Fund Reviews Conversion to Corporate Structure TRADING SYMBOL: Toronto Stock Exchange - GRO.UN Sun Gro Horticulture Income Fund will hold a conference call and webcast to discuss 2008 second quarter results on August 14, 2008 at 7:30 am Pacific Time (10:30 am Eastern). The call can be accessed by dialing: 1-866-249-2157 or 416-915-5767 (GTA local & International). A replay will be available through August 29, 2008 at: 1-877-289-8525 or 416-640-1917. Passcode 21279990 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)132313 or to the fund's website at: www.sungro.com.
VANCOUVER, Aug. 13 /CNW/ - Sun Gro Horticulture Income Fund (the Fund) today reported financial results for the three and six months ended June 30, 2008. The three-month period represents the second 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 August 14, 2008. At the same time, the Fund announced it is considering conversion from an income trust to a corporate structure before the end of the current fiscal year.
Proposed Conversion to Corporate Structure:
After reviewing the merits of continuing to operate under the income fund structure, the Fund's Board of Trustees is considering the consequences and benefits of converting to a corporation. As more fully described in management's discussion and analysis, the Trustees believe that a corporate structure would better enable Sun Gro to execute its growth strategy and reduce its debt levels. As a result of current and pending tax regulations, investor interest in income funds has declined and the income fund structure greatly limits the Fund's financial flexibility. "We've reached the point where a corporate structure may be more suitable for Sun Gro," said Mitch Weaver, President and CEO of Sun Gro, and a Trustee of the Fund. "Under the current circumstances, we believe there are opportunities for future growth and acquisitions that are best achieved as a corporation." Weaver added that the Trustees are conducting a review of strategic acquisitions in connection with the contemplated conversion and have engaged an investment bank to assist in this process. If and when the proposed conversion is approved, Sun Gro's immediate plan would be to use a significant portion of its cash flow to reduce its debt levels. "We intend to continue cash distributions to unitholders at the current level until the November 15, 2008 distribution payment as permitted under our recently amended loan agreements. We are working to complete the proposed conversion during the fourth quarter," added Weaver.
Financial Results:
During the second 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. While "same-store" sales volumes (which exclude the Florida operations acquired in October 2007) were down by 18% over the same period in 2007, with the volume reduction concentrated in the retail sector, overall second quarter sales volumes improved slightly and revenues were comparable to the 2007 level. For the six-month period, same-store sales volumes were down by 14%, overall sales volumes improved by 4% and revenues were 6% lower than in 2007.
As in each of the past two quarters, the Fund's distributable cash flow was eroded by the impact of a 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 9% higher than in the second quarter of 2007, effectively reducing Sun Gro's revenue for the 2008 period by $6.4 million ($0.29 per unit). In addition to lower same-store sales volumes, Sun Gro saw production inefficiencies at certain Canadian plants due to a slower than normal start to its annual peat harvest. The delays were the result of wet weather conditions across Canada. Total volumes harvested at June 30, 2008 equaled only two-thirds of the 2007 level and were the lowest mid-year volumes since the inception of the Fund. As a result of these factors, gross margin for both the quarter and the half declined to 39%, from 43.5% and 45%, respectively.
"As we work into the third quarter, we continue to concentrate on containing costs and are working hard to match our production capacity with current demand," said Weaver. Weaver added that selling prices were adjusted during the quarter to help offset the stronger Canadian dollar and higher costs.
In response to the current challenging business environment, Sun Gro has implemented a wide range of cost and productivity initiatives. During the first quarter, as previously announced, the company cut compensation for senior management, trustees and directors by 10%, froze staff salaries and new hiring, and closed its Kennetcook, Nova Scotia peat production facility. During the second quarter, harvesting equipment from the Kennetcook site was redeployed to Sun Gro's Quebec harvest operations. In New Brunswick, Sun Gro transitioned its St. Raphael facility to a harvest only operation. Baling equipment from the St. Raphael plant was transferred to the company's Fort Frances, Ontario production facility. In addition, as planned, Sun Gro outsourced baling operations at its Riviere du Loup and Port-Cartier peat plants in Quebec, outsourced distribution operations at its Abbotsford, BC depot and closed its Niagara, Ontario depot. The Niagara property has been listed for sale. The company also plans to significantly scale back production at its Terrell, Texas facility. Peat mixing operations at the plant will be relocated to one of Sun Gro's Manitoba facilities and production at the Texas location will be limited to bulk bark mixes more suited to the local marketplace.
As announced in May, Sun Gro successfully completed the refinancing of US$50 million of its term debt facility. The refinancing reduced the company's exposure to currency exchange and interest rate fluctuations by fixing the interest rate and denominating the borrowings in US dollars. It also extended the maturity of the debt. These funds were borrowed from a US lender, subject to prevailing credit market conditions in the United States. In the interim, these conditions have become increasingly constrained and Sun Gro's second quarter financial performance was lower than expected. As a result, in August 2008, the company's credit facilities were amended so as to suspend distributions after November 30, 2008 if Sun Gro does not comply with certain financial ratios.
