Freeport-McMoRan Inc. press release
Sun Gro Horticulture Income Fund Releases 2009 Third Quarter Results
NYSE - New York Stock Exchange · Copper · Gold · Molybdenum · United States
Nov. 4, 2009 (Canada NewsWire Group) --
VANCOUVER, Nov. 4 /CNW/ -- Sun Gro Horticulture Income Fund (the Fund) today reported financial results for the three months ended September 30, 2009, which represents the third 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 $3.2 million, up from $0.8 million in the third quarter of 2008. Year-over-year, gross margin improved to 46% from 44% in 2008, while EBITDA was up by 31%. Net earnings for the quarter also improved markedly, swinging from a loss of $2.5 million in 2008 to a profit of $3.7 million this year.
As in the first half of the year, the positive results were achieved despite lower sales volumes, largely due to the economic downturn. The performance improvement was driven by a combination of factors. These included the positive impact of a stronger US dollar on Sun Gro's primarily US dollar denominated revenues, the ongoing favourable effect of its 2008 productivity initiatives on operating costs, lower energy prices and transportation costs, and improved peat harvest conditions.
"Although the business environment has not notably improved, we have sustained our performance improvement trend and made a strong start to the seasonally slower second half of the year," said Mitch Weaver, President and CEO of Sun Gro and a Trustee of the Fund. "We remain focused on reducing debt, driving greater operating efficiency by strengthening our infrastructure, and strategically growing our business. We are making good progress."
Third Quarter Financial Results
Third quarter revenues of $45.6 million were only slightly lower than the $45.9 million reported in 2008, despite an 8% 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 in relation to the Canadian dollar was up by 5% from the third quarter of 2008, offsetting much of the effect of the volume decline.
Year-over-year, sales volumes were lower in all product categories except sand-based mixes. Volumes of peat and bark-based growing mixes decreased by 2% due to reduced sales of private label retail products. The lower retail volumes were partially offset by a modest increase in sales to Sun Gro's core professional grower segment. Volumes of straight peat moss decreased by 15%, due to the company's decision not to renew two large contracts. Reduced sales of landscape products also brought bulk bark mix volumes down by 14%. In the sand-based mix category, volumes increased by 17%, due mainly to the successful repositioning of the company's sales focus from new golf course development to golf course and sports field renovation.
EBITDA for the third quarter increased to $5.1 million from $3.8 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 $1.0 million realized loss on foreign exchange contracts that was recorded during the quarter. This compares to a gain of $0.3 million in the same period of 2008.
Sun Gro's annual peat harvest benefited from improved weather conditions during the third quarter and had a strong finish in September. Overall harvest volumes were comparable to 2008 levels, but regional yields varied greatly. Harvest volumes in New Brunswick were significantly higher than in 2008 and a modest improvement was seen in Alberta, while wet weather in Manitoba resulted in historically low harvest yields for the second consecutive year. The low harvest volumes in Manitoba resulted in increased costs and production inefficiencies; however, costs in Alberta and New Brunswick were lower than in 2008, due to the improved harvest, as well as the positive impact of Sun Gro's productivity initiatives.
As part of the ongoing strategic rationalization of its operations in Eastern Canada, Sun Gro permanently closed its Kennetcook, Nova Scotia production facility in September and released its harvest rights to the adjacent bog. As a result, the value of all remaining assets and the bog were written off and the Fund recorded a one-time charge of $2.9 million in the third quarter. The Kennetcook facility was temporarily closed in March 2008. Equipment from the plant was relocated at that time for use at other Sun Gro production facilities.
Nine Month Financial Results
For the first nine months of 2009, revenues of $179.5 million were up by 7% over 2008, despite an 11% decline in overall sales volumes. As with the quarterly result, the revenue increase was primarily due to the stronger US dollar, as well as stable pricing. Gross margin improved to 44% from 40% in 2008. Operating income increased significantly to $16.6 million from $2.4 million in 2008, while EBITDA was up by 50% and net earnings improved to $16.0 million from a loss of $25.0 million in 2008.
