distributable cash generated and distributions paid in 2007 was funded from temporary borrowings under the Fund's credit facility.
(in thousands of
dollars except
per-unit amounts) For the For the For the For the
three three year year
months ended months ended ended ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
--------------------------------------------------
Cash flows from
operating activities $ (2,995) $ 7,687 $ 16,273 $ 30,406
Adjustments:
Change in non-cash
operating working
capital(1) 5,097 (2,441) 5,688 (3,306)
Sustaining capital
expenditures(2) (800) (664) (3,560) (2,650)
Proceeds from
government grants(3) - - - 60
Repayments on
government loans(3) (55) (50) (221) (200)
Repayments on
equipment loans(4) (45) (45)
Repayments on capital
lease obligations(6) (65) (65)
Current income taxes
expected to
seasonally reverse
in the current fiscal
year(6) (144)
--------------------------------------------------
Distributable cash $ 993 $ 4,532 $ 18,070 $ 24,310
--------------------------------------------------
--------------------------------------------------
Distributable cash per
unit $ 0.04 $ 0.21 $ 0.82 $ 1.10
--------------------------------------------------
--------------------------------------------------
Distributions declared
per unit $ 0.225 $ 0.225 $ 0.90 $ 0.90
--------------------------------------------------
--------------------------------------------------
Payout Ratio 110% 82%
------------------------
------------------------
(1) Non-cash working capital fluctuates significantly on a quarterly
basis as a result of the seasonality of Sun Gro's business.
(2) Sustaining capital expenditures are defined as cash outlays, capital
in nature, required to maintain the business at its current operating
capacity and efficiency level. Investment capital expenditures are
those that are for the purpose of business expansion and are not
recorded as a reduction from distributable cash.
(3) Government grants and loans were received to directly support certain
capital projects. Proceeds and repayments are included in the
calculation of distributable cash, as the related capital spending is
presented on a gross basis.
(4) As part of the acquisition of GrowBest Holdings, LLC, Sun Gro assumed
loans related to equipment which is required to maintain the current
operating capacity. Repayment of these equipment loans is included in
the calculation of distributable cash.
(5) Capital leases are used to finance certain harvesting equipment.
Repayment of the capital leases is included in the calculation of
distributable cash.
(6) Each quarter, Sun Gro records the amount of current income tax
expense or recovery based on the quarter's taxable income or loss.
Due to the seasonal nature of its operations, the company typically
records current income tax expense in the first half of the year and
current tax recoveries in the second half of the year. Accordingly,
distributable cash is adjusted on a quarterly basis to eliminate this
seasonality and recognize only the current income tax expense Sun Gro
expects to incur for the full year.
Comparative Statements of Earnings and Comprehensive Income
(In thousands of
dollars except
per-unit amounts,
number of units For the three For the three
outstanding and months ended months ended
EBs(1)) December 31, 2007 December 31, 2006
------------------- ------------------
Revenue $ 52,464 100% $ 46,459 100%
Cost of goods sold 31,909 61% 25,029 54%
------------ ------------
Gross profit 20,555 39% 21,430 46%
Distribution expenses 11,949 23% 10,176 22%
Selling expenses 4,021 8% 3,680 8%
General and administrative expenses 5,439 10% 5,066 11%
------------ ------------
------------ ------------
Total operating expenses 21,409 41% 18,922 41%
------------ ------------
Operating income (854) -2% 2,508 5%
Other income (expense), net 294 1% (2,860) -6%
Interest expense (1,627) -3% (1,066) -2%
------------ ------------
Earnings before income taxes (2,187) -4% (1,418) -3%
Income tax (provision) recovery
Current (107) 0% 356 1%
Future 2,936 5% 1,129 2%
------------ ------------
Income tax (provision) recovery,
net 2,829 5% 1,485 3%
------------ ------------
Net earnings for the period $ 642 1% $ 67 0%
Other comprehensive income (loss)
Unrealized gain (loss) on
translating financial statements
of self-sustaining foreign
operations $ (223) 0% $ 1,623 3%
------------ ------------
Comprehensive income (loss) for the
period $ 419 0% $ 1,690 3%
------------ ------------
------------ ------------
Basic and diluted earnings per
unit $ 0.03 $ 0.00
------------ ------------
------------ ------------
Weighted average number of units
outstanding 22,284,681 22,023,000
------------ ------------
------------ ------------
Selected supplemental revenue
information
Volume in thousands of EBs(1)
Growing Mixes 1,888 1,516
Bulk Bark Mixes 278 63
Sand Mixes 256 -
Peat Moss 1,206 1,152
Fertilizer and Minerals 65 60
------------ ------------
Total company sales 3,693 2,791
------------ ------------
------------ ------------
Average revenue per EB(1) (US $)
Growing Mixes $ 18.30 $ 18.76
Bulk Bark Mixes 6.77 7.62
Sand Mixes 10.63 -
Peat Moss 10.51 9.22
Fertilizer and Minerals 41.46 36.30
------------ ------------
Total company sales $ 14.77 $ 14.94
------------ ------------
------------ ------------
Average revenue per EB(1)
(Canadian $)
Growing Mixes $ 17.86 $ 21.17
Bulk Bark Mixes 6.59 8.60
Sand Mixes 10.36 -
Peat Moss 10.22 10.41
Fertilizer and Minerals 40.41 41.00
------------ ------------
Total company sales $ 14.39 $ 16.86
------------ ------------
------------ ------------
(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 or the
cost of early payment discounts.
