Sun Gro Horticulture Income Fund Releases 2010 Third Quarter and Nine-Month Results

Nov. 9, 2010 (Canada NewsWire Group) --

Fund further strengthens balance sheet; Sun Gro continues to improve sales
volumes of core growing mix products, negative impacts of slower peat moss
sales and unfavourable currency exchange rates persist

TRADING SYMBOL: Toronto Stock Exchange - GRO.UN

Sun Gro Horticulture Income Fund will hold a conference call and webcast to discuss 2010 third quarter and nine-month financial results on Wednesday, November 10 at 7:30 am Pacific Time (10:30 am Eastern). The call can be accessed by dialing: 1-888-231-8191 or 647-427-7450 (Greater Toronto Area and International).

A replay will be available through November 23, 2010 at: 1-800-642-1687 or 416-849-0833. Passcode 21672081.

To access the live and archived webcast, please go to: http://www.investorcalendar.com/IC/CEPage.asp?ID=162397 or to the Fund's website at:
www.sungro.com.

VANCOUVER, Nov. 9 /CNW/ - Sun Gro Horticulture Income Fund (the Fund or Sun Gro) today reported financial results for the three and nine months ended September 30, 2010. For the three-month period, which represents the third quarter of the Fund's 2010 fiscal year, its primarily US dollar denominated sales revenues were just slightly down from the amount recorded in 2009 when reported in US dollars. In Canadian dollars, third quarter revenues were down by 9% year-over-year, due to the effect of a significantly stronger Canadian dollar and a continued slowdown in orders of straight peat moss. To combat the US dollar erosion, Sun Gro implemented a sales price increase on its peat and bark-based growing mixes. Sales mix improvements during the quarter drove a 2% increase in average US dollar pricing.

Overall sales volumes, as measured in equivalent bales, or EBs (referring to 10 cubic feet of product), declined by 6%. The continued strength of Sun Gro's core product offering was reflected in a 10% increase in sales volumes of its higher-margin professional compressed mixes. The higher mix sales were offset by the slower peat moss orders and ongoing weakness in sales of sand-based mixes for construction and renovation of golf courses and sports fields. The drop in sales of straight peat moss was driven by generally reduced demand and aggressive competitive pricing in certain regions during the quarter.

The stronger Canadian dollar had a negative impact on gross margin and a favourable impact on selling, general and administrative expenses. Distribution costs decreased as the positive effect of exchange rates on US freight costs and the lower sales volumes more than offset a slight increase in per-EB shipment costs.

Sun Gro's annual peat harvest proceeded throughout the quarter and was completed in late October. Overall harvest volumes equalled the prior year level. However, poor weather conditions during the third quarter, especially in September, resulted in a 27% year-over-year decrease in volumes harvested during the three months. Unfavourable operating cost variances at certain facilities as a result of the lower harvest volumes effectively increased costs by approximately $1.0 million. During the quarter, to ensure it will have sufficient supply to meet projected customer demand until the 2011 harvest commences, the company pre-positioned some of its eastern Canadian peat moss harvest to the Western US.

"We can mitigate but not fully control the impact of weather on our peat harvest, and we were fortunate to have been able to make up the Q3 shortfall in October, as last year's harvest ended in September," said Mitch Weaver, President and CEO of Sun Gro and a Trustee of the Fund. "We expect that the measures we took during the quarter to ensure raw material supply is matched with regional demand will pay off as we move into the 2011 growing season."

Weaver added, "While our Q3 operating performance did not meet our expectations, we are pleased with the sustained growth of our professional compressed mix sales and our on-going progress in strengthening our balance sheet. We have continued to meet our aggressive debt reduction targets and reduce our interest expense. As a result, our quarter-end senior leverage ratio of 2.7 was well below the 3.3 we reported a year ago."

Third Quarter Financial Results
Sun Gro's revenue for the seasonally slower third quarter was $41.5 million, a decrease of $4.1 million from the $45.6 million reported in 2009. The average value of the Canadian dollar compared to the US dollar for the three months appreciated 6% year-over-year, effectively reducing revenue by approximately $2.0 million. Lower sales volumes accounted for the balance of the revenue reduction.

The less favourable exchange rates and poor peat harvest in Central and Western Canada reduced third quarter gross margin to 42% from 46% in 2009 and drove a 24% decrease in EBITDA. These factors, together with the lower volumes, brought operating income down to $0.2 million from the $3.2 million in 2009.

