Sun Gro sustains improved performance; Fund delivers significantly improved net earnings, reduces debt by $6.1 million TRADING SYMBOL: Toronto Stock Exchange - GRO.UN Sun Gro Horticulture Income Fund will hold a conference call and webcast to discuss 2009 second quarter results on Thursday, August 6, 2009 at 7:30 am Pacific Time (10:30 am Eastern). The call can be accessed by dialing: 1-866-249-2157 or 416-915-5648 (Greater Toronto Area and International). A replay will be available through August 20, 2009 at: 1-877-289-8525 or 416-640-1917. Passcode 21311453 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)146701 or to the Fund's website at: www.sungro.com.
VANCOUVER, Aug. 5 /CNW/ - Sun Gro Horticulture Income Fund (the Fund) today reported financial results for the three months ended June 30, 2009, which represents the second quarter of its 2009 fiscal year. The Fund's wholly-owned subsidiary, Sun Gro Horticulture Canada Ltd. (Sun Gro or the company) recorded operating income of $4.9 million, up from $0.4 million in the second quarter of 2008. Year-over-year, revenues increased by 5% and EBITDA was up by 15%, while gross margin improved to 41% from 39% in 2008. Net earnings for the quarter also improved markedly, swinging from a loss of $21.2 million in 2008 to a profit of $9.0 million in 2009.
As in the first quarter of the year, these positive results were achieved despite lower sales volumes as a result of the difficult economic conditions. The performance improvement was driven by a combination of factors. Revenues and gross margin benefited from a stronger US dollar, while the favourable effect of Sun Gro's 2008 productivity initiatives continued to be reflected in critical elements of its cost structure, most notably transportation and manufacturing. Lower energy prices also again contributed to reduced costs during the quarter.
"As demonstrated by our recent results and in line with our expectations, the cash generating capacity of Sun Gro has continued to improve, even in the current difficult market," said Mitch Weaver, President and CEO of Sun Gro and a Trustee of the Fund. "Moving through the second half of the year, we will be maintaining our focus on improving our operating infrastructure as we continue to reduce our debt."
Second Quarter Financial Results
Revenues for the second quarter increased to $64.9 million from $62.1 million in 2008, despite a 13% decrease in overall sales volumes as measured in equivalent bales (EBs), referring to 10 cubic feet of product. US dollar product pricing remained stable, while the average value of the US dollar strengthened by 14% compared to the second quarter of 2008. Sales volumes declined in all product categories except sand-based mixes. Lower sales of private label retail products brought peat and bark-based growing mix volumes down by 4%. Volumes of straight peat moss decreased by 30%, due to the combined impact of supply restrictions following the 2008 harvest shortfall, the loss of a large non-grower account and reduced demand. Volumes of bulk bark mixes decreased by 13%, primarily as a result of reduced sales of landscape bark nuggets from Sun Gro's Valdosta, Georgia facility. In the sand-based mix category, due mainly to the successful repositioning of the company's sales focus from new golf course development to golf course and sports field renovation, volumes increased by 36%.
EBITDA for the second quarter increased to $6.1 million from $5.3 million in 2008. The gain was driven by Sun Gro's improved cost structure and the positive impact of the stronger US dollar on revenues. The EBITDA growth was achieved despite a $2.4 million realized loss on foreign exchange contracts that was recorded during the quarter, compared to a gain of $1.5 million in the same period of 2008.
Sun Gro's annual peat harvest began in May and should proceed through October. Due to unfavourable weather in several regions, total volumes harvested during the second quarter were slightly lower than in 2008, and significantly below historical averages, resulting in production inefficiencies at certain plants.
Reconciliation of net earnings (loss) to earnings before interest, taxes,
depreciation and amortization (EBITDA)
Three months Three months
ended ended
(in thousands of dollars) June 30, June 30,
2009 2008
---------------------------
Net earnings (loss) of the period $ 9,028 $ (21,192)
Adjustments:
Interest expense 2,593 1,776
Depreciation, depletion and accretion 3,209 3,128
Amortization of intangibles 612 636
Goodwill and asset impairments - 23,373
Unrealized (gain) loss on foreign currency
contracts (8,260) 305
Unrealized foreign exchange (gain) loss on
US dollar assets and liabilities (3,039) 525
Loss (gain) on disposal of property, plant
and equipment (4) 34
Income tax provision (recovery), net 1,912 (3,323)
---------------------------
EBITDA $ 6,051 $ 5,262
---------------------------
---------------------------
Balance Sheet Improvements
During the second quarter, Sun Gro reduced its term debt and other loans by $3.1 million. In addition, complying with the terms of its recently amended senior note agreement, it deposited $3.0 million to a restricted cash account. Drawings on the Fund's revolving operating facility at the end of the second quarter were $27.9 million, down slightly from a year ago. At June 30, 2009, the Fund was in compliance with all of its debt covenants.
