Financial Performance Continues to be Severely Impacted by Weakening
US Dollar and Economy; Fund Implements Cost and Production Efficiencies
TRADING SYMBOL: Toronto Stock Exchange - GRO.UN
Sun Gro Horticulture Income Fund will hold a conference call and webcast
to discuss 2008 first quarter results on May 8, 2008 at 7:30 am Pacific
Time (10:30 am Eastern). The call can be accessed by dialing:
1-800-814-4853 or 416-644-3434.
A replay will be available through May 22, 2008 at: 1-877-289-8525 or
416-640-1917. Passcode 21270841 followed by the pound sign.
To access the live and archived webcast, please go to:
http://www.vcall.com/IC/CEPage.asp?ID(equal sign)126151 or to the fund's
website at: www.sungro.com.
VANCOUVER, May 7 /CNW/ - Sun Gro Horticulture Income Fund (the Fund) today reported financial results for the three months ended March 31, 2008, which represents the first quarter of its 2008 fiscal year. (Copies of management's discussion and analysis, and the unaudited interim financial statements will be available at www.sedar.com and www.sungro.com on or about May 8, 2008.)
During the quarter, the Fund's wholly-owned subsidiary, Sun Gro Horticulture Canada Ltd. (Sun Gro or the company), continued to benefit from its 2007 US acquisitions, with its new Florida operations driving a 7% increase in overall sales volumes. However, as in the final quarter of 2007, the Fund's distributable cash flow was severely eroded by the impact of a significantly stronger Canadian dollar on Sun Gro's primarily US-dollar denominated sales, as well as by the effect of continued general economic weakness in the US. The average value of the Canadian dollar was 17% higher than in the first quarter of 2007, effectively reducing Sun Gro's revenue by $9.4 million ($0.42 per unit). As a result of these factors, Sun Gro's sales revenues, "same store" sales volumes (which exclude the new Florida operations) and gross margin were all down from the levels achieved in the first quarter of 2007.
In light of the year-over-year decline in Sun Gro's financial performance, lower than anticipated sales from the Florida operations and growing concerns about Sun Gro's ability to raise prices in the short-term due to current economic conditions in the US, the Fund announced a temporary reduction in its distribution level on March 26, 2008. In addition, as previously announced, it implemented a number of cost and production efficiencies during the first quarter. These included a 10% cut in compensation for senior management, trustees and directors, a freeze on staff salaries and new hiring, and the closure of its Kennetcook, Nova Scotia peat production facility. Sun Gro is also refinancing a portion of its term debt facility into US dollars to reduce exposure to currency and interest rate fluctuations, and extend its maturity.
"We are continuing to respond aggressively to current market conditions with rigorous, organization-wide cost reduction measures and by further rationalizing our production facilities," said Mitch Weaver, President and CEO, and a Trustee of the Fund. Sun Gro outsourced baling operations at its Riviere du Loup and Port-Cartier peat plants in Quebec at quarter-end. The company has also announced that it will be outsourcing distribution operations at its Abbotsford, BC depot and plans to close its Niagara, Ontario depot in June 2008.
Weaver added that Sun Gro is also continuing to work on optimizing its manufacturing and logistic design processes through further integration of the facilities it acquired during 2007. The company will also reduce its capital spending for the balance of the year.
Distributable Cash
In the three months ended March 31, 2008, the Fund generated distributable cash of $2.3 million, or $0.10 per unit. This compares to $6.6 million, or $0.30 per unit, in the first quarter of 2007. Distributable cash paid to unitholders was unchanged at $5.0 million, or $0.225 per unit. The $2.7 million difference between distributable cash generated and distributions paid to unitholders was funded from temporary borrowings under the Fund's credit facility.
Effective with the April 2008 distribution, payable in mid-May 2008, monthly cash distributions to unitholders have been reduced by 50% to $0.0375 per unit. "The Fund's trustees believe it is prudent to maintain an annual payout ratio of 85% to 90% and Sun Gro's recent financial performance did not support the previous rate of cash distributions," said Weaver.
