Nouveau Monde Graphite Inc. press release

Sun Gro Horticulture Income Fund Releases Third Quarter 2005 Results

2005-11-03

TSX - Toronto Stock Exchange · Graphite · Canada

TRADING SYMBOL: Toronto Stock Exchange - GRO.UN

Sun Gro Horticulture Income Fund will hold a conference call to discuss 2005 third quarter results on November 4, 2005 at 7:30 am Pacific Time (10:30 am Eastern). The call can be accessed by dialing: 1-866-249-2157 or 416-640-4127. A replay will be available through November 19, 2005 at: 1-877-289-8525 (Passcode: 21161082 followed by the number sign) or 416-640-1917

VANCOUVER, Nov. 3 /CNW/ - Sun Gro Horticulture Income Fund (the "Fund") today reported financial results for the three and nine-month periods ended September 30, 2005. The three-month period represents the third quarter of the Fund's 2005 fiscal year.

Operating Results

For the three months ended September 30, 2005, Sun Gro Horticulture Canada Ltd. ("Sun Gro", or the "company"), the Fund's wholly owned subsidiary, recorded revenue of $44.0 million, up by 11% from the $39.6 million recorded in the third quarter of 2004. The $4.4 million revenue gain was due to improved pricing and increased sales volumes for growing mixes, driven largely by sales of the Metro-Mix and Redi-Earth professional brands acquired by Sun Gro in September 2004. Average US dollar prices for growing mixes and peat moss were up by 9% and 20%, respectively, over the third quarter of 2004. In Canadian dollars, revenue per equivalent bale (Sun Gro's standard unit of volume measurement, referring to 10 cubic feet of peat) decreased slightly for growing mixes and increased by 9% for peat moss. Growing mix volumes for the quarter were up by more than 13% year-over- year, generating an additional $3.2 million in revenue. The bark-based Metro-Mix and Redi-Earth brands accounted for approximately 65% of the increased mix volume, contributing $2.7 million in revenue during the quarter. For the first full year of ownership, the new brands generated $18.0 million of sales. For peat moss, excluding volumes sold under a supply agreement signed by Sun Gro in conjunction with its June 2004 acquisition of the Lameque Group, three-month revenues were up by $1.7 million over last year. This revenue growth was driven by a 3% increase in pricing and an 8% increase in volumes sold. Volumes under the supply agreement were down by 20% over 2004 due to customer order patterns. These sales typically account for 30% to 40% of Sun Gro's third quarter peat moss volumes and have no associated packaging, distribution or selling expenses. Accordingly, pricing under the supply agreement is substantially lower than Sun Gro's typical price per equivalent bale. Sun Gro continued to experience the negative effects of the stronger Canadian dollar on its primarily US dollar-denominated sales during the third quarter. The value of the Canadian dollar averaged US$0.82, compared to US$0.75 in the third quarter of 2004. The difference in exchange rates effectively reduced third quarter revenue by 8% over 2004. Operating results also continued to be negatively impacted by rising freight rates, which pushed per-unit transportation costs for the quarter up by 5% year-over-year, as well as higher production costs. In addition to increased raw material costs, Sun Gro continued to experience production inefficiencies, with some of its plants operating at reduced production levels due to lower than anticipated harvest volumes. Net earnings for the third quarter totaled $5.3 million, generating basic and diluted earnings of $0.24 per unit, compared to net earnings of $4.0 million, or $0.18 per unit, in 2004. The increase was due to the differences in current and future taxes, and unrealized gains and losses on forward currency contracts. Non-cash unrealized gains or losses are created by the valuation of Sun Gro's open currency hedge position at the end of each quarter. For the nine months ended September 30, 2005, revenue was $156.9 million, up by $14.7 million from the $142.2 million generated in the first nine months of 2004. The revenue increase was driven by Sun Gro's improved pricing performance, a 2% increase in overall sales volume and a proportionate sales volume shift toward higher-value growing mixes. As with the quarterly result, the positive impact of Sun Gro's higher sales volumes and improved pricing was partially offset by the stronger Canadian dollar. During the first nine months of 2005, the average Canadian dollar exchange rate was US$0.82, compared to US$0.75 in 2004. Net earnings for the nine-month period were $8.3 million, or $0.38 per unit, down by $7.1 million from $15.4 million, or $0.70 per unit, in 2004. As with the quarterly result, the decrease was mainly due to the differences in current and future taxes and unrealized gains and losses on forward currency contracts between the two periods.