Distributable Cash
In the three months ended June 30, 2009, the Fund generated negative distributable cash of $3.2 million, or ($0.15) per unit, after the $6.1 million of term debt repayments and restricted cash deposits. Under its recently amended credit facility, the Fund is prohibited from making distributions during 2009. All available funds are now being used to strengthen the Fund's balance sheet, which in recent years was leveraged to acquire key peat resources and build out Sun Gro's US plant network.
By comparison, in the second quarter of 2008, the Fund generated distributable cash of $2.2 million, or $0.10 per unit, and distributed $2.5 million, or $0.11 per unit.
Statement of Distributable Cash
Three months Three months
ended ended
(in thousands of dollars June 30, June 30,
except per-unit amounts) 2009 2008
---------------------------
Cash flows from operating activities $ 23,777 $ 17,968
Adjustments:
Change in non-cash operating working
capital (1) (20,468) (15,155)
Sustaining capital expenditures (2) (472) (506)
Payments on capital leases and other term
loans (3) (126) (136)
Restricted cash (4) (2,960) -
Repayments on term loans(5) (2,985) -
---------------------------
Distributable cash $ (3,234) $ 2,171
---------------------------
---------------------------
Distributable cash per unit $ (0.15) $ 0.10
---------------------------
---------------------------
Distributions declared per unit (6) $ - $ 0.11
---------------------------
---------------------------
(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 2009 period were made to a restricted cash account
related to the Fund's fixed-rate term debt.
(5) Repayments in the 2009 period were made on the Fund's variable-rate
term debt.
(6) For 2009, the Fund is prohibited from making distributions under its
amended credit facilities.
Operating Results for the three months ended June 30, 2009 and 2008
Comparative Statements of Earnings (Loss)
and Comprehensive Income (Loss)
(In thousands of dollars except
per-unit amounts, number of Three months ended Three months ended
units outstanding and EBs(1)) June 30, 2009 June 30, 2008
------------------- -------------------
Revenue $ 64,893 100% $ 62,053 100%
Cost of goods sold 38,482 59% 37,609 61%
------------ ------------
Gross profit 26,411 41% 24,444 39%
Distribution expenses 11,028 17% 14,984 24%
Selling expenses 4,920 7% 4,129 7%
General and administrative
expenses 5,556 9% 4,906 8%
------------ ------------
Total operating expenses 21,504 33% 24,019 39%
------------ ------------
Operating income 4,907 8% 425 0%
Other income 8,626 13% 209 0%
Asset impairment - 0% (23,373) -37%
Interest expense (2,593) -4% (1,776) -2%
------------ ------------
Earnings (loss) before income
taxes `10,940 17% (24,515) -39%
Income tax (provision) recovery
Current (149) 0% (673) -1%
Future (1,763) -3% 3,996 6%
------------ ------------
Income tax (provision) recovery,
net (1,912) -3% 3,323 5%
------------ ------------
Net earnings (loss) for the period 9,028 14% $ (21,192) -34%
Other comprehensive income:
Unrealized gain on translating
financial statements of
self-sustaining foreign
operations (3,684) -6% (866) -1%
------------ ------------
Comprehensive income (loss) for
the period $ 5,344 8% $ (22,058) -35%
------------ ------------
------------ ------------
Basic and diluted earnings (loss)
per unit $ 0.41 $ (0.95)
------------ ------------
------------ ------------
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 1,638 1,702
Peat Moss 1,002 1,433
Bulk Bark Mixes 695 800
Fertilizer and Minerals 76 90
Sand-based Mixes 256 188
------------ ------------
Total 3,667 4,213
------------ ------------
------------ ------------
Average revenue per EB (1)
(US $)
Peat and Bark-based Growing
Mixes $ 19.95 $ 19.59
Peat Moss 10.87 10.70
Bulk Bark Mixes 7.94 8.39
Fertilizer and Minerals 41.18 43.48
Sand-based Mixes 11.07 11.43
------------ ------------
Total $ 15.01 $ 14.59
------------ ------------
------------ ------------
Average revenue per EB (1)
(Canadian $)
Peat and Bark-based Growing
Mixes $ 23.69 $ 19.82
Peat Moss 12.82 10.82
Bulk Bark Mixes 9.41 8.49
Fertilizer and Minerals 48.58 43.98
Sand-based Mixes 12.89 11.51
------------ ------------
Total $ 17.78 $ 14.75
------------ ------------
------------ ------------
(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
Until there is a substantial improvement in general economic conditions and a resurgence of US new home construction activity, Sun Gro anticipates that opportunities to improve sales volumes will be limited. Over the balance of the year, the Fund will continue to focus on improving its cost structure. It 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 packaging costs and harvest fuel costs. Similarly, transportation costs are expected to remain favourable, due to lower freight rates resulting from reduced demand and the lower energy prices, as well as more efficient truck loading and routing.