Statement of Distributable Cash
(in thousands of dollars except
per-unit amounts) For the three For the three
months ended months ended
March 31, 2008 March 31, 2007
-------------------------------
Cash flows from operating activities $ (9,074) $ (6,080)
Adjustments:
Change in non-cash operating
working capital(1) 12,569 13,041
Sustaining capital expenditures(2) (1,102) (621)
Repayments on government loans(3) (55) (55)
Repayments on equipment loans(4) (44) -
Repayments on capital lease obligations(5) (34) -
Current income taxes expected to
seasonally reverse in the current
fiscal year(6) - 340
-------------------------------
Distributable cash $ 2,260 $ 6,625
-------------------------------
-------------------------------
Distributable cash per unit $ 0.10 $ 0.30
-------------------------------
-------------------------------
Distributions declared per unit $ 0.225 $ 0.225
-------------------------------
-------------------------------
(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.
Outlook
Excluding the volumes contributed by its recently acquired Florida business, Sun Gro anticipates that its overall sales volumes for the balance of 2008 remain will remain lower than 2007 levels. The negative impact of the broader economic downturn is reducing demand for Sun Gro's products in a number of its key US regional markets. The company also expects to experience continued pressure on its margins from the weaker US dollar.
"While the last few months have been turbulent, we are confident about the long-term outlook for Sun Gro," said Weaver. "The investments we have made in broadening our peat supply, expanding our geographic presence and increasing our product offerings have provided a solid foundation from which we can profitability grow our business."
"The principle focus of the trustees and everyone at Sun Gro over the coming months will be on improving financial performance so that we can restore distributions to the previous level as soon as possible," Weaver concluded.
Selected Consolidated Financial Information
(in thousands of dollars
except units outstanding, per-unit For the three For the three
amounts and equivalent bales sold) months ended months ended
(unaudited) March 31, 2008 March 31, 2007
-------------------------------
Revenue $ 60,357 $ 66,666
Gross profit 23,429 30,519
Operating income 1,184 6,681
Unrealized gains (losses) on foreign
currency contracts (2,523) 503
Realized gain (loss) on foreign
currency contracts 726 (111)
Asset impairment (1,572) -
Net earnings (loss) for the period (1,361) 4,769
Basic and diluted earnings (loss) per unit $ (0.06) $ 0.22
Weighted average of number of units
outstanding 22,284,681 22,023,000
Distributable cash(1) 2,260 6,625
Distributions declared 5,013 4,956
Number of units outstanding 22,284,681 22,023,000
Distributable cash per unit(1) based on
number of units outstanding $ 0.10 $ 0.30
Distributions declared per unit $ 0.225 $ 0.225
Average US dollar exchange rate(2) $ 1.00 $ 0.85
Volume in thousands of equivalent
bales sold(3) 3,858 3,591
(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. Therefore, distributable
cash of the Fund is unlikely to be comparable to similar measures
presented by other issuers. Refer to Management's Discussion and
Analysis of distributable cash for a description of the calculation
method used by the Fund.
(2) The average US dollar exchange rates were supplied by the Bank of
Canada.
(3) An EB, or equivalent bale, is Sun Gro's standard unit of measure,
referring to 10 cubic feet of product.
