Strong performance sustained; Fund delivers best ever quarterly EBITDA, more than doubles distributable cash, reduces term debt TRADING SYMBOL: Toronto Stock Exchange - GRO.UN Sun Gro Horticulture Income Fund will hold a conference call and webcast to discuss 2009 first quarter results on Wednesday, April 29, 2009 at 7:30 am Pacific Time (10:30 am Eastern). The call can be accessed by dialing: 1-800-814-4862 or 416-644-3430 (Greater Toronto Area and International). A replay will be available through May 14, 2009 at: 1-877-289-8525 or 416-640-1917. Passcode 21304687 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)144212 or to the fund's website at: www.sungro.com.
VANCOUVER, April 28 /CNW/ - Sun Gro Horticulture Income Fund (the Fund) today reported financial results for the three months ended March 31, 2009, which represents the first quarter of its 2009 fiscal year. The Fund's wholly-owned subsidiary, Sun Gro Horticulture Canada Ltd. (Sun Gro) recorded operating income of $8.6 million, up seven-fold from the first quarter of 2008. Gross margin was maintained at the 46% achieved in the final quarter of 2008, up from 39% in the first three months of 2008. Distributable cash for the quarter was up by 143% year-over-year. At the Florida operations Sun Gro acquired in October 2007, sales and EBITDA improved by 17% and 273%, respectively, in US dollars. Finally, first quarter net income improved to $3.3 million from a loss of $1.4 million in 2008.
The positive results were driven by a combination of factors. A much stronger US dollar improved revenue, while critical elements of Sun Gro's cost structure, such as transportation and manufacturing, benefited from efficiency and cost-saving initiatives implemented in 2008. Lower energy prices also contributed to reduced costs.
First Quarter Financial Results
Revenues for the first three months of the year increased by 14% over 2008. US dollar product pricing was stable, while the average value of the US dollar strengthened by 24%, when compared to the first quarter of 2008. Sales volumes declined in both the peat and bark-based growing mix, and straight peat moss product categories. Growing mix sales volumes were down by 8% year-over-year due to reduced crop plantings, lower retail co-pack mix sales and the lingering impact of the weak US housing market, while peat moss volumes decreased by 30% due to supply restrictions as a result of the 2008 harvest shortfall. First quarter sales of bulk bark mixes increased by 6%, primarily as a result of capital upgrades completed during 2008 at the Valdosta, Georgia plant that Sun Gro acquired in Q4 2007 as part of its acquisition of Florida Potting Soils. Sand-based mix volumes were up by 20%, due mainly to the repositioning of Sun Gro's sales focus from new golf course development to golf course and sports field renovation.
"Our ability to perform well in today's difficult market is due in large part to the measures we took in 2008 to boost our production efficiency, and enhance our manufacturing and logistical design processes," said Mitch Weaver, President and CEO of Sun Gro and a Trustee of the Fund. "Going forward, we remain focused on optimizing the assets we have in place as we continue to work to improve plant productivity and strengthen our balance sheet."
Balance Sheet Improvements
Drawings on the revolving operating portion of the company's credit facility in the first three months of 2009 were $9.9 million, down substantially from the $15.5 million drawn in the same period of 2008. During the first quarter of this year, Sun Gro reduced its term debt by $2.4 million. Funds applied to the term debt included net proceeds of $1.3 million from the sale of the Niagara, Ontario depot Sun Gro closed as part of its 2008 cost-saving program. As previously announced, this transaction was completed successfully in February 2009. At March 31, 2009, the Fund was in compliance with all of its debt covenants.
EBITDA
EBITDA for the first quarter increased to $10.8 million, nearly twice the 2008 amount. The gain was driven by Sun Gro's improved cost structure and the positive impact of the stronger US dollar on revenues. In addition, the Fund recorded $1.4 million of realized foreign exchange contract losses, compared to a gain of $0.7 million in the first quarter of 2008.
Reconciliation of cash flows from operating activities to earnings before
interest, taxes, depreciation and amortization (EBITDA)
Three Three
months ended months ended
March March
(in thousands of dollars) 31, 2009 31, 2008
-----------------------------
Cash flows from operating activities (1) $ (11,965) $ (9,074)
Adjustments:
Change in non-cash operating working
capital 19,587 12,569
Interest expense 2,444 1,633
Current income tax provision 721 359
-----------------------------
EBITDA $ 10,787 $ 5,487
-----------------------------
-----------------------------
(1) Cash flows from operating activities from the consolidated
statements of cash flows.
