Performance Significantly Impacted by Poor Peat Harvest and Reduced Peat Shipments; Fund Focuses on Debt Reduction TRADING SYMBOL: Toronto Stock Exchange - GRO.UN Sun Gro Horticulture Income Fund will hold a conference call and webcast to discuss 2008 third quarter results on November 13, 2008 at 7:30 am Pacific Time (10:30 am Eastern). The call can be accessed by dialing: 1-800-814-3911 or 416-915-5763 (Greater Toronto Area and International). A replay will be available through November 28, 2008 at: 1-877-289-8525 or 416-640-1917. Passcode 21287125 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)136455 or to the fund's website at: www.sungro.com.
VANCOUVER, Nov. 12 /CNW/ - Sun Gro Horticulture Income Fund (the Fund) today reported financial results for the three and nine months ended September 30, 2008. The three-month period represents the third quarter of its 2008 fiscal year. Copies of management's discussion and analysis, and the Fund's unaudited interim financial statements will be available at www.sedar.com and www.sungro.com on or about November 13, 2008. The Fund also announced that it would not be proceeding with conversion from an income trust to a corporate structure before the end of 2008, as contemplated at mid-year.
Financial Results
During the third quarter, the financial performance of the Fund's wholly-owned subsidiary, Sun Gro Horticulture Canada Ltd. (Sun Gro) continued to be negatively impacted by poor peat harvest conditions and general economic weakness in the US. Demand in both the nursery and greenhouse segments of its business was down due to the low level of housing starts in the US and more cautious crop plantings by professional growers throughout North America.
While revenues and sales volumes for the three months were up by 7% and 5%, respectively, over 2007, the gains were due to sales contributed by the Florida operations acquired in October 2007. Same-store sales volumes (excluding the Florida operations) were down by 16% over the prior year, due to decreased demand from professional growers and reduced peat shipments. For the nine-month period, same-store sales volumes were down by 11%, overall sales volumes improved by 4% and revenues were 2% lower than in 2007.
Although Sun Gro's third quarter revenue was not affected by exchange rate fluctuations, with the average US dollar exchange rate for the three months returning to the 2007 level, the impact of foreign exchange on its nine-month revenue was considerable. The average value of the Canadian dollar was 9% higher than in the first nine months of 2007, effectively reducing Sun Gro's revenue for the 2008 period by $16.2 million (or $0.72 per unit).
As in the second quarter, Sun Gro saw production inefficiencies at certain Canadian plants due to significantly lower than normal peat harvest volumes as a result of wet weather conditions across Canada. Volumes harvested through September 30, 2008 were down by 17% over 2007.
Sun Gro's third quarter gross margin declined to 44% from 47% in 2007. For the year-to-date, gross margin declined to 40% from 45%.
"Going into the final quarter, with our annual harvest now complete, we are continuing to adjust selling prices to help offset the margin loss as we maintain our focus on containing costs and matching our production capacity with current demand," said Mitch Weaver, President and CEO of Sun Gro and a Trustee of the Fund. Since the beginning of the year, Sun Gro has implemented a wide range of cost and productivity initiatives in response to the current challenging business environment, as previously announced. These include a 10% cut in compensation for senior management, trustees and directors, a freeze on staff salaries and new hiring, the closure of several plants, outsourcing of operations at several facilities, and redeployment of equipment from closed plants to other Sun Gro locations. The company's most recent price increase took effect on October 1, 2008.
Distributable Cash
As announced on September 15, 2008, in light of reduced profitability, the Fund accelerated a planned suspension of monthly distributions to unitholders by two months. Effective with the August 2008 distribution paid in mid-September 2008, distributions have been discontinued for the foreseeable future. Available funds will now be applied to reduce the Fund's debt.
