Q4 Operating Income Up Significantly, Distributable Cash Highest in Five Quarters, Paving Way for Strong Start to 2009; Fund Completes Debt Amendments TRADING SYMBOL: Toronto Stock Exchange - GRO.UN Sun Gro Horticulture Income Fund will hold a conference call and webcast to discuss 2008 fourth quarter and year-end results on Tuesday, March 31, 2009 at 7:30 am Pacific Time (10:30 am Eastern). The call can be accessed by dialing: 1-800-732-0232 or 416-644-3416 (Greater Toronto Area and International). A replay will be available through April 14, 2009 at: 1-877-289-8525 or 416-640-1917. Passcode 21298631 followed by the number sign. To access the live and archived webcast, please go to: http://www.investorcalendar.com/IC/CEPage.asp?ID(equal sign)141907 or to the fund's website at: www.sungro.com.
VANCOUVER, March 30 /CNW/ - Sun Gro Horticulture Income Fund (the Fund) today reported financial results for the three and 12 months ended December 31, 2008. During the three-month period, which represents the fourth quarter of the Fund's 2008 fiscal year, its wholly-owned subsidiary, Sun Gro Horticulture Canada Ltd. (Sun Gro) recorded a $4.4 million increase in operating income, which swung from a loss of $0.9 million in 2007 to income of $3.6 million in 2008. Distibutable cash for the quarter was up by 163% year-over-year.
A much stronger US dollar played a positive role in the Fund's significantly improved financial performance, as did Sun Gro's continued focus on aligning its production capacities with demand. The company achieved cost efficiencies by using new and relocated baling equipment, which enabled it to process and package the harvest much more quickly. Transportation costs benefited from lower freight rates as a result of weakened demand for trucking services and lower energy prices, as well as increased efficiency in truck loading and routing.
"We have been working hard to boost our production efficiency and further enhance our manufacturing and logistical design processes, and we've made some very positive inroads in terms of containing costs," said Mitch Weaver, President and CEO of Sun Gro and a Trustee of the Fund, "We are confident that the initiatives we have been implementing over the last several years will continue to benefit our financial results over the months to come. The positive impact of more favourable exchange rates, and lower raw material and transportation costs is also carrying into 2009 and, having now successfully negotiated an amendment to our credit facilities, we are well positioned to strengthen our balance sheet and add value for our unitholders."
Fourth-Quarter Financial Results
The dramatic improvement in Sun Gro's performance in the fourth quarter was achieved despite reduced peat moss volumes and the continued impact of weak economic conditions. Demand in both the nursery and greenhouse segments of Sun Gro's business was down significantly due to the declining level of housing starts in the US and cautious crop plantings by professional growers throughout North America.
Overall sales volumes for the fourth quarter were down by 16% year-over-year, while revenues were up by 2%. The average value of the Canadian dollar was 20% lower than in the fourth quarter of 2007, effectively increasing Sun Gro's revenue for the 2008 period by $6.5 million. This helped increase gross margin for the fourth quarter of 2008 to 46% from 39% in the same period of 2007.
The sales volume decline occurred in both the peat and bark-based growing mix, and straight peat moss product categories. Peat and bark-based growing mix sales volumes were down by 9% due to reduced crop plantings, while peat moss volumes decreased by 32% as a result of the loss of a key non-grower account, limited export opportunities and reduced demand. Fourth quarter sales of bulk bark mixes increased by 11%, primarily as a result of capital upgrades completed during 2008 at Sun Gro's plant in Valdosta, Georgia.
Annual Financial Results
For the 12 months ended December 31, 2008, revenues and sales volumes were both down by 1% over the prior year. As with the quarterly result, volumes of peat and bark-based growing mixes and straight peat moss were well below 2007 levels, declining by 10% and 22%, respectively. These reduced volumes were partially offset by higher volumes of bulk bark and sand-based mixes, which increased by 120% and 145%, respectively. Sales volumes of water soluble fertilizers were up by 84% over 2007.
Sun Gro's 2008 gross margin of 42% was down from the 44% recorded in 2007. The reduction was primarily due to the combined impact of the strengthening of the Canadian dollar during the first nine months of 2008, production inefficiencies created by the year's poor peat harvest and, as expected, the significant volumes of lower-margin products added with Sun Gro's strategic expansion in Florida. During the first three quarters of 2008, the average value of the Canadian dollar was 9% higher than in the same period in 2007, effectively reducing Sun Gro's nine-month 2008 revenue by $16.2 million.