Foreign exchange contracts for the remainder of 2009 total US$29.0 million, of which US$20.0 million mature in the third quarter. For 2010, Sun Gro has entered into foreign exchange contracts totaling US$35.0 million at an average rate of $1.16 (or US$0.84).
"Based on the current market outlook and performance trends, we expect that our third quarter sales volumes will be in line with the 2008 level," said Weaver. "Across our North America-wide network, we will be working hard to support our improved performance by driving up the efficiency of our industry-leading production, distribution and sales infrastructures." He added that the Fund is cautious, but optimistic, about the outcome of the year's peat harvest. "The geographic diversity of our peat resources goes a long way towards mitigating weather risk in any one region during harvesting, but the reality is that no one can control the weather."
Copies of management's discussion and analysis (MD&A) and the Fund's audited financial statements for the three months ended June 30, 2009 will be available at www.sedar.com and www.sungro.com on or about August 11, 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 for the balance 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 net earnings (loss) for the period, adjusted for interest expense, income tax provision or recovery, depreciation, depletion and accretion, amortization of intangibles, goodwill and asset impairments, gain or loss on disposal of property, plant and equipment, unrealized gain or loss on foreign currency contracts and unrealized foreign exchange gain or loss on US dollar assets and liabilities.
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, sustaining capital expenditures, government grants and government loans, other loans for certain production equipment, capital lease obligations, repayments on term loans, restricted cash payments 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 August 5, 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 is the largest producer and distributor of peat and bark-based growing mixes to professional plant growers in the US and Canada. It is also North America's largest producer and distributor of sphagnum peat moss, with approximately 65,000 acres of peat bogs under lease. Sun Gro sells its professional products primarily to greenhouse, nursery and specialty crop growers. The company also sells peat moss and potting mixes to retail customers, either by way of private label partnerships or under its own brand names. In addition, Sun Gro sells sand-based mixes to golf course developers and landscapers. The US accounts for approximately 81% of its sales volumes. 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 As at
June 30, December 31,
2009 2008
Assets ------------- -------------
Current assets
Cash $ - $ 2,277
Accounts receivable 45,389 43,838
Inventories 34,426 43,003
Prepaid expenses and other
assets 2,410 4,200
------------- -------------
82,225 93,318
Property, plant and equipment 116,770 123,492
Intangible assets 42,852 44,853
Unrealized gain on foreign
currency contracts 792 -
Restricted cash 3,102 -
Other assets 1,361 1,379
------------- -------------
$ 247,102 $ 263,042
------------- -------------
------------- -------------
Liabilities and Unitholders' Equity
Current liabilities
Bank indebtedness $ 1,107 $ -
Operating line 27,874 34,109
Accounts payable and accrued
liabilities 16,775 21,204
Unrealized loss on foreign
currency contracts 1,990 8,843
Current portion of long-term debt 7,971 6,598
------------- -------------
55,717 70,754
Other liabilities 5,699 5,518
Unrealized loss on foreign
currency contracts - 1,042
Long-term debt 64,772 76,455
Future income taxes 13,731 11,540
------------- -------------
139,919 165,309
Unitholders' equity
Capital contributions 211,726 211,726
Accumulated other comprehensive
loss (15,103) (12,200)
Cumulative earnings 43,578 31,225
Cumulative distributions declared (133,018) (133,018)
------------- -------------
107,183 97,733
------------- -------------
$ 247,102 $ 263,042
------------- -------------