As expected, the Fund's March 2008 announcement of its decision to reduce cash distributions to unitholders effective with the April distribution resulted in a decline in its unit trading price. In June, after completing an impairment analysis of goodwill, Sun Gro determined that the fair value of goodwill was nil, and recorded a non-cash impairment charge of $23.4 million.
Distributable Cash
In the three months ended June 30, 2008, the Fund generated distributable cash of $2.2 million, or $0.10 per unit. This compares to $6.3 million, or $0.28 per unit, in the second quarter of 2007. With the reduction in the Fund's monthly distribution amount in April 2008, distributions declared to unitholders in the second quarter decreased to $2.5 million, or $0.11 per unit, from $5.0 million, or $0.225 per unit, in 2007. For the six months ended June 30, 2008, distributable cash totalled $4.4 million, or $0.20 per unit, compared to $12.9 million, or $0.58 per unit, in 2007. Distributions declared to unitholders in the first half of 2008 totalled $7.5 million, or $0.34 per unit, compared to $9.9 million, or $0.45 per unit, in 2007. The distributable cash shortfall was funded from temporary borrowings under the Fund's credit facility.
Statement of Distributable Cash
For the For the For the For the
three three six six
months months months months
(in thousands of ended ended ended ended
dollars except June 30, June 30, June 30, June 30,
per-unit amounts) 2008 2007 2008 2007
------------------------------------------------
Cash flows from
operating activities $ 17,968 $ 19,649 $ 8,988 $ 13,569
Adjustments:
Change in non-cash
operating working
capital(1) (15,155) (12,857) (2,680) 184
Sustaining capital
expenditures(2) (506) (860) (1,608) (1,481)
Repayments on
government loans(3) (55) (55) (110) (110)
Repayments on
equipment loans(4) (47) - (91) -
Repayments on capital
lease obligations(5) (34) - (68) -
Current income taxes
expected to seasonally
reverse in the current
fiscal year(6) - 374 - 714
------------------------------------------------
Distributable cash $ 2,171 $ 6,251 $ 4,431 $ 12,876
------------------------------------------------
------------------------------------------------
Distributable cash
per unit $ 0.10 $ 0.28 $ 0.20 $ 0.58
------------------------------------------------
------------------------------------------------
Distributions declared
per unit $ 0.1125 $ 0.225 $ 0.3375 $ 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.
Comparative Statement of Earnings and Comprehensive Income
(In thousands of dollars
except per-unit amounts, For the three For the three
number of units outstanding months ended months ended
and EBs(1)) (unaudited) June 30, 2008 June 30, 2007
---------------------- --------------------
Revenue $ 62,053 100% $ 63,181 100%
Cost of goods sold 37,609 61% 35,712 57%
--------------- --------------
Gross profit 24,444 39% 27,469 43%
Distribution expenses 14,984 24% 14,436 23%
Selling expenses 4,129 7% 4,225 7%
General and administrative
expenses 4,906 8% 4,677 7%
--------------- --------------
Total operating expenses 24,019 39% 23,338 37%
--------------- --------------
Operating income 425 0% 4,131 6%
Other income, net 209 0% 3,320 6%
Goodwill impairment (23,373) -37% - 0%
Interest expense (1,776) -2% (1,238) -2%
--------------- --------------
Earnings (loss) before
income taxes (24,515) -39% 6,213 10%
Income tax (provision)
recovery
Current (673) -1% (436) -1%
Future 3,996 6% (882) -1%
--------------- --------------
Income tax (provision)
recovery, net 3,323 5% (1,318) -2%
--------------- --------------
Net earnings (loss) for
the period $ (21,192) -34% 4,895 8%
Other comprehensive
income (loss):
Unrealized (loss) on
translating financial
statements of self-
sustaining foreign
operations (866) -1% (4,362) -7%
--------------- --------------
Comprehensive income for
the period $ (22,058) -35% $ 533 1%
--------------- --------------
--------------- --------------
Basic and diluted earnings
(loss) per unit $ (0.96) $ 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 1,702 1,881
Bulk Bark Mixes 800 280
Sand Mixes 188 -
Peat Moss 1,433 1,951
Fertilizer and Minerals 90 71
--------------- --------------
Total 4,213 4,183
--------------- --------------
--------------- --------------
Average revenue per
EB(1) (US $)
Growing Mixes $ 19.59 $ 18.36
Bulk Bark Mixes 8.39 8.17
Sand Mixes 11.43 -
Peat Moss 10.70 9.04
Fertilizer and Minerals 43.48 37.58
--------------- --------------
Total $ 14.59 $ 13.66
--------------- --------------
--------------- --------------
Average revenue per
EB(1) (Canadian $)
Growing Mixes $ 19.82 $ 20.47
Bulk Bark Mixes 8.49 9.03
Sand Mixes 11.51 -
Peat Moss 10.82 10.04
Fertilizer and Minerals 43.98 41.54
--------------- --------------
Total $ 14.75 $ 15.20
--------------- --------------
--------------- --------------
(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.