Distributable Cash
In the three months ended March 31, 2009, the Fund generated distributable cash of $5.5 million, or $0.25 per unit, and did not make any distributions to unitholders. In light of Sun Gro's reduced profitability in 2008, the Fund suspended monthly distributions to unitholders effective with the August 2008 distribution. All available funds are now being used to strengthen the Fund's balance sheet, which was leveraged to acquire key peat resources and build out Sun Gro's US plant network.
By comparison, in the first quarter of 2008, the Fund generated distributable cash of $2.3 million or $0.10 per unit, and distributed $5.0 million, or $0.225 per unit. The 2008 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)
Three Three
months ended months ended
March March
31 2009 31 2008
-----------------------------
Cash flows from operating activities $ (11,965) $ (9,074)
Adjustments:
Change in non-cash operating working
capital (1) 19,587 12,569
Sustaining capital expenditures (2) (364) (1,102)
Payments on capital leases and other term
loans (3) (159) (133)
Repayments on term loans(4) (1,612) -
-----------------------------
Distributable cash $ 5,487 $ 2,260
-----------------------------
-----------------------------
Distributable cash per unit $ 0.25 $ 0.10
-----------------------------
-----------------------------
Distributions declared per unit (5) $ - $ 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) Capital leases and equipment loans are used to finance certain
harvesting and transportation equipment. Government loans were
received to directly support certain capital projects. Payments on
these capital related loans and leases are included in the
calculation of distributable cash. .
(4) Payments in the period were made on a vendor note for business
acquisition and the variable-rate US$ term debt. In future periods,
Sun Gro has minimum repayments under its amended credit facilities.
(5) For 2009, the Fund is prohibited from making distributions under its
amended credit facilities.
Operating Results for the three months ended March 31, 2009
Comparative Statements of Earnings
(Loss) and Comprehensive Income
(In thousands of dollars
except per-unit amounts,
number of units Three months ended Three months ended
outstanding and EBs(1)) March 31, 2009 March 31, 2008
--------------------- --------------------
Revenue $ 68,961 100% $ 60,357 100%
Cost of goods sold 37,464 54% 36,928 61%
-------------- --------------
Gross profit 31,497 46% 23,429 39%
Distribution expenses 10,471 15% 13,064 22%
Selling expenses 5,245 8% 4,170 7%
General and administrative
expenses 7,201 10% 5,011 8%
-------------- --------------
Total operating expenses 22,917 33% 22,245 37%
-------------- --------------
Operating income 8,580 13% 1,184 2%
Other income (expense), net (1,229) -2% (1,550) -2%
Asset impairment - 0% (1,572) -3%
Interest expense (2,444) -4% (1,633) -3%
-------------- --------------
Earnings (loss) before
income taxes 4,907 7% (3,571) -6%
Income tax (provision)
recovery
Current (721) -1% (359) 0%
Future (861) -1% 2,569 4%
-------------- --------------
Income tax (provision)
recovery, net (1,582) -2% 2,210 4%
-------------- --------------
Net earnings (loss) for the
period 3,325 5% $ (1,361) -2%
Other comprehensive income:
Unrealized gain on
translating financial
statements of self-
sustaining foreign
operations 781 1% 2,228 4%
-------------- --------------
Comprehensive income for the
period $ 4,106 6% $ 867 2%
-------------- --------------
-------------- --------------
Basic and diluted earnings
(loss) per unit $ 0.15 $ (0.06)
-------------- --------------
-------------- --------------
Weighted average number of
units outstanding 22,284,681 22,284,681
-------------- --------------
-------------- --------------
Selected supplemental
revenue information
Volume in thousands of
EBs (1)
Peat and Bark-based Growing
Mixes 1,750 1,893
Peat Moss 801 1,148
Bulk Bark Mixes 616 580
Fertilizer and Minerals 86 96
Sand-based Mixes 169 141
-------------- --------------
Total 3,422 3,858
-------------- --------------
-------------- --------------
Average revenue per EB (1)
(US $)
Peat and Bark-based Growing
Mixes $ 20.58 $ 20.08
Peat Moss 10.92 10.85
Bulk Bark Mixes 8.48 9.16
Fertilizer and Minerals 46.06 43.88
Sand-based Mixes 11.26 10.77
-------------- --------------
Total $ 16.32 $ 15.95
-------------- --------------
-------------- --------------
Average revenue per EB (1)
(Canadian $)
Peat and Bark-based Growing
Mixes $ 25.35 $ 19.74
Peat Moss 13.46 10.66
Bulk Bark Mixes 10.43 9.01
Fertilizer and Minerals 56.60 43.16
Sand-based Mixes 13.87 10.58
-------------- --------------
Total $ 20.10 $ 15.68
-------------- --------------
-------------- --------------
(1) An EB, or equivalent bale, is Sun Gro's standard unit of measure,
referring to 10 cubic feet of product. Calculation of average revenue
per EB does not include transportation-related surcharges or the cost
of early payment discounts.