Earnings during the quarter were also affected significantly by the change in exchange rates and by the Fund's foreign currency management program. Maturing forward currency contracts resulted in realized gains of $1.3 million, compared to losses of $1.0 million in Q3 2009. The marked-to-market value of its forward foreign currency contract position resulted in an unrealized gain of $1.2 million, compared to an unrealized gain of $3.8 million last year. Consequently, the Fund recorded earnings of $2.9 million, compared to earnings of $3.7 million in 2009.

Capital spending was $0.8 million, up slightly from 2009, and was focused on plant improvements to enhance efficiency at certain locations. During the quarter, Sun Gro proceeded with its acquisition of a new 110-cubic-foot baler for its Seba Beach, Alberta plant. The new baler will allow the company to package products more efficiently and will reduce its use of plastic. Installation is on schedule for start-up by year-end.  

Balance Sheet Improvements
In the third quarter, Sun Gro reduced its term-debt obligations by a total of $1.6 million, repaying principal of $0.8 million on term loans and other debt, and depositing $0.8 million (US$0.8 million) to a restricted cash account. Drawings on the Fund's revolving operating facility at September 30, 2010 were reduced to $21.8 million from $24.5 million at June 30, 2010, and were also down year-over-year from borrowings of $24.0 million at September 30, 2009. The Fund's improved balance sheet enabled it to reduce third quarter interest expense by $0.6 million compared to Q3 2009. At September 30, 2010, the Fund was in compliance with all of its debt covenants.

Under the terms of its credit facilities, the Fund is currently prohibited from making distributions to unitholders. The allocation of available funds to debt reduction has significantly impacted distributable cash. For the nine months ended September 30, 2010, after deducting the $10.6 million of debt repayments and restricted cash deposits made during the period, distributable cash was $2.3 million, or $0.10 per unit. This compares to distributable cash of $2.6 million, or $0.12 per unit in the first nine months of 2009.

Nine-Month Financial Results
In US dollar terms, revenue for the nine months ended September 30, 2010 increased by 3% to $155.4 million from $151.4 million in the same period of 2009. In Canadian dollars, revenue decreased by 10% to $161.8 million from $179.5 million last year. Over the year-to-date, the average value of the Canadian dollar compared to the US dollar appreciated by 13%. This change effectively reduced Sun Gro's 2010 revenue by approximately $19.0 million. The adverse effect of exchange rates was partially offset by a 1% increase in overall sales volumes and changes in Sun Gro's sales mix. As with the quarterly result, nine-month sales volumes of higher-value professional mix products increased significantly and sales of lower value sand-based mixes decreased, driving a 2% improvement in average US dollar pricing.

Sun Gro's nine-month gross margin of 41% was down by 3% from the 44% recorded in 2009. The gross margin reduction brought operating income down to $8.3 million from the $16.6 million reported for the first nine months of 2009. Had exchange rates remained constant, gross margin and operating income would have been consistent with the prior year. Nine-month EBITDA of $21.9 million was equal to the 2009 amount. Due to the impact of exchange rate fluctuations on the Fund's forward foreign currency contracts, net earnings decreased to $3.2 million from $16.0 million last year.

Reconciliation of net earnings to earnings before interest, taxes, depreciation and amortization (EBITDA)

Statement of Distributable Cash

(1) Non-cash operating 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 made 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 were made to a restricted cash account related to the Fund's fixed-rate term debt.

(5) Repayments were made on a vendor note for a business acquisition and on the Fund's variable-rate term debt.

(6) Under its amended credit facilities, the Fund is prohibited from making distributions.

Operating Results for the three months ended September 30, 2010 and 2009

(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.

Operating Results for the nine months ended September 30, 2010 and 2009

(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.

Strategic Review
During the third quarter, as announced September 7, 2010, the Fund formed a Special Committee of the Board of Trustees to explore strategic alternatives aimed at enhancing unitholder value. These could potentially include the sale of Sun Gro, a merger or other business combination, or a sale of all or a substantial portion of Sun Gro's assets. The Board also adopted a unitholder rights plan on September 7, 2010. Notice for filing of this plan was accepted by the TSX on October 8, 2010. The rights plan is designed to provide a fair and equitable process for the completion of a possible transaction, as well as to allow the Board of Trustees and unitholders sufficient time to consider fully any potential transaction involving the acquisition of 20% or more of the outstanding units and, if appropriate, for the Board to seek alternatives to such a transaction.

Outlook
Over the near term, Sun Gro anticipates that its sales volumes will not exceed 2009 levels. "The majority of our top 10 professional compressed mix customers increased their volumes with us in the third quarter, attesting to the stability of our greenhouse business. However, we expect that sales to nursery customers will continue to be negatively impacted by significantly reduced new home construction activity in the US," said Weaver.