During 2008, as previously announced, Sun Gro implemented a wide range of cost and productivity initiatives in response to the challenging business environment. These included the closure of several plants, outsourcing of operations at several facilities, redeployment of equipment from closed plants to other locations and capital upgrades at two plants to increase production capacity. In addition, as part of its focus on efficient use of working capital, the company tightened customer credit terms to accelerate cash collections and implemented initiatives to reduce purchases of raw materials. Subsequent to year-end, in February, Sun Gro sold its previously closed Niagara, Ontario depot.
Distributable Cash
In light of Sun Gro's reduced profitability, the Fund suspended monthly distributions to unitholders effective with the August 2008 distribution paid in mid-September 2008. This suspension followed a 50% reduction in monthly distributions, effective with the April 2008 payment. All available funds are now being used to strengthen the Fund's balance sheet.
In the three months ended December 31, 2008, the Fund generated distributable cash of $2.6 million, or $0.12 per unit, and did not make any distributions to unitholders. In the same period of 2007, the Fund generated distributable cash of $1.0 million or $0.04 per unit, and distributed $5.0 million, or $0.225 per unit.
For the year ended December 31, 2008, the Fund generated distributable cash of $8.4 million, or $0.38 per unit, and distributed $9.2 million, or $0.41 per unit. In 2007, the Fund generated distributable cash of $18.1 million or $0.82 per unit, and distributed $19.9 million, or $0.90 per unit. The distributable cash shortfall was funded from temporary borrowings under the Fund's credit facility.
Statement of Distributable Cash
(in thousands of dollars except
per-unit amounts)
For the For the
three three For the For the
months months year year
ended ended ended ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2008 2007 2008 2007
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Cash flows from operating
activities $ 1,427 $ (2,995) $ 10,717 $ 16,273
Adjustments:
Change in non-cash operating
working capital 1,773 5,097 1,056 5,688
Sustaining capital
expenditures (491) (800) (2,901) (3,560)
Repayments on government
loans (55) (55) (221) (221)
Repayments on equipment loans (13) (45) (138) (45)
Repayments on capital lease
obligations (33) (65) (134) (65)
Current income taxes expected
to seasonally reverse in
the current fiscal year - (144) - -
------------------------------------------
Distributable cash $ 2,608 $ 993 $ 8,379 $ 18,070
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------------------------------------------
Distributable cash per unit $ 0.12 $ 0.04 $ 0.38 $ 0.82
------------------------------------------
------------------------------------------
Distributions declared per
unit $ - $ 0.225 $ 0.4125 $ 0.90
------------------------------------------
------------------------------------------
Payout Ratio 110% 110%
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Operating Results for the three months ended December 31, 2008 and 2007
Comparative Statements of
Earnings and Comprehensive Income
(In thousands of dollars except
per-unit amounts,
number of units outstanding Three months ended Three months ended
and EBs) Dec. 31, 2008 Dec. 31, 2007
------------------ -------------------
Revenue $ 53,654 100% $ 52,464 100%
Cost of goods sold 28,764 54% 31,909 61%
------------ ------------
Gross profit 24,890 46% 20,555 39%
Distribution expenses 10,744 20% 11,949 23%
Selling expenses 3,977 8% 4,021 8%
General and administrative expenses 6,599 12% 5,439 10%
------------ ------------
Total operating expenses 21,320 40% 21,409 41%
------------ ------------
Operating income 3,570 6% (854) -2%
Other income (expense), net (21,407) -40% 294 1%
Interest expense (2,178) -4% (1,627) -3%
------------ ------------
Earnings (loss) before income taxes (20,015) -38% (2,187) -4%
Income tax (provision) recovery
Current 874 2% (107) 0%
Future 2,094 4% 2,936 5%
------------ ------------
Income tax (provision) recovery,
net 2,968 6% 2,829 5%
------------ ------------
Net earnings (loss) for the year $ (17,047) -32% $ 642 1%
Other comprehensive income (loss):
Unrealized gain (loss) on
translating financial statements
