Sun Gro Horticulture Income Fund Releases 2010 First Quarter Results
Fund continues to strengthen balance sheet; Sun Gro posts 9% sales volume growth
TRADING SYMBOL: Toronto Stock Exchange - GRO.UN
Sun Gro Horticulture Income Fund will hold a conference call and webcast to discuss 2010 first quarter financial results on Tuesday, May 11 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 May 24, 2010 at: 1-800-642-1687 or 416-849-0833. Passcode 73267894.
To access the live and archived webcast, please go to: http://www.investorcalendar.com/IC/CEPage.asp?ID=158387 or to the Fund's website at: www.sungro.com.
VANCOUVER, May 10 /CNW/ - Sun Gro Horticulture Income Fund (the Fund) today reported financial results for the three months ended March 31, 2010, which represents the first quarter of its 2010 fiscal year. Sales volumes for the period increased by 9%, as measured in equivalent bales, or EBs (referring to 10 cubic feet of product), compared to the same three months of 2009. US dollar revenues increased by a similar amount. As expected, the stronger Canadian dollar reduced overall revenues and gross margin, but positively impacted selling, general and administrative expenses. Distribution costs were up due to the higher sales volumes and a slight increase in per-EB costs on shipments from US facilities. These factors drove a relatively modest 4% reduction in EBITDA from the quarterly record amount reported for the same three months of 2009. Net earnings increased by 76% from the first quarter of last year.
"Given that the average value of the Canadian dollar compared to the US dollar appreciated by 20% from the first quarter of last year, we are pleased with our performance in the first three months of 2010," said Mitch Weaver, President and CEO of Sun Gro and a Trustee of the Fund. "Our cost structure benefited from the higher volumes as well as our ongoing focus on production efficiency. We continued to reduce our debt obligations, as well as our interest expense, and our senior leverage ratio remained well below the level permitted under our debt covenants."
First Quarter Financial Results
Revenue for the first quarter of 2010 was $64.2 million, down from $69.0 million in 2009. The average Canadian dollar exchange rate for the three months strengthened to CDN$1.04 (US$0.96) from CDN$1.24 (US$0.80) last year, effectively decreasing Sun Gro's revenue by approximately $10.0 million. The adverse effect of exchange rates was partially offset by the 9% increase in overall sales volumes and sales mix changes, as sales volumes of higher value professional growing mixes increased significantly. Improved economic conditions in certain US markets resulted in stronger sales to vegetable and greenhouse growers, driving a 12% increase in peat and bark-based growing mix volumes. Sales volumes of straight peat moss increased by 18%, due mainly to increased customer demand.
The less favourable exchange rates reduced Sun Gro's gross margin to 42% from 46% in 2009. Had exchange rates remained constant year-over-year, gross margin would have been maintained at 46%. During the quarter, the Fund saw realized gains on foreign currency contracts, compared to losses in 2009. While operating income (which excludes gains and losses on foreign currency contracts) of $6.1 million was down from $8.6 million in 2009, net earnings improved to $5.9 million from $3.3 million last year. EBITDA decreased by $0.5 million to $10.3 million from $10.8 million in same period of 2009.
Capital spending in the first three months of 2010 increased from the prior year level, focusing on plant improvements to enhance efficiency and upgrade production capacity. During the quarter, Sun Gro began installation of a new 110-cubic-foot baler at its Seba Beach, Alberta plant. The new baler is expected to be in service by the fourth quarter of 2010 and will allow Sun Gro to cost-effectively meet increased demand from the plant while reducing its use of plastic packaging.
Reconciliation of net earnings to earnings before interest, taxes, depreciation and amortization (EBITDA)
Three months Three months
ended ended
March 31, March 31,
(in thousands of dollars) 2010 2009
----------------------------
Net earnings for the period $ 5,857 $ 3,325
Adjustments:
Interest expense 1,906 2,444
Depreciation, depletion and accretion 3,124 3,266
Amortization of intangibles 582 626
Unrealized gain on foreign currency
contracts (1,626) (427)
Unrealized foreign exchange (gain) loss
on US dollar assets and liabilities (1,323) 1,041
Loss (gain) on disposal of property,
plant and equipment 31 (1,070)
Income tax provision 1,782 1,582
----------------------------
EBITDA $ 10,333 $ 10,787
----------------------------
----------------------------
Balance Sheet Improvements
In the first quarter, Sun Gro reduced its debt obligations by a total of $2.1 million, repaying principal of $1.3 million on term loans and other debt, and depositing US$0.8 million to a restricted cash account. Drawings on the Fund's revolving operating facility seasonally increased from the 2009 year-end to $35.8 million, but were down from the $44.0 million drawn at March 31, 2009, continuing the trend of the last several quarters. The Fund's improved balance sheet enabled it to reduce first quarter interest expense by $0.5 million year-over-year. At March 31, 2010, the Fund was in compliance with all of its debt covenants.