Comparative Statements of Earnings and Comprehensive Income
(In thousands of
dollars except
per-unit amounts,
number of units For the For the
outstanding and year ended year ended
EBs(1)) December 31, 2007 December 31, 2006
------------------- ------------------
Revenue $ 224,994 100% $ 197,307 100%
Cost of goods sold 126,183 56% 102,161 52%
------------ ------------
Gross profit 98,811 44% 95,146 48%
Distribution expenses 49,937 22% 44,410 22%
Selling expenses 16,445 8% 15,331 8%
General and administrative expenses 20,631 9% 18,942 10%
------------ ------------
------------ ------------
Total operating expenses 87,013 39% 78,683 40%
------------ ------------
Operating income 11,798 5% 16,463 8%
Other income, net 8,052 4% 449 0%
Interest expense (5,143) -2% (4,316) -2%
------------ ------------
Earnings before income taxes 14,707 7% 12,596 6%
Income tax (provision) recovery
Current (828) 0% (956) 0%
Future 2,012 0% 4,307 2%
------------ ------------
Income tax (provision) recovery, net 1,184 0% 3,351 2%
------------ ------------
Net earnings for the year 15,891 7% 15,947 8%
Other comprehensive loss
Unrealized loss on translating
financial statements of self-
sustaining foreign operations (6,951) -3% (472) 0%
------------ ------------
Comprehensive income for the year $ 8,940 4% $ 15,475 8%
------------ ------------
------------ ------------
Basic and diluted earnings per
unit $ 0.72 $ 0.72
------------ ------------
------------ ------------
Weighted average number of units
outstanding 22,088,420 22,023,000
------------ ------------
------------ ------------
Selected supplemental revenue
information
Volume in thousands of EBs(1)
Growing Mixes 7,270 5,931
Bulk Bark Mixes 758 213
Sand Mixes 256 -
Peat Moss 5,901 6,076
Fertilizer and Minerals 290 323
------------ ------------
Total company sales 14,475 12,543
------------ ------------
------------ ------------
Average revenue per EB(1) (US $)
Growing Mixes $ 18.26 $ 18.45
Bulk Bark Mixes 7.50 6.86
Sand Mixes 10.63 -
Peat Moss 9.50 8.49
Fertilizer and Minerals 37.84 30.17
------------ ------------
------------ ------------
Total company sales $ 14.38 $ 13.73
------------ ------------
------------ ------------
Average revenue per EB(1)
(Canadian $)
Growing Mixes $ 19.87 $ 20.91
Bulk Bark Mixes 7.85 7.75
Sand Mixes 10.35 -
Peat Moss 10.30 9.61
Fertilizer and Minerals 41.22 34.22
------------ ------------
------------ ------------
Total company sales $ 15.60 $ 15.56
------------ ------------
------------ ------------
(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 or the
cost of early payment discounts.
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 and interest rates, changes in tax laws, the impact of adverse weather conditions on harvesting operations, an increase in freight rates, failure to successfully implement Sun Gro's strategies of adding mix products and targeting the professional grower market, failure of acquisitions to be accretive to unitholders or to be accretive within Sun Gro's anticipated time frames, inability to refinance acquisition debt, the impact of an increase in fuel costs, reduced consumer demand from natural disasters and economic factors, and competitive activity. Readers should specifically consider these factors, including the risks and uncertainties which will be described in the Fund's 2007 year-end MD&A to be filed on SEDAR. 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, except as required by law.
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, adjusted for changes in non-cash operating working capital, realized gains and losses on foreign currency contracts, sustaining capital expenditures, government grants and government loans, terms loans for certain production equipment, capital lease obligations 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 on March 27, 2002. Units of the Fund are listed for trading on the Toronto Stock Exchange. At December 31, 2007, there were 22,284,681 units of the Fund issued and outstanding. 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 currently has approximately 65,000 acres of peat bogs under lease. The company's North America-wide production network now comprises 13 Canadian peat and peat-mixing plants and 13 US peat and bark-mixing plants.