Outlook
Sun Gro anticipates that its sales volumes for 2009 will continue to be impacted by the US economy and the sluggishness in housing starts. However, its gross margin percentage should continue to 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. The company also expects to continue to benefit from reduced raw material costs, particularly for energy and fertilizers. The lower energy prices are continuing to have a positive impact on Sun Gro's packaging costs and should reduce harvesting costs in 2009. Similarly, transportation costs are expected to continue to be favourable, due to lower freight rates resulting from reduced demand and lower energy prices, as well as more efficient truck loading and routing.
The benefit of a stronger US 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 $1.05. An increase in the value of the US dollar will also result in an unrealized loss on the Fund's US dollar denominated debt. Foreign exchange contracts for the remainder of 2009 total US$45.5 million, of which US$20.5 million mature in the second quarter.
Based on these factors, the Fund expects that year-over-year EBITDA will improve in the second quarter, and that distributable cash through June 2009 will exceed the 2008 level. EBITDA for the first quarter of 2009 equalled more than half the $19.1 million recorded for the entire 2008 fiscal year.
Weaver said that the Fund believes that its cash flows from operating activities and the revolving operating facility will be sufficient to meet its working capital needs. "As we prepare to begin the 2009 harvest, we continue to be optimistic about the long-term outlook for Sun Gro." He continued, "Our number one priority remains to improve Sun Gro's profitability and create long term value for our unitholders by building on Sun Gro's long-established industry leadership."
Copies of management's discussion and analysis (MD&A) and the Fund's audited financial statements for the three months ended March 31, 2009 will be available at www.sedar.com and www.sungro.com on or about May 8, 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. 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. In particular, the disclosure in the "Outlook" section above includes forward-looking information regarding Sun Gro's anticipated sales volumes and gross margin for the balance of 2009, the Fund's anticipated year-over-year EBITDA and distributable cash through the second quarter of 2009. These statements are intended to provide investors with information that reflects management's reasonable expectations regarding the anticipated financial performance of Sun Gro and the Fund. Readers are cautioned that these statements may not be appropriate for other purposes. 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. 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, risks associated with 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 the information to reflect new events or circumstances, except as required by law.
Non-GAAP Measures
EBITDA is not an earnings measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP. Therefore, EBITDA of the Fund may not be comparable to EBITDA measures presented by other issuers. However, EBITDA is commonly used as an indicator of financial performance and the Fund believes that EBITDA is a useful supplemental measure that may assist in assessing the potential return on an investment in the Fund.
The calculation of EBITDA is based on cash flows from operating activities, adjusted for changes in non-cash operating working capital, interest expense and current income taxes.
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 April 28, 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.
Sun Gro Horticulture Income Fund
Consolidated Balance Sheet
(in thousands of dollars) (unaudited)
As at March 31, As at December 31,
Assets 2009 2008
--------------- ------------------
Current assets
Cash $ - $ 2,277
Accounts receivable 66,873 43,838
Inventories 40,131 43,003
Prepaid expenses and other assets 3,490 4,200
--------------- ------------------
110,494 93,318
Property, plant and equipment 120,689 123,492
Intangible assets 44,451 44,853
Other assets 1,418 1,379
--------------- ------------------
$ 277,052 $ 263,042
--------------- ------------------
--------------- ------------------
Liabilities and Unitholders' Equity
Current liabilities
Bank indebtedness $ 1,823 $ -
Operating line 44,037 34,109
Accounts payable and
accrued liabilities 20,461 21,204
Unrealized loss on foreign
currency contracts 8,699 8,843
Current portion of long-term debt 8,530 6,598
--------------- ------------------
83,550 70,754
Other liabilities 5,620 5,518
Unrealized loss on foreign
currency contracts 759 1,042
Long-term debt 72,754 76,455
Future income taxes 12,530 11,540
--------------- ------------------
175,213 165,309
Unitholders' equity
Capital contributions 211,726 211,726
Accumulated other comprehensive loss (11,419) (12,200)
Cumulative earnings 34,550 31,225