Distributable Cash
After the $2.1 million of debt repayments and restricted cash deposits, the Fund generated distributable cash of $4.0 million, or $0.18 per unit, in the three months ended March 31, 2010. Under the terms of its credit facility, the Fund is currently prohibited from making distributions to unitholders. Available funds are 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 in recent years.
By comparison, in the three months ended March 31, 2009, the Fund generated distributable cash of $5.5 million, or $0.25 per unit. The difference was primarily due to increased debt repayments and restricted cash deposits, and higher sustaining capital expenditures in 2010.
Statement of Distributable Cash
Three months Three months
ended ended
(in thousands of dollars except March 31, March 31,
per-unit amounts) 2010 2009
----------------------------
Cash flows from operating activities $ (8,248) $ (11,965)
Adjustments:
Change in non-cash operating working
capital 15,199 19,587
Sustaining capital expenditures (812) (364)
Payments on capital leases and
other loans (90) (159)
Restricted cash payments (789) -
Repayment of term loans (1,247) (1,612)
----------------------------
Distributable cash $ 4,013 $ 5,487
----------------------------
----------------------------
Distributable cash per unit $ 0.18 $ 0.25
----------------------------
----------------------------
Operating Results for the three months ended March 31, 2010 and 2009
Comparative Statements of Earnings
and Comprehensive Income
(In thousands of dollars
except per-unit amounts, and Three months ended Three months ended
number of units outstanding) March 31, 2010 March 31, 2009
-------------------- --------------------
Revenue $ 64,217 100% $ 68,961 100%
Cost of goods sold 37,092 58% 37,464 54%
------------- -------------
Gross profit 27,125 42% 31,497 46%
Distribution expenses 11,058 17% 10,471 15%
Selling expenses 4,797 7% 5,245 8%
General and administrative
expenses 5,204 8% 7,201 10%
------------- -------------
Total operating expenses 21,059 32% 22,917 33%
------------- -------------
Operating income 6,066 10% 8,580 12%
Other income (expense), net 3,479 5% (1,229) -2%
Interest expense (1,906) -3% (2,444) -4%
------------- -------------
Earnings before income taxes 7,639 12% 4,907 7%
Income tax provision
Current (1,476) -2% (721) -1%
Future (306) 0% (861) -1%
------------- -------------
Income tax provision (1,782) -3% (1,582) -2%
------------- -------------
Net earnings for the period $ 5,857 9% $ 3,325 5%
Other comprehensive income:
Unrealized gain (loss) on
translating financial
statements of self-sustaining
foreign operations (1,723) -3% 781 1%
------------- -------------
Comprehensive income for
the period $ 4,134 6% $ 4,106 6%
------------- -------------
------------- -------------
Basic and diluted earnings
per unit $ 0.26 $ 0.15
------------- -------------
------------- -------------
Weighted average number of
units outstanding 22,284,681 22,284,681
------------- -------------
------------- -------------
Selected supplemental
revenue information
for the three months
ended March 31 2010 2009 Increase (decrease)
----------- ----------- -----------------------
Volume in thousands of
EBs(1)
Peat and Bark-based
Growing Mixes 1,965 1,750 215 12%
Peat Moss 942 801 141 18%
Bulk Bark Mixes 619 616 3 0%
Fertilizer and Minerals 117 86 31 36%
Sand-based Mixes 75 169 (94) -56%
----------- ----------- ----------- -----------
Total 3,718 3,422 296 9%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Average revenue per
EB(1) (US$)
Peat and Bark-based
Growing Mixes $ 21.05 $ 20.58 $ 0.47 2%
Peat Moss 10.84 10.92 (0.08) -1%
Bulk Bark Mixes 7.85 8.48 (0.63) -7%
Fertilizer and Minerals 38.58 46.06 (7.48) -16%
Sand-based Mixes 10.04 11.26 (1.22) -11%
----------- ----------- ----------- -----------
Total $ 16.59 $ 16.32 $ 0.27 2%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Average revenue per
EB(1) (CDN$)
Peat and Bark-based
Growing Mixes $ 22.09 $ 25.35 $ (3.26) -13%
Peat Moss 11.37 13.46 (2.09) -16%
Bulk Bark Mixes 8.23 10.43 (2.20) -21%
Fertilizer and Minerals 40.50 56.60 (16.10) -28%
Sand-based Mixes 10.54 13.87 (3.33) -24%
----------- ----------- ----------- -----------
Total $ 17.41 $ 20.10 $ (2.69) -13%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