Sun Gro Horticulture Income Fund
Consolidated Balance Sheet
(in thousands of dollars)
As at As at
December 31, December 31,
Assets 2007 2006
------------ ------------
Current assets
Accounts receivable $ 39,599 $ 38,338
Inventories 36,803 33,874
Unrealized gain on foreign currency contracts 4,114 -
Prepaid expenses and other assets 4,524 3,522
------------ ------------
85,040 75,734
Property, plant and equipment 129,077 122,459
Intangible assets 44,428 33,653
Goodwill 23,263 11,202
Other assets 386 442
------------ ------------
$ 282,194 $ 243,490
------------ ------------
------------ ------------
Liabilities and Unitholders' Equity
Current liabilities
Bank indebtedness $ 1,966 $ 649
Operating line 36,702 31,146
Accounts payable and accrued liabilities 19,394 15,781
Unrealized loss on foreign currency contracts - 824
Current portion of long-term debt 22,427 221
Distribution payable to unitholders 1,671 1,652
------------ ------------
82,160 50,273
Other liabilities 5,038 4,561
Long-term debt 37,466 27,511
Future income taxes 19,011 13,678
------------ ------------
143,675 96,023
Unitholders' equity
Capital contributions 211,726 209,733
Accumulated other comprehensive loss (22,668) (15,717)
Cumulative earnings 73,286 57,395
Cumulative distributions declared (123,825) (103,944)
------------ ------------
138,519 147,467
------------ ------------
$ 282,194 $ 243,490
------------ ------------
------------ ------------
Sun Gro Horticulture Income Fund
Consolidated Statements of Earnings and Comprehensive Income
(in thousands of dollars except per-unit
amounts and number of units outstanding)
Year ended Year ended
December 31, December 31,
2007 2006
--------------------------
Revenue $ 224,994 $ 197,307
Cost of goods sold 126,183 102,161
--------------------------
Gross profit 98,811 95,146
Distribution expenses 49,937 44,410
Selling expenses 16,445 15,331
General and administrative expenses 20,631 18,942
--------------------------
Total operating expenses 87,013 78,683
--------------------------
Operating income 11,798 16,463
Other income, net 8,052 449
Interest expense (5,143) (4,316)
--------------------------
Earnings before income taxes 14,707 12,596
Income tax (provision) recovery
Current (828) (956)
Future 2,012 4,307
--------------------------
Income tax (provision) recovery, net 1,184 3,351
--------------------------
Net earnings for the year 15,891 15,947
Other comprehensive loss
Unrealized loss on translating financial
statements of self-sustaining foreign
operations (6,951) (472)
--------------------------
Comprehensive income for the year $ 8,940 $ 15,475
--------------------------
--------------------------
Basic and diluted earnings per unit $ 0.72 $ 0.72
--------------------------
--------------------------
Weighted average number of units outstanding 22,088,420 22,023,000
--------------------------
--------------------------
Sun Gro Horticulture Income Fund
Consolidated Statements of Changes in Unitholders' Equity
(in thousands of dollars)
Accumulated
Other
Unit- Compre- Cumu-
holders' hensive lative Cumulative
Capital Loss Earnings Distributions Total
-------------------------------------------------------
Balance -
December 31,
2005 $ 209,733 $ (15,245) $ 41,448 $ (84,120) $ 151,816
Earnings for
the year - - 15,947 - 15,947
Other
comprehensive
gain (loss)
for the year - (472) - - (472)
Distributions
for the year - - - (19,824) (19,824)
-------------------------------------------------------
Balance -
December 31,
2006 $ 209,733 $ (15,717) $ 57,395 $(103,944) $ 147,467
Units issued as
part of
acquisition 1,993 - - - 1,993
Earnings for the
year - - 15,891 - 15,891
Other
comprehensive
gain (loss) for
the year - (6,951) - - (6,951)
Distributions
for the year - - - (19,881) (19,881)
-------------------------------------------------------
Balance -
December 31,
2007 $ 211,726 $ (22,668) $ 73,286 $(123,825) $ 138,519
-------------------------------------------------------
-------------------------------------------------------
Sun Gro Horticulture Income Fund
Consolidated Statements of Cash Flows
(in thousands of dollars)
Year ended Year ended
December 31, December 31,
2007 2006
--------------------------
Cash flows from operating activities
Net earnings for the year $ 15,891 $ 15,947
Items not affecting cash
Depreciation, depletion and accretion 10,321 9,655
Amortization of intangible assets 2,139 1,963
Unrealized (gain) loss on foreign currency
contracts (4,938) 3,865
Unrealized gain on foreign currency
revaluation 635 -
Gain on disposal of property, plant and
equipment (75) (23)
Future income tax recovery (2,012) (4,307)
--------------------------
21,961 27,100
Change in non-cash operating working capital (5,688) 3,306
--------------------------
16,273 30,406
Cash flows from investing activities
Acquisitions (28,900) (3,366)
Additions to property, plant and equipment (4,991) (2,650)
Proceeds from disposal of property, plant
and equipment 190 43
--------------------------
(33,701) (5,973)
Cash flows from financing activities
Distributions paid to unitholders (19,862) (19,824)
Proceeds from term loans 33,035 3,350
Increase (decrease) in operating line 5,556 (7,183)
Proceeds from government grant and loan - 165
Payments on capital leases (65) -
Repayment of term loans (45) -
Repayment of government loans (221) (200)
--------------------------
18,398 (23,692)
Effect of exchange rate changes on cash (2,287) (337)
--------------------------
(Increase) decrease in bank indebtedness (1,317) 404
Bank indebtedness - beginning of year (649) (1,053)
--------------------------
Bank indebtedness - end of year $ (1,966) $ (649)
--------------------------
--------------------------
Supplemental cash flow information
Interest paid $ 4,542 $ 2,801
Income taxes paid $ 532 $ 416
Equipment acquired under capital lease
obligations $ 486 $ -
%SEDAR: 00017490E