of self-sustaining foreign
operations 8,190 15% (223) 0%
------------ ------------
Comprehensive income (loss) for
the period $ (8,857) -17% $ 419 1%
------------ ------------
------------ ------------
Basic and diluted earnings (loss)
per unit $ (0.76) $ 0.03
------------ ------------
------------ ------------
Weighted average number of units
outstanding 22,284,681 22,284,681
------------ ------------
------------ ------------
Selected supplemental revenue
information
Volume in thousands of EBs
Peat and Bark-based Growing
Mixes 1,417 1,556
Peat Moss 818 1,206
Bulk Bark Mixes 675 610
Sand Mixes 131 256
Fertilizer and Minerals 62 65
------------ ------------
Total 3,103 3,693
------------ ------------
------------ ------------
Average revenue per EB (US $)
Peat and Bark-based Growing
Mixes $ 20.71 $ 19.85
Peat Moss 11.26 10.51
Bulk Bark Mixes 8.02 9.05
Sand Mixes 10.83 10.63
Fertilizer and Minerals 40.63 41.46
------------ ------------
Total $ 15.44 $ 14.77
------------ ------------
------------ ------------
Average revenue per EB
(Canadian $)
Peat and Bark-based Growing
Mixes $ 23.31 $ 19.37
Peat Moss 12.77 10.22
Bulk Bark Mixes 9.07 8.79
Sand Mixes 12.51 10.36
Fertilizer and Minerals 46.60 40.41
------------ ------------
Total $ 17.44 $ 14.39
------------ ------------
------------ ------------
Operating Results for the years ended December 31, 2008 and 2007
Comparative Statements of Earnings and Comprehensive Income
(In thousands of
dollars except
per-unit amounts,
number of units Year ended Year ended
outstanding and EBs) Dec. 31, 2008 Dec. 31, 2007
------------------- -------------------
Revenue $ 221,935 100% $ 224,994 100%
Cost of goods sold 129,084 58% 126,183 56%
------------ ------------
Gross profit 92,851 42% 98,811 44%
Distribution expenses 49,064 22% 49,937 22%
Selling expenses 16,353 8% 16,445 8%
General and administrative
expenses 21,443 9% 20,631 9%
------------ ------------
Total operating expenses 86,860 39% 87,013 39%
------------ ------------
Operating income 5,991 3% 11,798 5%
Other income (expense), net (24,883) -11% 8,052 4%
Goodwill and asset impairments (24,945) -11% - 0%
Interest expense (7,440) -4% (5,143) -2%
------------ ------------
Earnings (loss) before
income taxes (51,277) -23% 14,707 7%
Income tax (provision) recovery
Current 111 0% (828) 0%
Future 9,105 4% 2,012 0%
------------ ------------
Income tax (provision)
recovery, net 9,216 4% 1,184 0%
------------ ------------
Net earnings (loss) for the year $ (42,061) -19% $ 15,891 7%
Other comprehensive income (loss):
Unrealized gain (loss) on
translating financial
statements of self-sustaining
foreign operations 10,468 5% (6,951) -3%
------------ ------------
Comprehensive income (loss)
for the period $ (31,593) -14% $ 8,940 4%
------------ ------------
------------ ------------
Basic and diluted earnings
(loss) per unit $ (1.89) $ 0.72
------------ ------------
------------ ------------
Weighted average number of
units outstanding 22,284,681 22,088,420
------------ ------------
------------ ------------
Selected supplemental revenue
information
Volume in thousands of EBs
Peat and Bark-based
Growing Mixes 6,114 6,808
Peat Moss 4,581 5,901
Bulk Bark Mixes 2,680 1,220
Sand Mixes 628 256
Fertilizer and Minerals 320 290
------------ ------------
Total 14,323 14,475
------------ ------------
------------ ------------
Average revenue per EB (US $)
Peat and Bark-based
Growing Mixes $ 20.09 $ 18.81
Peat Moss 10.73 9.50
Bulk Bark Mixes 8.66 8.61
Sand Mixes 11.08 10.63
Fertilizer and Minerals 43.86 37.84
------------ ------------
Total $ 15.09 $ 14.38
------------ ------------
------------ ------------
Average revenue per EB
(Canadian $)
Peat and Bark-based
Growing Mixes $ 20.74 $ 20.52
Peat Moss 11.06 10.30
Bulk Bark Mixes 8.96 8.90
Sand Mixes 11.47 10.35
Fertilizer and Minerals 45.17 41.22
------------ ------------
Total $ 15.58 $ 15.60
------------ ------------
------------ ------------
Amendments to Credit Facilities
Subsequent to year-end, the Fund amended its operating credit facilities and term loans, bringing it into compliance with the covenants of the facilities as of December 31, 2008. The credit facilities are comprised of a $55.0 million revolving credit facility and term loans of $81.1 million. The Fund's senior leverage ratio has been amended to fit Sun Gro's projected performance over the next two years.