Reconciliation of net earnings (loss) to earnings before interest, taxes, depreciation and amortization (EBITDA) Three Three Nine Nine months months months months (in thousands of dollars) ended ended ended ended Sept 30, Sept 30, Sept 30, Sept 30, 2009 2008 2009 2008 Net earnings (loss) for the period $ 3,658 $ (2,461) $ 16,011 $(25,014) Adjustments: Interest expense 2,139 1,853 7,176 5,262 Depreciation, depletion and accretion 2,397 2,308 8,872 8,562 Amortization of intangibles 595 578 1,833 1,843 Goodwill and asset impairments 2,855 - 2,855 24,945 Unrealized (gain) loss on foreign currency contracts (3,799) 1,306 (12,486) 4,134 Unrealized foreign exchange (gain) loss on US dollar assets and liabilities (2,913) 874 (4,911) 974 Loss (gain) on disposal of property, plant and equipment (61) 106 (1,135) 140 Income tax provision (recovery), net 180 (715) 3,674 (6,248) EBITDA $ 5,051 $ 3,849 $ 21,889 $ 14,598
Balance Sheet Improvements
During the third quarter, Sun Gro reduced its long-term debt by $1.0 million. In addition, complying with the terms of its senior note agreement, it deposited $0.8 million to a restricted cash account. Drawings on the Fund's revolving operating facility at the end of the third quarter were $24.0 million, down by $10.1 million from $34.1 million at the beginning of the year. The reduction was due to reduced sales activity and more efficient use of working capital. At September 30, 2009, the Fund was in compliance with all of its debt covenants and had improved its senior leverage ratio to 3.3 from 5.3 a year ago.
"I am pleased with the excellent progress we have made with repaying our long-term debt and reducing the usage of our revolving operating facility," said Weaver. "We expect to be in compliance with our debt covenants at year-end. However, due to the seasonal nature of our business, we are forecasting that we will likely exceed our required senior leverage ratio of 3.0 at March 31, 2010 and be temporarily out of compliance. We expect that a suitable modification to our covenant will be made prior to then with the lender, and that the Fund will return to compliance with existing covenants during the second quarter, and for the balance of 2010."
Distributable Cash
After the $1.8 million of debt repayments and the restricted cash deposits, the Fund generated distributable cash of $0.3 million, or $0.02 per unit, in the three months ended September 30, 2009. Under its credit facility, the Fund is prohibited from making distributions. All available funds are 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 third quarter of 2008, the Fund generated distributable cash of $1.3 million, or $0.06 per unit, and declared distributions of $1.7 million, or $0.075 per unit.
Statement of Distributable Cash Three Three Nine Nine months months months months (in thousands of dollars ended ended ended ended except per-unit amounts) Sept 30, Sept 30, Sept 30, Sept 30, 2009 2008 2009 2008 Cash flows from operating activities $ 6,054 $ 302 $ 17,866 $ 9,290 Adjustments: Change in non-cash operating working capital (3,135) 1,963 (4,016) (717) Sustaining capital expenditures (782) (802) (1,618) (2,410) Payments on capital leases and other term loans (103) (123) (388) (692) Restricted cash (835) - (3,795) - Repayments on term loans (862) - (5,459) - Distributable cash $ 337 $ 1,340 $ 2,590 $ 5,471 Distributable cash per unit $ 0.02 $ 0.06 $ 0.12 $ 0.25 Distributions declared per unit $ - $ 0.075 $ - $ 0.4125 Operating Results for the three months ended September 30, 2009 and 2008 Comparative Statements of Earnings (Loss) and Comprehensive Income (Loss) Three months Three months (In thousands of dollars except ended ended per-unit amounts, number of units September 30, September 30, outstanding and EBs(1)) 2009 2008 Revenue $ 45,614 100% $ 45,871 100% Cost of goods sold 24,716 54% 25,783 56% Gross profit 20,898 46% 20,088 44% Distribution expenses 8,412 18% 10,272 22% Selling expenses 4,335 10% 4,077 9% General and administrative expenses 4,989 11% 4,927 11% Total operating expenses 17,736 39% 19,276 42% Operating income 3,162 7% 812 2% Other income (expense), net 5,670 12% (2,135) -5% Asset impairment (2,855) -6% - 0% Interest expense (2,139) -5% (1,853) -4% Earnings (loss) before income taxes 3,838 8% (3,176) -7% Income tax (provision) recovery Current 7 0% 269 1% Future (187) 0% 446 1% Income tax (provision) recovery, net (180) 0% 715 2% Net earnings (loss) for the period 3,658 8% $ (2,461) -5% Other comprehensive income (loss): Unrealized gain (loss) on translating financial statements of self-sustaining foreign operations (2,607) -6% 916 2% Comprehensive income (loss) for the period $ 1,051 2% $ (1,545) -3% Basic and diluted