In the three months ended September 30, 2008, the Fund generated distributable cash of $1.3 million, or $0.06 per unit. This compares to $4.2 million, or $0.19 per unit, in the third quarter of 2007. With the reduction in the Fund's monthly distribution amount in April 2008 and the September suspension, distributions declared to unitholders in the third quarter decreased to $1.7 million, or $0.075 per unit, from $5.0 million, or $0.225 per unit, in 2007. For the nine months ended September 30, 2008, distributable cash totalled $5.8 million, or $0.26 per unit, compared to $17.1 million, or $0.78 per unit, in 2007. Distributions declared to unitholders in the first nine months of this year totalled $9.2 million, or $0.4125 per unit, compared to $14.9 million, or $0.675 per unit, in 2007. 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 For the For the
three three nine nine
months months months months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
-------------------------------------------
Cash flows from operating
activities $ 302 $ 5,699 $ 9,290 $ 19,268
Adjustments:
Change in non-cash operating
working capital(1) 1,963 407 (717) 591
Sustaining capital
expenditures(2) (802) (1,279) (2,410) (2,760)
Repayments on government
loans(3) (56) (56) (166) (166)
Repayments on equipment
loans(4) (34) - (125) -
Repayments on capital
lease obligations(5) (33) - (101) -
Current income taxes
expected to seasonally
reverse in the current
fiscal year(6) - (570) - 144
-------------------------------------------
Distributable cash $ 1,340 $ 4,201 $ 5,771 $ 17,077
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-------------------------------------------
Distributable cash per unit $ 0.06 $ 0.19 $ 0.26 $ 0.78
-------------------------------------------
-------------------------------------------
Distributions declared per
unit $0.0750 $ 0.225 $ 0.4125 $ 0.675
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(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 that 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 and
transportation 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 Sun Gro's 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 EBs(1)) months ended months ended
(unaudited) Sept. 30, 2008 Sept. 30, 2007
------------------ ------------------
Revenue $ 45,871 100% $ 42,683 100%
Cost of goods sold 25,783 56% 22,415 53%
------------ ------------
Gross profit 20,088 44% 20,268 47%
Distribution expenses 10,272 22% 9,596 23%
Selling expenses 4,077 9% 3,988 9%
General and administrative expenses 4,927 11% 4,844 11%
------------ ------------
Total operating expenses 19,276 42% 18,428 43%
Operating income 812 2% 1,840 4%
Other income (expense), net (2,135) -5% 4,166 10%
Asset impairments - 0% - 0%
Interest expense (1,853) -4% (1,103) -3%
------------ ------------
Earnings (loss) before income taxes (3,176) -7% 4,903 11%
Income tax (provision) recovery
Current 269 1% 1,172 3%
Future 446 1% (490) -1%
------------ ------------
Income tax (provision) recovery, net 715 2% 682 2%
------------ ------------
Net earnings (loss) for the period $ (2,461) -5% $ 5,585 13%
Other comprehensive income (loss):
Unrealized gain (loss) on
translating financial statements
of self-sustaining foreign
operations 916 2% (1,807) -4%
------------ ------------
Comprehensive income (loss) for
the period $ (1,545) -3% $ 3,778 9%
------------ ------------
------------ ------------
Basic and diluted earnings (loss)
per unit $ (0.11) $ 0.25
------------ ------------
------------ ------------
Weighted average number of units
outstanding 22,284,681 22,023,000
------------ ------------
------------ ------------
Selected supplemental revenue
information
Volume in thousands of EBs (1)
Growing Mixes 1,102 1,317
Bulk Bark Mixes 625 220
Sand Mixes 168 -
Peat Moss 1,182 1,411
Fertilizer and Minerals 72 60
------------ ------------
Total 3,149 3,008
------------ ------------
------------ ------------
Average revenue per EB(1) (US $)
Growing Mixes $ 19.94 $ 18.18
Bulk Bark Mixes 8.91 8.03
Sand Mixes 11.07 -
Peat Moss 10.17 9.02
Fertilizer and Minerals 46.97 34.00
------------ ------------
Total $ 14.22 $ 13.45
------------ ------------
------------ ------------
Average revenue per EB (1)
(Canadian $)
Growing Mixes $ 20.43 $ 19.28
Bulk Bark Mixes 9.11 8.52
Sand Mixes 11.30 -
Peat Moss 10.41 9.57
Fertilizer and Minerals 47.99 36.11
------------ ------------
Total $ 14.56 $ 14.27
------------ ------------
------------ ------------
(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.