Outlook
In light of cautious crop plantings for 2009 by its nursery and greenhouse grower customers, Sun Gro anticipates that its sales volumes for the year will not exceed the 2008 level. "The lawn and garden industry tends to be more recession-resistant than many other sectors, and we believe that demand for green goods has stabilized, but until there is a substantial improvement in general economic conditions, we expect to see limited opportunities for significant volume improvements," said Weaver. "Likewise, while the strengthening of the Canadian dollar in recent years has driven several price increases, given current exchange rates and the poor state of the economy, we do not believe we will be able to increase prices further in 2009."
Sun Gro anticipates, however, that its gross margin percentage will improve year-over-year, due both to a more favourable exchange rate environment and the positive impact of the productivity initiatives it launched in 2008. In addition, the company expects to benefit from decreasing raw material costs, particularly for energy and fertilizers. The lower energy prices are positively impacting its packaging costs and should reduce harvest costs in 2009. Similarly, transportation costs are expected to continue to decline due to lower freight rates as a result of weakened demand and lower energy prices, as well as more efficient truck loading and routing. The benefit of a weaker Canadian dollar in 2009 will be tempered, as the Fund's US dollar exposure for the year has been largely hedged with forward foreign exchange contracts at an average rate of $1.03. A decrease in the value of the Canadian dollar will also result in an unrealized loss on the Fund's US dollar denominated debt.
Based on these factors, the Fund expects to see a substantial year-over-year increase, likely a doubling, in its distributable cash in the first quarter of 2009. However, as required by its credit facilities, the Fund does not expect to resume distributions to unitholders in 2009.
"Our overriding priority for the year to come is to significantly reduce our debt in excess of obligatory amounts, and thus strengthen our financial position," said Weaver. "We also want to build on the foundation we have established. We are committed to maintaining the strong sales and technical teams that have always set Sun Gro apart in our industry, and are investigating new ways of capitalizing on our North America-wide production and distribution network to generate incremental revenues. In particular, we plan to implement new sales strategies to better utilize our plants in the US, expand markets for our Florida production and take advantage of our efficient peat harvesting and processing system."
"We believe that our cash flows from operating activities and the revolving operating facility will be sufficient to meet our working capital needs, and remain cautious but confident about the long-term outlook for Sun Gro as we continue to strengthen our industry-leading position. We are keenly focused on improving Sun Gro's profitability and committed to creating long-term value for our unitholders," he concluded.
Copies of management's discussion and analysis (MD&A) and the Fund's audited financial statements for the year ended December 31, 2008 will be available at www.sedar.com and www.sungro.com on or about March 31, 2009.
Forward-Looking Information
This news release contains "forward-looking information". Forward-looking information relates to future events or future performance and reflects the Fund's expectations regarding Sun Gro's growth, results of operations, performance, business prospects, opportunities or industry performance, or trends. Any forward-looking information included in this news release reflects Sun Gro's current internal projections, expectations or beliefs and is based on information currently available. In some cases, forward-looking information 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 any forward-looking information. 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, failure to meet certain financial covenant requirements, the impact of an increase in fuel costs, reduced consumer demand due to natural disasters and economic factors, and competitive activity. Readers should specifically consider these factors, including the risks and uncertainties described in the 2008 year-end MD&A filed on SEDAR. Although Sun Gro believes that any forward-looking information contained in this news release is based on reasonable assumptions, readers cannot be assured that actual results will be consistent with such statements. Accordingly, readers are cautioned against placing undue reliance on forward-looking information. Any forward-looking information provided in this news release is provided as of the date of the news release and Sun Gro assumes no obligation to update or revise it 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, term loans for certain production equipment, capital lease obligations and such reserves as the Board of Directors of Sun Gro 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 30, 2009, 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. The US accounts for approximately 81% of the company's sales volumes.
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 operating plants and 13 US operating plants.
%SEDAR: 00017490E