(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
As economic conditions continue to improve, Sun Gro expects to see a gradual increase in demand for consumer green goods. Based on current demand from its professional grower and retail customers, Sun Gro believes that on-hand peat supply will be sufficient to support sales until the 2010 harvest is fully underway. "While no one can predict the weather, we are encouraged to have seen a strong and early start to this year's harvest last month in selected parts of Manitoba," said Weaver, who added that Sun Gro has not yet commenced meaningful harvest operations at its other harvest locations. The Fund expects to continue to benefit from generally lower transportation costs as well as its 2008 and ongoing productivity initiatives.
"We remain focused on reducing debt in order to further strengthen our balance sheet and expect to make principal payments over the course of 2010 similar to those made last year," said Weaver. "Capital spending will likely be somewhat higher than in 2009, as we complete the Seba Beach baler project."
Weaver said that the Fund will continue to closely monitor its foreign exchange exposure. Foreign currency contracts for the remainder of 2010 total US$43.5 million at an average rate of CDN$1.14 (US$0.88), 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 totaling US$36.0 million at an average rate of CDN$1.04 (US$0.96).
As announced March 17, 2009, subject to the approval of its unitholders at its annual and special general meeting on May 27, 2010, the Fund intends to convert from its current income trust structure to a corporation by the end of the year. The proposed conversion is expected to provide broadened access to capital markets and allow Sun Gro's unitholders to benefit from a simplified and more efficient corporate structure. A management information circular providing details of the proposed plan of arrangement for the conversion has been mailed to unitholders and can be viewed on SEDAR at www.sedar.com.
Copies of management's discussion and analysis (MD&A) and the Fund's unaudited financial statements for the three months ended March 31, 2010 will also be available at www.sedar.com and at www.sungro.com on or about May 11, 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: compliance with Sun Gro's debt covenants; the completion of the new baler installation at Sun Gro's Seba Beach facility; the adequacy of Sun Gro's peat supply to support sales until the 2010 harvest; the expected benefits associated with lower transportation costs and productivity initiatives commenced in prior periods; expected principal payments on Sun Gro's debt facilities; the approval of the proposed conversion into a corporation at the upcoming annual and general special meeting, and the completion of the proposed conversion prior to year-end. 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 May 10, 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)
As at As at
March 31 December 31
2010 2009
------------- -------------
Assets
Current assets
Accounts receivable $ 52,769 $ 30,356
Inventories 33,674 39,723
Unrealized gain on foreign currency
contracts 5,731 4,511
Prepaid expenses and other assets 2,418 2,911
------------- -------------
94,592 77,501
Property, plant and equipment 107,892 110,436
Intangible assets 39,494 40,490
Unrealized gain on foreign currency contracts 521 115
Restricted cash 5,386 4,790
Other assets 1,299 1,253
------------- -------------
$ 249,184 $ 234,585
------------- -------------
------------- -------------
Liabilities and Unitholders' Equity
Current liabilities
Bank overdraft $ 2,403 $ 2,242
Operating line 35,778 24,709
Accounts payable and accrued liabilities 15,381 13,722
Current taxes payable 1,483 816
Current portion of long-term debt 9,003 7,264
------------- -------------
64,048 48,753
Other liabilities 6,009 5,887
Long-term debt 51,969 57,016
Future income taxes 13,823 13,728
------------- -------------
135,849 125,384
------------- -------------
Unitholders' equity
Capital contributions 211,726 211,726
Accumulated other comprehensive loss (21,376) (19,653)
Cumulative earnings 56,003 50,146
Cumulative distributions declared (133,018) (133,018)