Cash Distributions

The Fund maintained its level of distributions to unitholders in the third quarter of 2005, declaring monthly cash distributions of $0.075 per unit for each of July, August and September. In total, the Fund earned $5.19 million of distributable cash, or $0.236 per unit, and distributed $4.96 million, or $0.225 per unit, to unitholders. By comparison, in the third quarter of 2004, the Fund earned $5.19 million of distributable cash, or $0.236 per unit, and distributed $5.16 million, or $0.234 per unit, to unitholders. For the nine months ended September 30, 2005, the Fund generated distributable cash of $16.3 million, or $0.74 per unit, and distributed $14.9 million, or $0.675 per unit. In the same period of 2004, the Fund generated distributable cash of $16.5 million, or $0.75 per unit, and distributed $16.4 million, or $0.74 per unit. "We are pleased with our third quarter revenue growth, which can be directly attributed to Sun Gro's successful implementation of our pricing and acquisition growth strategies," said Mitch Weaver, Sun Gro's President and CEO, and a Trustee of the Fund, who also highlighted the gross margin improvement that was achieved during the quarter. "Despite the ongoing cost pressures and foreign exchange challenges we experienced, we were able to boost our margin to nearly 50% from 45% in the first half of the year," he said.

Amended Credit Facility

In October 2005, Sun Gro amended its credit facility to extend the maturity date of its term loans to September 2008 and its revolving operating facility to September 2007. As a result of the amendment, $23.6 million in term loans to finance acquisitions and capital expenditures for plant upgrades required to produced the Metro-Mix and Redi-Earth brands have now been reclassified as long-term debt. At September 30, 2005, Sun Gro had drawn $33.6 million on the revolving operating facility. The revolving facility is used to finance Sun Gro's working capital and general corporate requirements. Maturity of both the term loans and revolving facility may be further extended by one year annually, subject to approval of the lender.

<< Operating Results for the three months ended September 30, 2005 and 2004

Comparative Statements of Earnings (In thousands of dollars except For the three For the three per unit amounts and number of months ended months ended units outstanding) September 30, 2005 September 30, 2004 (unaudited) ------------------ ------------------

Revenue $ 43,987 100% $ 39,561 100% Cost of goods sold 22,132 50% 18,801 48% Gross profit 21,855 50% 20,760 52%

Distribution expenses 10,876 25% 9,403 24% Selling expenses 3,969 9% 4,087 10% General and administrative expenses 4,856 11% 4,842 12% Total operating expenses 19,701 45% 18,332 46% Operating income 2,154 5% 2,428 6%

Other income, net 4,409 10% 3,162 8% Interest expense (662) -1% (363) -1% Earnings before income taxes 5,901 14% 5,227 13% Income tax (provision) recovery Current 633 1% (90) 0% Future (1,213) -3% (1,158) -3% Net earnings for the period $ 5,321 12% $ 3,979 10% Basic and diluted earnings per unit $ 0.24 $ 0.18 Weighted average number of units outstanding 22,023,000 22,023,000 Selected supplemental revenue information

Volume in thousands of EB's(1) Growing Mixes 1,270 1,119 Peat Moss 2,023 2,086 Fertilizer and Minerals 76 82 Total company sales 3,369 3,287 Average revenue per EB(1) (U.S. $) Growing Mixes $ 15.91 $ 14.59 Peat Moss 6.63 5.54 Fertilizer and Minerals 25.15 20.29 Total company sales $ 10.55 $ 8.99 Average revenue per EB(1) (Canadian $) Growing Mixes $ 19.31 $ 19.42 Peat Moss 8.05 7.38 Fertilizer and Minerals 30.58 27.02 Total company sales $ 12.81 $ 11.96

Operating Results for the nine months ended September 30, 2005 and 2004

Comparative Statements of Earnings (In thousands of dollars except For the nine For the nine per unit amounts and number of months ended months ended units outstanding) September 30, 2005 September 30, 2004 (unaudited) ------------------ ------------------

Revenue $ 156,930 100% $ 142,205 100% Cost of goods sold 83,869 53% 71,990 51% Gross profit 73,061 47% 70,215 49%

Distribution expenses 37,440 24% 33,173 23% Selling expenses 12,458 8% 12,020 9% General and administrative expenses 15,114 10% 14,833 10% Total operating expenses 65,012 42% 60,026 42% Operating income 8,049 5% 10,189 7%

Other income, net 1,099 1% 6,249 5% Interest expense (2,084) -2% (968) -1% Earnings before income taxes 7,064 4% 15,470 11% Income tax (provision) recovery Current (1,118) -1% (360) 0% Future 2,371 2% 257 0% Net earnings for the period $ 8,317 5% $ 15,367 11% Basic and diluted earnings per unit $ 0.38 $ 0.70 Weighted average number of units outstanding 22,023,000 22,023,000 Selected supplemental revenue information