earnings (loss) per unit $ 0.16 $ (0.11) 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 1,084 1,102 Peat Moss 1,010 1,182 Bulk Bark Mixes 539 625 Fertilizer and Minerals 63 72 Sand-based Mixes 197 168 Total 2,893 3,149 Average revenue per EB(1) (US $) Peat and Bark-based Growing Mixes $ 19.60 $ 19.94 Peat Moss 10.83 10.17 Bulk Bark Mixes 9.08 8.91 Fertilizer and Minerals 41.67 46.97 Sand-based Mixes 9.64 11.07 Total $ 14.37 $ 14.22 Average revenue per EB(1) (Canadian $) Peat and Bark-based Growing Mixes $ 21.75 $ 20.43 Peat Moss 12.03 10.41 Bulk Bark Mixes 10.07 9.11 Fertilizer and Minerals 46.48 47.99 Sand-based Mixes 10.81 11.30 Total $ 15.97 $ 14.56 (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, 2009 and 2008 Comparative Statements of Earnings (Loss) and Comprehensive Income (Loss) Nine months Nine months (In thousands of dollars except ended ended per-unit amounts, number of units September 30, September 30, outstanding and EBs(1)) 2009 2008 Revenue $ 179,468 100% $ 168,281 100% Cost of goods sold 100,662 56% 100,320 60% Gross profit 78,806 44% 67,961 40% Distribution expenses 29,911 17% 38,320 23% Selling expenses 14,500 8% 12,376 7% General and administrative expenses 17,746 10% 14,844 9% Total operating expenses 62,157 35% 65,540 39% Operating income 16,649 9% 2,421 1% Other income (expense), net 13,067 8% (3,476) -2% Goodwill and asset impairments (2,855) -2% (24,945) -15% Interest expense (7,176) -4% (5,262) -3% Earnings (loss) before income taxes 19,685 11% (31,262) -19% Income tax (provision) recovery Current (863) 0% (763) 0% Future (2,811) -2% 7,011 4% Income tax (provision) recovery, net (3,674) -2% 6,248 4% Net earnings (loss) for the period 16,011 9% $ (25,014) -15% Other comprehensive income (loss): Unrealized gain (loss) on translating financial statements of self-sustaining foreign operations (5,510) -3% 2,278 1% Comprehensive income (loss) for the period $ 10,501 6% $ (22,736) -14% Basic and diluted earnings (loss) per unit $ 0.72 $ (1.12) 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 4,472 4,697 Peat Moss 2,813 3,763 Bulk Bark Mixes 1,850 2,005 Fertilizer and Minerals 225 258 Sand-based Mixes 622 497 Total 9,982 11,220 Average revenue per EB(1) (US $) Peat and Bark-based Growing Mixes $ 20.11 $ 19.90 Peat Moss 10.87 10.62 Bulk Bark Mixes 8.45 8.87 Fertilizer and Minerals 43.17 44.63 Sand-based Mixes 10.67 11.15 Total $ 15.28 $ 15.00 Average revenue per EB(1) (Canadian $) Peat and Bark-based Growing Mixes $ 23.87 $ 19.97 Peat Moss 12.72 10.69 Bulk Bark Mixes 9.94 8.93 Fertilizer and Minerals 51.05 44.82 Sand-based Mixes 12.49 11.20 Total $ 18.05 $ 15.06 (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 does not anticipate any significant growth in its sales volumes and operating income. It expects to continue to benefit from generally lower transportation costs. The lower costs are due to lower freight rates resulting from reduced demand and lower energy prices, as well as more efficient truck loading and routing. Sun Gro believes that peat supply currently on hand will be sufficient to support sales at current levels until the 2010 harvest begins. It does not expect to incur significant additional costs for cross-regional shipments of peat as a result of the 2009 Manitoba harvest shortfall.
"While we are optimistic about our capacity to sustain the stronger financial performance we have delivered for the last four quarters, the foreign exchange environment remains volatile. Further strengthening of the Canadian dollar could put significant pressure on our margins," said Weaver. "We will continue to closely monitor our exposure and use forward exchange contracts to help manage currency exchange risk."
Foreign exchange contracts for the remainder of 2009 total US$9.0 million at an average rate of $1.10 (or US$0.91). For 2010, Sun Gro has entered into foreign exchange contracts totaling US$45.0 million at an average rate of $1.15 (or US$0.87).
Copies of management's discussion and analysis (MD&A) and the Fund's audited financial statements for the three months ended September 30, 2009 will be available at www.sedar.com and www.sungro.com on or about November 12, 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. Forward-looking information is also included in the "Balance Sheet Improvements" section, including management's expectation that Sun Gro will be temporarily out of compliance with its senior leverage ratio at the end of the first quarter of 2010, as well as management's expectation that a suitable modification of the debt covenants under Sun Gro's credit facilities will be negotiated with Sun Gro's lenders prior to March 31, 2010. 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.