Comparative Statements of Earnings and Comprehensive Income
(In thousands of dollars
except per-unit amounts, For the For the
number of units outstanding three months three months
and EBs(1)) (unaudited) March 31, 2008 March 31, 2007
--------------------- ---------------------
Revenue $ 60,357 100% $ 66,666 100%
Cost of goods sold 36,928 61% 36,147 54%
--------------- ---------------
Gross profit 23,429 39% 30,519 46%
Distribution expenses 13,064 22% 13,956 21%
Selling expenses 4,170 7% 4,211 6%
General and administrative
expenses 5,011 8% 5,671 9%
--------------- ---------------
Total operating expenses 22,245 37% 23,838 36%
--------------- ---------------
Operating income 1,184 2% 6,681 10%
Other income (expense), net (1,550) -3% 272 0%
Asset impairment (1,572) -3% - 0%
Interest expense (1,633) -2% (1,175) -2%
--------------- ---------------
Earnings (loss) before
income taxes (3,571) -6% 5,778 8%
Income tax (provision)
recovery
Current (359) -1% (1,457) -2%
Future 2,569 4% 448 1%
--------------- ---------------
Income tax (provision)
recovery, net 2,210 3% (1,009) -1%
--------------- ---------------
Net earnings (loss) for
the period $ (1,361) -3% 4,769 7%
Other comprehensive
income (loss):
Unrealized gain (loss)
on translating financial
statements of self-
sustaining foreign
operations 2,228 4% (559) -1%
--------------- ---------------
Comprehensive income for
the period $ 867 1% $ 4,210 6%
--------------- ---------------
--------------- ---------------
Basic and diluted earnings
(loss) per unit $ (0.06) $ 0.22
--------------- ---------------
--------------- ---------------
Weighted average number of
units outstanding 22,284,681 22,023,000
--------------- ---------------
--------------- ---------------
Selected supplemental revenue
information
Volume in thousands of EBs(1)
Growing Mixes 1,893 2,068
Bulk Bark Mixes 580 96
Sand Mixes 141 -
Peat Moss 1,148 1,333
Fertilizer and Minerals 96 94
--------------- ---------------
Total company sales 3,858 3,591
--------------- ---------------
--------------- ---------------
Average revenue per
EB(1) (US $)
Growing Mixes $ 20.08 $ 18.70
Bulk Bark Mixes 9.16 7.81
Sand Mixes 10.77 -
Peat Moss 10.85 9.78
Fertilizer and Minerals 43.88 38.00
--------------- ---------------
Total company sales $ 15.95 $ 15.60
--------------- ---------------
--------------- ---------------
Average revenue per
EB(1) (Canadian $)
Growing Mixes $ 19.74 $ 22.08
Bulk Bark Mixes 9.01 9.22
Sand Mixes 10.58 -
Peat Moss 10.66 11.53
Fertilizer and Minerals 43.16 44.80
--------------- ---------------
Total company sales $ 15.68 $ 18.41
--------------- ---------------
--------------- ---------------
(1) An EB, or equivalent bale, is Sun Gro's standard unit of measure,
referring to 10 cubic feet of product. 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 that are described in the Fund's 2008 first quarter MD&A, available on SEDAR on or about May 8, 2008. 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 March 31, 2008, 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 12 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) (unaudited)
As at As at
March 31, December 31,
Assets 2008 2007
--------------- ---------------
Current assets
Accounts receivable $ 61,037 $ 39,599
Inventories 32,801 36,803
Unrealized gain on foreign currency
contracts 1,591 4,114
Prepaid expenses and other assets 3,839 4,524
--------------- ---------------
99,268 85,040
Property, plant and equipment 126,236 129,077
Intangible assets 44,310 44,428
Goodwill 23,767 23,263
Other assets 424 386
--------------- ---------------
$ 294,005 $ 282,194
--------------- ---------------
--------------- ---------------
Liabilities and Unitholders' Equity
Current liabilities
Bank indebtedness $ 2,367 $ 1,966
Operating line 52,210 36,702
Accounts payable and accrued liabilities 21,575 19,394
Current portion of long-term debt 22,451 22,427
Distribution payable to unitholders 1,671 1,671
--------------- ---------------
100,274 82,160
Other liabilities 5,132 5,038
Long-term debt 37,539 37,466
Future income taxes 16,687 19,011
--------------- ---------------
159,632 143,675
Unitholders' equity
Capital contributions 211,726 211,726
Accumulated other comprehensive loss (20,440) (22,668)
Cumulative earnings 71,925 73,286
Cumulative distributions declared (128,838) (123,825)
--------------- ---------------
134,373 138,519