He continued, "Going into the fourth quarter, we remain focused on reducing debt in order to further strengthen our balance sheet. We are also continuing to work to increase our operating efficiency through initiatives such as the standardization of our professional packaging." Weaver added that the Fund does not expect to incur further additional expenses as a result of the Q3 peat harvest shortfall.

Foreign currency contracts for the remainder of 2010 total US$10.0 million at an average rate of CDN$1.11 (US$0.90), representing substantially all of Sun Gro's anticipated purchases of Canadian dollars for the balance of the year. For 2011, the Fund has entered into foreign currency contracts totalling US$41.0 million at an average rate of CDN$1.05 (US$0.95), which equals approximately two-thirds of its anticipated Canadian dollar purchases. Copies of management's discussion and analysis (MD&A) and the Fund's unaudited financial statements for the three and nine months ended September 30, 2010 will be available at www.sedar.com and at www.sungro.com on or about November 10, 2010. 

Forward-Looking Information
This news release contains certain forward-looking statements within the meaning of applicable Canadian provincial securities laws. All statements, other than statements of historical fact, are forward-looking statements or information. When used in this news release, the words "anticipate", "will", "believe", "estimate", "expect", "intend", "target", "plan", "goals", "objectives", "pro forma", "forecast", "schedule", "may" and other similar words and expressions, identify forward-looking statements or information.

These forward-looking statements or information relate to, among other things: the expected impact of measures taken to match raw material supply with regional demand; the completion of the new baler installation at Sun Gro's Seba Beach facility; expected sales volumes; expected expenses as a result of the peat harvest shortfall; and anticipated Canadian dollar purchases for the balance of 2010 and 2011. These statements reflect the current views of the Fund with respect to future events and are necessarily based upon a number of assumptions and estimates that, while considered reasonable by the Fund, are inherently subject to significant business, economic, political and social uncertainties and contingencies.  Many factors, both known and unknown, could cause actual results, performance or achievements to be materially different from the results, performance or achievements that are or may be expressed or implied by such forward-looking statements contained in this news release and the Fund has made assumptions based on or related to many of these factors. Such factors include, without limitation, risks relating to: currency fluctuations; interest rate fluctuations; Sun Gro's ability to meet its financial obligations as they fall due; financial loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations; Sun Gro's resource supply; competition in the growing media industry; the effect of seasonality, weather and other related factors on Sun Gro's production and sales; environmental regulations and related requirements; climate and its ability to affect the cost and quality of Sun Gro's harvest; potential product liabilities, regulatory requirements and labour relations connected with Sun Gro's operations; Sun Gro's ability to retain key personnel; potential litigation; unitholder distributions; the Fund's reliance on Sun Gro's operations; unitholder limited liability; income tax matters; the eligibility of the Fund's units under registered retirement savings plans, deferred profit sharing plans, registered retirement income funds and registered education savings plans; the nature of and statutory rights associated with units; distributions to unitholders upon redemption of units or termination of the Fund; dilution of existing unitholder interests on the issuance of additional units; restrictions on Sun Gro's potential growth under its current income trust structure; the inability to obtain required consents, permits or approvals including unitholder and court approval of the proposed conversion into a corporation; the completion of the proposed conversion; and those factors that have been identified under the caption "Risk Factors" in the Fund's Annual Information Form filed on SEDAR at www.sedar.com. Although the Fund has attempted to identify important factors that could cause actual results to differ materially, there may be other factors that cause results not to be as anticipated, estimated, described or intended. The Fund does not intend and does not assume any obligation, to update the forward-looking statements or information to reflect changes in assumptions or changes in circumstances where any other events affecting such statements or information, other than as required by applicable securities laws. Unitholders are cautioned against attributing undue reliance on forward-looking statements or information.

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 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 November 9, 2010, there were 22,284,681 units of the Fund issued and outstanding.

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 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)

Sun Gro Horticulture Income Fund
Consolidated Statements of Earnings and Comprehensive Income
(in thousands of dollars except per-unit amounts and number of units outstanding)

Sun Gro Horticulture Income Fund
Consolidated Statements of Changes in Unitholders' Equity
(in thousands of dollars)

Sun Gro Horticulture Income Fund
Consolidated Statements of Cash Flows
(in thousands of dollars)

%SEDAR: 00017490E

Bradley A. Wiens, Vice-President, Finance and CFO
Sun Gro Horticulture Income Fund
Tel: (425) 373-3603
Email: bradw@sungro.com
Website: www.sungro.com