------------- -------------
113,335 109,201
------------- -------------
$ 249,184 $ 234,585
------------- -------------
------------- -------------
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)
Three months Three months
ended ended
March 31, March 31,
2010 2009
----------------------------
Revenue $ 64,217 $ 68,961
Cost of goods sold 37,092 37,464
----------------------------
Gross profit 27,125 31,497
Distribution expenses 11,058 10,471
Selling expenses 4,797 5,245
General and administrative expenses 5,204 7,201
----------------------------
Total operating expenses 21,059 22,917
----------------------------
Operating income 6,066 8,580
Other income (expense), net 3,479 (1,229)
Interest expense (1,906) (2,444)
----------------------------
Earnings before income taxes 7,639 4,907
Income tax provision
Current (1,476) (721)
Future (306) (861)
----------------------------
Income tax provision (1,782) (1,582)
----------------------------
Net earnings for the period 5,857 3,325
Other comprehensive income (loss):
Unrealized (loss) gain on translating
financial statements of self-sustaining
foreign operations (1,723) 781
----------------------------
Comprehensive income for the period $ 4,134 $ 4,106
----------------------------
----------------------------
Basic and diluted earnings per unit $ 0.26 $ 0.15
----------------------------
----------------------------
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)
Accumu-
lated
Other
Unit- Compre- Cumulative
holders' hensive Cumulative Distri-
Capital Loss Earnings butions Total
------------------------------------------------------
Balance -
December 31,
2008 $ 211,726 $ (12,200) $ 31,225 $(133,018) $ 97,733
Earnings for
the year - - 18,921 - 18,921
Other comprehensive
loss for the year - (7,453) - - (7,453)
------------------------------------------------------
Balance -
December 31,
2009 $ 211,726 $ (19,653) $ 50,146 $(133,018) $ 109,201
Earnings for
the period - - 5,857 - 5,857
Other comprehensive
loss for the
period - (1,723) - - (1,723)
------------------------------------------------------
Balance -
March 31, 2010 $ 211,726 $ (21,376) $ 56,003 $(133,018) $ 113,335
------------------------------------------------------
------------------------------------------------------
Sun Gro Horticulture Income Fund
Consolidated Statements of Cash Flows
(in thousands of dollars)
Three months Three months
ended ended
March 31, March 31,
2010 2009
----------------------------
Cash flows from operating activities
Net earnings for the period $ 5,857 $ 3,325
Items not affecting cash
Depreciation, depletion and accretion 3,124 3,266
Amortization of intangible assets 582 626
Unrealized gain on foreign currency
contracts (1,626) (427)
Unrealized foreign exchange (gain) loss
on US dollar assets and liabilities (1,323) 1,041
Loss (gain) on disposal of property,
plant and equipment 31 (1,070)
Future income tax provision 306 861
----------------------------
6,951 7,622
Change in non-cash operating working
capital (15,199) (19,587)
----------------------------
(8,248) (11,965)
Cash flows from investing activities
Instalment note payment for business
acquisition (420) (496)
Additions to property, plant and equipment (812) (364)
Proceeds from disposal of property,
plant and equipment - 1,346
----------------------------
(1,232) 486
Cash flows from financing activities
Restricted cash payments (789) -
Repayment of term loans (827) (2,366)
Increase in operating line 11,068 9,928
Payments on capital leases and other
term loans (90) (159)
----------------------------
9,362 7,403
Effect of exchange rate changes on cash (43) (24)
----------------------------
Increase in bank overdraft (161) (4,100)
Cash (bank overdraft) - beginning
of the period (2,242) 2,277
----------------------------
Bank overdraft - end of the period $ (2,403) $ (1,823)
----------------------------
----------------------------
Supplemental cash flow information
Interest paid $ 1,989 $ 2,534
Income taxes paid $ 801 $ 21
Equipment acquired under capital lease $ 220 $ -
%SEDAR: 00017490E
For further information: Bradley A. Wiens, Vice-President, Finance and CFO, Sun Gro Horticulture Income Fund, Tel: (425) 373-3603, Email: [email protected], Website: www.sungro.com
Share this article