(In thousands of dollars except For the nine For the nine
per-unit amounts, number of months ended months ended
units outstanding and EBs(1)) Sept. 30, 2008 Sept. 30, 2007
(unaudited) ------------------ ------------------
Revenue $ 168,281 100% $ 172,530 100%
Cost of goods sold 100,320 60% 94,274 55%
------------ ------------
Gross profit 67,961 40% 78,256 45%
Distribution expenses 38,320 23% 37,988 22%
Selling expenses 12,376 7% 12,424 7%
General and administrative expenses 14,844 9% 15,192 9%
------------ ------------
Total operating expenses 65,540 39% 65,604 38%
------------ ------------
Operating income 2,421 1% 12,652 7%
Other income (expense), net (3,476) -2% 7,758 5%
Asset and goodwill impairments (24,945) -15% - 0%
Interest expense (5,262) -3% (3,516) -2%
------------ ------------
Earnings (loss) before income taxes (31,262) -19% 16,894 10%
Income tax (provision) recovery
Current (763) 0% (721) 0%
Future 7,011 4% (924) -1%
------------ ------------
Income tax (provision)
recovery, net 6,248 4% (1,645) -1%
------------ ------------
Net earnings (loss) for the period $ (25,014) -15% $ 15,249 9%
Other comprehensive income:
Unrealized gain (loss) on
translating financial
statements of self-sustaining
foreign operations 2,278 1% (6,728) -4%
------------ ------------
Comprehensive income (loss)
for the period $ (22,736) -14% $ 8,521 5%
------------ ------------
------------ ------------
Basic and diluted
earnings (loss) per unit $ (1.12) $ 0.69
------------ ------------
------------ ------------
Weighted average number
of units outstanding 22,284,681 22,023,000
------------ ------------
------------ ------------
Selected supplemental
revenue information
Volume in thousands of EBs(1)
Growing Mixes 4,697 5,252
Bulk Bark Mixes 2,005 610
Sand Mixes 497 -
Peat Moss 3,763 4,695
Fertilizer and Minerals 258 225
------------ ------------
Total 11,220 10,782
------------ ------------
------------ ------------
Average revenue per EB(1) (US $)
Growing Mixes $ 19.90 $ 18.48
Bulk Bark Mixes 8.87 8.04
Sand Mixes 11.15 -
Peat Moss 10.62 9.24
Fertilizer and Minerals 44.63 36.80
------------ ------------
Total $ 15.00 $ 14.25
------------ ------------
------------ ------------
Average revenue per EB(1)
(Canadian $)
Growing Mixes $ 19.97 $ 20.84
Bulk Bark Mixes 8.93 8.87
Sand Mixes 11.20 -
Peat Moss 10.69 10.32
Fertilizer and Minerals 44.82 41.46
------------ ------------
Total $ 15.06 $ 16.01
------------ ------------
------------ ------------
(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.
Violation of financial covenants and waiver
At September 30, 2008, Sun Gro was in violation of certain financial covenants. The Fund has sought and received a waiver of compliance with these covenants as at September 30, 2008 from its lenders. Based on current circumstances and conditions, Sun Gro anticipates that during the next 12 months it may be unable to comply with the senior debt ratio covenant. Accordingly, its term loans have been classified as current. "We are working to reduce our leverage in order to satisfy our financial covenants as soon as possible. In addition to the changes we have made to our cost structure since the beginning of the year, we have now tightened customer credit terms to accelerate cash collections and have reduced our purchases of raw materials," said Weaver. "With our distributable cash now being applied to debt reduction, we believe we will be successful in improving our senior debt ratio."
Outlook
Sun Gro expects that its fourth quarter volumes will decline somewhat from 2007 levels as its professional grower customers are reducing crop plantings in response to the current economic weakness in the US. At the same time, the company anticipates that its gross margin will improve from the year ago level, due to a more favorable exchange rate environment and improved pricing.
"Going forward, if the recent strengthening of the US dollar is sustained, it will increase revenue and help relieve pressure on our gross margins in the coming quarters. A continuation of the current trend toward lower energy costs would also benefit us," said Weaver.
"We believe that our cash flows from operating activities and revolving operating facility will be sufficient to meet our working capital needs for the next year, and remain confident about the long-term outlook for Sun Gro as we continue to build on 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.
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, failure to meet certain financial covenant requirements, 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 third quarter MD&A, available on SEDAR on or about November 13, 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, 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 November 12, 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 81% of the company's sales volume is in 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