------------- -------------
Sun Gro Horticulture Income Fund
Consolidated Statements of Earnings (Loss)
and Comprehensive Income (Loss)
(in thousands of dollars except per-unit
amounts and number of units outstanding)
(unaudited)
Three months Three months
ended ended
June 30, 2009 June 30, 2008
----------------------------
Revenue $ 64,893 $ 62,053
Cost of goods sold 38,482 37,609
----------------------------
Gross profit 26,411 24,444
Distribution expenses 11,028 14,984
Selling expenses 4,920 4,129
General and administrative expenses 5,556 4,906
----------------------------
Total operating expenses 21,504 24,019
----------------------------
Operating income 4,907 425
Other income (expense), net 8,626 209
Goodwill and asset impairments - (23,373)
Interest expense (2,593) (1,776)
----------------------------
Earnings (loss) before income taxes 10,940 (24,515)
Income tax (provision) recovery
Current (149) (673)
Future (1,763) 3,996
----------------------------
Income tax (provision) recovery, net (1,912) 3,323
----------------------------
Net earnings (loss) for the period 9,028 (21,192)
Other comprehensive income:
Unrealized (loss) gain on
translating financial statements
of self-sustaining foreign
operations (3,684) (866)
----------------------------
Comprehensive income (loss) for
the period $ 5,344 $ (22,058)
----------------------------
----------------------------
Basic and diluted earnings (loss)
per unit $ 0.41 $ (0.95)
----------------------------
----------------------------
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)
Accumu-
lated
Other
Unit- Compre- Cumulative
holders' hensive Cumulative Distri-
Capital Loss Earnings butions Total
----------------------------------------------------
Balance
- December 31,
2007 $ 211,726 $(22,668) $ 73,286 $(123,825) $ 138,519
Loss for the year - - (42,061) - (42,061)
Other comprehensive
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 - - 12,353 - 12,353
Other comprehensive
loss for the
period - (2,903) - - (2,903)
----------------------------------------------------
Balance - June 30,
2009 $ 211,726 $(15,103) $ 43,578 $(133,018) $ 107,183
----------------------------------------------------
----------------------------------------------------
Sun Gro Horticulture Income Fund
Consolidated Statements of Cash Flows
(in thousands of dollars) (unaudited)
Three months Three months
ended ended
June 30, 2009 June 30, 2008
------------- -------------
Cash flows from operating
activities
Net earnings (loss) for the
period $ 9,028 $ (21,192)
Items not affecting cash
Depreciation, depletion and
accretion 3,209 3,128
Amortization of intangible
assets 612 636
Goodwill impairment - 23,373
Unrealized (gain) loss on
foreign currency contracts (8,260) 305
Unrealized foreign exchange
(gain) loss on US dollar assets
and liabilities (3,039) 525
Loss (gain) on disposal of
property, plant and equipment (4) 34
Future income tax provision
(recovery) 1,763 (3,996)
------------- -------------
3,309 2,813
Change in non-cash operating
working capital 20,468 15,155
------------- -------------
23,777 17,968
Cash flows from investing activities
Additions to property, plant
and equipment (472) (506)
Proceeds from disposal of
property, plant and equipment 24 12
------------- -------------
(448) (494)
Cash flows from financing activities
Distributions paid to unitholders - (3,343)
Proceeds from term loans - 50,425
Restricted cash payments (2,960) -
Repayment of term loans (2,985) (39,790)
Decrease in operating line (16,163) (23,297)
Payments on capital leases and
other term loans (126) (136)
------------- -------------
(22,234) (16,141)
Effect of exchange rate changes on cash (379) (475)
------------- -------------
Decrease in bank indebtedness 716 858
Bank indebtedness - beginning
of the period (1,823) (2,367)
------------- -------------
Bank indebtedness - end
of the period $ (1,107) $ (1,509)
------------- -------------
------------- -------------
Supplemental cash flow information
Interest paid $ 2,464 $ 1,408
Income taxes paid (refund), net $ (43) $ 208
%SEDAR: 00017490E