Volume in thousands of EB's(1) Growing Mixes 5,108 4,404 Peat Moss 4,829 5,302 Fertilizer and Minerals 279 307 Total company sales 10,216 10,013 Average revenue per EB(1) (U.S. $) Growing Mixes $ 16.43 $ 15.07 Peat Moss 7.31 6.38 Fertilizer and Minerals 22.47 18.96 Total company sales $ 12.28 $ 10.59 Average revenue per EB(1) (Canadian $) Growing Mixes $ 20.15 $ 20.10 Peat Moss 8.94 8.52 Fertilizer and Minerals 27.53 25.26 Total company sales $ 15.05 $ 14.13

Reconciliation of non-GAAP financial measures to Sun Gro's GAAP financial results

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 is unlikely to 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 we believe that distributable cash is a useful supplemental measure that may assist in assessing the potential return on an investment in our units. The calculation of distributable cash of the Fund is based on cash flows from operating activities before changes in non-cash operating working capital, adjusted for sustaining capital expenditures, government grants and loans, current income taxes expected to reverse in the current fiscal year, and such reserves as the Board of Directors and Trustees of the Fund consider appropriate. Certain expenditures that are incurred as part of earnings- enhancing capital projects and acquisitions may be excluded from the determination of distributable cash flow if the project or acquisition is funded by term debt or equity financing.

(in thousands of dollars except per unit amounts) For the three For the three For the nine For the nine Statement of months ended months ended months ended months ended distributable September September September September cash 30, 2005 30, 2004 30, 2005 30, 2004 Cash flows from operating activities before change in non-cash operating working capital $ 6,293 $ 5,311 $ 17,504 $ 17,624 Adjustments: Sustaining capital expenditures (984) (93) (2,207) (1,124) Government grants and loans: Proceeds 688 - 688 - Repayment (25) (25) (75) (50) Current income taxes expected to reverse in the current fiscal year (779) - 416 - Distributable cash $ 5,193 $ 5,193 $ 16,326 $ 16,450 Distributable cash per unit $ 0.24 $ 0.24 $ 0.74 $ 0.75

Outlook

For the remainder of 2005, Sun Gro anticipates modest sales volume growth. Assuming a stable US dollar, the company should see a revenue improvement as a result of its 2005 price increases. The company expects to generate sufficient distributable cash from operations, coupled with its first nine months' surplus, to meet the $0.90 per unit distributions to unitholders projected for 2005. Weaver anticipates that Sun Gro's 2005 peat harvest, now in its final stages, will deliver a slightly lower volume yield than the previous year's. He believes that peat moss supply will be tight across the industry until the 2006 harvest commences. "We will continue to focus on production of our higher-value professional growing mixes and do not expect that supply constraints will restrict our ability to fulfill our customers' orders for our mix products," said Weaver. For the first half of 2006, Sun Gro expects that its sales volumes will remain flat, with a return to more normal, historical sales volume growth in the second half of the year, assuming normal harvest levels are achieved. With approximately 40% of its operating expenses incurred in US dollars, the company continues to enjoy a natural hedge against some of the impact of foreign exchange. In addition, Sun Gro holds currency exchange contracts acquired in 2003 and 2004 for 2005 that cover approximately 85% of its estimated net US dollar cash flows for the remainder of the year at a blended rate of $1.30. Sun Gro has also hedged approximately 60% of its expected 2006 net US dollar cash flows at a blended rate of $1.23. The company expects that these factors, together with pricing increases, will help offset most of the near-term effect of the stronger Canadian dollar.

Forward-Looking Statements

This news release contains forward-looking statements. These statements relate to future events or future performance and reflect Sun Gro's expectations regarding its growth, results of operations, performance, business prospects, opportunities or industry performance or trends. These forward-looking statements reflect management's current internal projections, expectations or beliefs and are based on information currently available. In some cases, forward-looking statements 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. A number of factors could cause actual events or results to differ materially from those discussed in the forward-looking statements. Readers should specifically consider these factors, including the risks and uncertainties described in the Fund's most recent annual report. In addition, the Fund's ability to make distributions to unitholders is entirely dependent on Sun Gro's performance. Although management believes that the forward-looking statements contained in this news release are based on reasonable assumptions, readers cannot be assured that actual results will be consistent with such statements. Forward-looking statements are made as of the date of this news release and Sun Gro assumes no obligation to update or revise them to reflect new events or circumstances.

Income Fund Profile

Sun Gro Horticulture Income Fund was launched with the completion of an Initial Public Offering of 22,023,000 trust units on March 27, 2002. 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. Approximately 80% of the company's sales volume goes to the US.