Comparative Statements of Earnings and Comprehensive Income
(In thousands of dollars
except per-unit amounts, For the six For the six
number of units outstanding months ended months ended
and EBs(1)) (unaudited) June 30, 2008 June 30, 2007
---------------------- --------------------
Revenue $ 122,410 100% $ 129,847 100%
Cost of goods sold 74,537 61% 71,859 55%
--------------- --------------
Gross profit 47,873 39% 57,988 45%
Distribution expenses 28,048 23% 28,392 22%
Selling expenses 8,299 7% 8,436 7%
General and administrative
expenses 9,917 8% 10,348 8%
--------------- --------------
Total operating expenses 46,264 38% 47,176 37%
--------------- --------------
Operating income 1,609 1% 10,812 8%
Other income (expense), net (1,341) -1% 3,592 3%
Asset and Goodwill impairments (24,945) -20% - 0%
Interest expense (3,409) -3% (2,413) -2%
--------------- --------------
Earnings (loss) before
income taxes (28,086) -23% 11,991 9%
Income tax (provision)
recovery
Current (1,032) -1% (1,893) -2%
Future 6,565 6% (434) 0%
--------------- --------------
Income tax (provision)
recovery, net 5,533 5% (2,327) -2%
--------------- --------------
Net earnings (loss) for
the period $ (22,553) -18% 9,664 7%
Other comprehensive income:
Unrealized gain on
translating financial
statements of self-
sustaining foreign
operations 1,362 1% (4,921) -4%
--------------- --------------
Comprehensive income (loss)
for the period $ (21,191) -17% $ 4,743 3%
--------------- --------------
--------------- --------------
Basic and diluted earnings
(loss) per unit $ (1.02) $ 0.44
--------------- --------------
--------------- --------------
Weighted average number of
units outstanding 22,284,681 22,023,000
--------------- --------------
--------------- --------------
Selected supplemental revenue
information
Volume in thousands of EBs(1)
Growing Mixes 3,595 3,935
Bulk Bark Mixes 1,380 390
Sand Mixes 329 -
Peat Moss 2,581 3,284
Fertilizer and Minerals 186 165
--------------- --------------
Total 8,071 7,774
--------------- --------------
--------------- --------------
Average revenue per
EB(1) (US $)
Growing Mixes $ 19.83 $ 18.58
Bulk Bark Mixes 8.76 8.05
Sand Mixes 11.15 -
Peat Moss 10.77 9.34
Fertilizer and Minerals 43.69 31.82
--------------- --------------
Total $ 15.24 $ 14.56
--------------- --------------
--------------- --------------
Average revenue per
EB(1) (Canadian $)
Growing Mixes $ 19.76 $ 21.36
Bulk Bark Mixes 8.75 9.07
Sand Mixes 11.11 -
Peat Moss 10.75 10.64
Fertilizer and Minerals 43.56 43.39
--------------- --------------
Total $ 15.20 $ 16.68
--------------- --------------
(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.
Outlook
Sun Gro's business for the second half of the year will be concentrated in the professional sector. The company expects that it will continue to see lower same store-sales volumes in the third quarter, and that the decline will again be offset by the sales volumes added by its acquired Florida operations. Sun Gro anticipates that its gross margin will track below the third quarter 2007 level as a result of changes to its business model from the 2007 Florida acquisition. In the event of poor harvest conditions through the balance of the season, the margin would be further reduced. However, despite initial concerns about its ability to raise prices in the current marketplace, Sun Gro successfully implemented price increases in the second quarter. Going forward, if the recent strengthening of the US dollar is sustained, it will help relieve pressure on the company's gross margins in the coming quarters.
"Despite decreased demand for 'green goods' at the end-user consumer level, we have been able to maintain our core professional grower business. Going into the third quarter, we are concerned about the weak early harvest and look forward to improved conditions," said Weaver. "We are pleased to see some improvement in our performance in Florida, where we had down-graded our expectations due to the current economic conditions, and are now also beginning to get some traction in California."
He concluded, "We remain confident about the long-term outlook for Sun Gro as we continue to build on our industry-leading position and believe that, if approved, our proposed conversion to a corporate structure will better position Sun Gro to pursue our growth strategy."
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 second quarter MD&A, available on SEDAR on or about August 14, 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. Accordingly, readers are cautioned against placing undue reliance on forward-looking 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 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 July 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.
%SEDAR: 00017490E