Cumulative distributions declared (133,018) (133,018)
--------------- ------------------
101,839 97,733
--------------- ------------------
$ 277,052 $ 263,042
--------------- ------------------
--------------- ------------------
Sun Gro Horticulture Income Fund
Consolidated Statements of Earnings (Loss) and Comprehensive Income
(in Sun Gro Horticulture Income Fund thousands of dollars except per-unit
amounts and number of units outstanding)
(unaudited)
Three months ended Three months ended
March 31, 2009 March 31, 2008
-----------------------------------------
Revenue $ 68,961 $ 60,357
Cost of goods sold 37,464 36,928
-----------------------------------------
Gross profit 31,497 23,429
Distribution expenses 10,471 13,064
Selling expenses 5,245 4,170
General and administrative expenses 7,201 5,011
-----------------------------------------
Total operating expenses 22,917 22,245
-----------------------------------------
Operating income 8,580 1,184
Other income (expense), net (1,229) (1,550)
Asset impairment - (1,572)
Interest expense (2,444) (1,633)
-----------------------------------------
Earnings (loss) before income taxes 4,907 (3,571)
Income tax (provision) recovery
Current (721) (359)
Future (861) 2,569
-----------------------------------------
Income tax (provision) recovery, net (1,582) 2,210
-----------------------------------------
Net earnings (loss) for the period 3,325 (1,361)
Other comprehensive income:
Unrealized gain on translating
financial statements of
self-sustaining foreign operations 781 2,228
-----------------------------------------
Comprehensive income for the period $ 4,106 $ 867
-----------------------------------------
-----------------------------------------
Basic and diluted earnings
(loss) per unit $ 0.15 $ (0.06)
-----------------------------------------
-----------------------------------------
Weighted average number
of units outstanding 22,284,681 22,284,681
-----------------------------------------
-----------------------------------------
Sun Gro Horticulture Income Fund
Consolidated Statements of Changes in Unitholders' Equity
(in thousands of dollars) (unaudited)
Accumulated
Other
Unit- Compre- Cumu- Cumu-
holders' hensive lative lative
Capital Loss Earnings Distributions Total
----------------------------------------------------------
Balance -
December
31, 2007 $ 211,726 $ (22,668) $ 73,286 $(123,825) $ 138,519
Loss for
the year - - (42,061) - (42,061)
Other
compre-
hensive
income
for the year - 10,468 - - 10,468
Distributions
for the year - - - (9,193) (9,193)
----------------------------------------------------------
Balance -
December
31, 2008 $ 211,726 $ (12,200) $ 31,225 $(133,018) $ 97,733
Earnings for
the period - - 3,325 - 3,325
Other
compre-
hensive
income for
the period - 781 - - 781
----------------------------------------------------------
Balance -
March
31, 2009 $ 211,726 $ (11,419) $ 34,550 $(133,018) $ 101,839
----------------------------------------------------------
----------------------------------------------------------
Sun Gro Horticulture Income Fund
Consolidated Statements of Cash Flows
(in thousands of dollars) (unaudited)
Three months ended Three months ended
March 31, 2009 March 31, 2008
-----------------------------------------
Cash flows from
operating activities
Net earnings (loss)
for the period $ 3,325 $ (1,361)
Items not affecting cash
Depreciation, depletion
and accretion 3,266 3,126
Amortization of
intangible assets 626 629
Asset impairment - 1,572
Unrealized loss (gain) on
foreign currency contracts (427) 2,523
Unrealized foreign exchange
(gain) loss on US
dollar assets and liabilities 1,041 (425)
Loss (gain) on disposal
of property, plant
and equipment (1,070) -
Future income tax recovery 861 (2,569)
-----------------------------------------
7,622 3,495
Change in non-cash
operating working capital (19,587) (12,569)
-----------------------------------------
(11,965) (9,074)
Cash flows from
investing activities
Installment payment on
vendor note for
business acquisition (496) (392)
Additions to property,
plant and equipment (364) (1,102)
Proceeds from disposal
of property, plant
and equipment 1,346 3
-----------------------------------------
486 (1,491)
Cash flows from
financing activities
Distributions paid
to unitholders - (5,013)
Repayment of term loans (2,366) -
Increase in operating line 9,927 15,508
Payments on capital leases
and other term loans (159) (133)
-----------------------------------------
7,402 10,362
Effect of exchange
rate changes on cash (23) (198)
-----------------------------------------
Decrease (increase)
in bank indebtedness (4,100) (401)
Cash (bank indebtedness) -
beginning of the period 2,277 (1,966)
-----------------------------------------
Bank indebtedness -
end of the period $ (1,823) $ (2,367)
-----------------------------------------
-----------------------------------------
Supplemental cash flow information
Interest paid $ 2,534 $ 1,898
Income taxes paid $ 21 $ 88
%SEDAR: 00017490E