--------------- ---------------
$ 294,005 $ 282,194
--------------- ---------------
--------------- ---------------
Sun Gro Horticulture Income Fund
Consolidated Statements of Earnings and Comprehensive Income
(in thousands of dollars except
per-unit amounts and number Three months Three months
of units outstanding) ended ended
(unaudited) March 31, 2008 March 31, 2007
-------------------------------
Revenue $ 60,357 $ 66,666
Cost of goods sold 36,928 36,147
-------------------------------
Gross profit 23,429 30,519
Distribution expenses 13,064 13,956
Selling expenses 4,170 4,211
General and administrative expenses 5,011 5,671
-------------------------------
Total operating expenses 22,245 23,838
-------------------------------
-------------------------------
Operating income 1,184 6,681
Other income (expense), net (1,550) 272
Asset impairment (1,572) -
Interest expense (1,633) (1,175)
-------------------------------
Earnings (loss) before income taxes (3,571) 5,778
Income tax (provision) recovery
Current (359) (1,457)
Future 2,569 448
-------------------------------
-------------------------------
Income tax (provision) recovery, net 2,210 (1,009)
-------------------------------
-------------------------------
Net earnings (loss) for the period (1,361) 4,769
Other comprehensive income (loss):
Unrealized gain (loss) on translating
financial statements of self-
sustaining foreign operations 2,228 (559)
-------------------------------
Comprehensive income for the period $ 867 $ 4,210
-------------------------------
-------------------------------
Basic and diluted earnings (loss)
per unit $ (0.06) $ 0.22
-------------------------------
-------------------------------
Weighted average number of units
outstanding 22,284,681 22,023,000
-------------------------------
-------------------------------
Sun Gro Horticulture Income Fund
Consolidated Statements of Changes in Unitholders' Equity
(in thousands of dollars) (unaudited)
Accumulated
Other
Compre- Cumulative
Unitholders' hensive Cumulative Distri-
Capital Loss Earnings butions Total
-----------------------------------------------------------
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
Earnings
(loss) for
the period - - (1,361) - (1,361)
Other
comprehensive
gain for
the period - 2,228 - - 2,228
Distributions
for the
period - - - (5,013) (5,013)
-----------------------------------------------------------
Balance -
March 31,
2008 $ 211,726 $ (20,440) $ 71,925 $(128,838) $ 134,373
-----------------------------------------------------------
-----------------------------------------------------------
Sun Gro Horticulture Income Fund
Consolidated Statements of Cash Flows
(in thousands of dollars) (unaudited)
Three months Three months
ended ended
March 31, 2008 March 31, 2007
-------------------------------
Cash flows from operating activities
Net earnings (loss) for the period $ (1,361) $ 4,769
Items not affecting cash
Depreciation, depletion and accretion 3,126 2,591
Amortization of intangible assets 629 561
Asset impairment 1,572 -
Unrealized loss (gain) on foreign
currency contracts 2,523 (503)
Unrealized gain on foreign currency
revaluation (425) -
Gain on disposal of property, plant
and equipment - (9)
Future income tax recovery (2,569) (448)
-------------------------------
3,495 6,961
Change in non-cash operating
working capital (12,569) (13,041)
-------------------------------
(9,074) (6,080)
Cash flows from investing activities
Acquisitions - (6,340)
Repayment of vendor note for
business acquisition (392) -
Additions to property, plant and equipment (1,102) (733)
Proceeds from disposal of property,
plant and equipment 3 44
-------------------------------
(1,491) (7,029)
Cash flows from financing activities
Distributions paid to unitholders (5,013) (4,956)
Proceeds from term loans - 6,435
Increase in operating line 15,508 11,518
Payments on capital leases and
other term loans (133) -
-------------------------------
10,362 12,997
Effect of exchange rate changes on cash (198) 44
-------------------------------
Increase in bank indebtedness (401) (68)
Bank indebtedness - beginning of period (1,966) (649)
-------------------------------
Bank indebtedness - end of period $ (2,367) $ (717)
-------------------------------
-------------------------------
Supplemental cash flow information
Interest paid $ 1,898 $ 1,045
Income taxes paid $ 88 $ 60
%SEDAR: 00017490E