Sun Gro Horticulture Income Fund Consolidated Balance Sheets (in thousands of dollars) (unaudited) As at As at September 30, December 31, Assets 2005 2004 Current assets Accounts receivable $ 44,807 $ 37,743 Inventories 27,825 28,825 Unrealized gain on foreign currency contracts 4,377 6,669 Prepaid expenses and other assets 2,226 3,325 79,235 76,562

Property, plant and equipment 127,882 130,239 Unrealized gain on foreign currency contracts 564 1,006 Note receivable - 1,064 Intangible assets 35,880 37,693 Goodwill 24,774 24,774 $ 268,335 $ 271,338 Liabilities and Unitholders' Equity

Current liabilities Bank indebtedness $ 219 $ 162 Operating line (note 4) 33,579 31,789 Accounts payable and accrued liabilities 15,954 14,340 Current portion of long-term debt (note 4) 100 10,600 Distribution payable to unitholders (note 3) 1,652 1,652 51,504 58,543

Other liabilities 4,382 3,696 Long-term debt (note 4) 23,886 10,542 Future income taxes 20,072 22,476 99,844 95,257 Contingency (note 6)

Unitholders' equity Capital contributions 209,733 209,733 Cumulative translation account (15,303) (14,264) Cumulative earnings 53,225 44,908 Cumulative distributions declared (79,164) (64,296) 168,491 176,081 $ 268,335 $ 271,338

Subsequent Event (note 7)

Approved by the Trustees

(Signed) (Signed) W. John Dawson, FCA Mitchell J. Weaver Chairman of the Trustee; President and CEO Board of Trustees

The accompanying notes are an integral part of these consolidated financial statements.

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

Distribution expenses 10,876 9,403 37,440 33,173 Selling expenses 3,969 4,087 12,458 12,020 General and administrative expenses 4,856 4,842 15,114 14,833 Total operating expenses 19,701 18,332 65,012 60,026 Operating income 2,154 2,428 8,049 10,189

Other income, net 4,409 3,162 1,099 6,249 Interest expense (662) (363) (2,084) (968) Earnings before income taxes 5,901 5,227 7,064 15,470 Income tax (provision) recovery Current 633 (90) (1,118) (360) Future (1,213) (1,158) 2,371 257 Net earnings for the period 5,321 3,979 8,317 15,367 Cumulative earnings - beginning of period 47,904 37,514 44,908 26,126 Cumulative earnings - end of period $ 53,225 $ 41,493 $ 53,225 $ 41,493 Basic and diluted earnings per unit $ 0.24 $ 0.18 $ 0.38 $ 0.70 Weighted average number of units outstanding 22,023,000 22,023,000 22,023,000 22,023,000

The accompanying notes are an integral part of these consolidated financial statements.

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

For the three For the three For the nine For the nine months ended months ended months ended months ended September September September September 30, 2005 30, 2004 30, 2005 30, 2004 Cash flows from operating activities Net earnings for the period $ 5,321 $ 3,979 $ 8,317 $ 15,367 Items not affecting cash Depreciation, depletion and accretion 2,306 1,941 7,077 5,666 Amortization of intangible assets 603 484 1,813 1,344 Change in fair value of foreign currency contracts (3,122) (2,268) 2,734 (4,871) Loss (gain) on disposal of property, plant and equipment (32) 17 (70) 375 Future income taxes 1,217 1,158 (2,367) (257) 6,293 5,311 17,504 17,624 Change in non-cash operating working capital (4,322) 938 (2,934) (1,275) 1,971 6,249 14,570 16,349 Cash flows from investing activities Acquisitions (note 2) - - (3,250) (11,574) Acquisition of property, plant and equipment (984) (2,379) (2,207) (4,068) Proceeds from disposal of property, plant and equipment 39 1,032 460 1,130 (945) (1,347) (4,997) (14,512) Cash flows from financing activities Distributions paid to unitholders (note 3) (4,956) (5,370) (14,868) (16,524) Proceeds from term loans - - 3,250 10,500 Increase in operating line 4,867 2,080 1,790 5,371 Proceeds from government grants 138 - 138 - Repayment of government loan (25) (25) (75) (50) 24 (3,315) (9,765) (703) Effect of exchange rate changes on cash (263) (152) 135 (35) Decrease (Increase) in bank indebtedness 787 1,435 (57) 1,099 Bank indebtedness beginning of period (1,006) (1,276) (162) (940) Cash and cash equivalents (bank indebtedness) - end of period $ (219) $ 159 $ (219) $ 159 Supplemental cash flow information Interest paid $ 523 $ 261 $ 2,001 $ 981 Income taxes paid $ 134 $ 107 $ 312 $ 378

Sun Gro Horticulture Income Fund Releases Third Quarter 2005 Results

Earlier from Nouveau Monde Graphite Inc.