Nouveau Monde Graphite Inc. press release
Sun Gro Horticulture Income Fund Releases 2006 Year-End Results - Fund Generates Record Distributable Cash and Operating Income
TSX - Toronto Stock Exchange · Graphite · Canada
TRADING SYMBOL: Toronto Stock Exchange - GRO.UN
Sun Gro Horticulture Income Fund will hold a conference call and webcast to discuss 2006 fourth quarter and year-end results on March 9, 2007 at 7:30 am Pacific Time (10:30 am Eastern). The call can be accessed by dialing: 1-800- 814-4860 or 416-644-3417. A replay will be available through March 23, 2007 at: 1-877-289-8525 or 416-640-1917. (Passcode: 21218117 followed by the number sign)
To access the live and archived webcast, please go to: http://www.vcall.com/IC/CEPage.asp?ID(equal sign)113422 or to the fund's website at: www.sungro.com.
VANCOUVER, March 8 /CNW/ - Sun Gro Horticulture Income Fund (the Fund) today reported financial results for the three and twelve-month periods ended December 31, 2006. The three-month period represents the final quarter of the Fund's 2006 fiscal year.
Distributable Cash
For the fourth consecutive quarter, the Fund generated record year-over- year distributable cash. In the three months ended December 31, 2006, it earned $4.5 million, or $0.21 per unit, of distributable cash, up from $3.8 million, or $0.17 per unit, in the final quarter of 2005. Distributable cash for the twelve-month period totalled $24.3 million, or $1.10 per unit, up from $20.1 million, or $0.91 per unit, in 2005. Distributable cash paid to unitholders was unchanged at $5.0 million, or $0.225 per unit, for the quarter and $19.8 million, or $0.90 per unit, for the twelve months in both years. This represents a payout ratio of 82% for 2006 compared to 99% in fiscal 2005.
"Thanks to the sustained improvement in our distributable cash generation in 2006, we made significant progress in reducing the Fund's payout ratio, one of our primary goals for the year," said Mitch Weaver, president and CEO of the Fund's wholly owned subsidiary, Sun Gro Horticulture Canada (Sun Gro, or the company) and a Trustee of the Fund. "We are pleased with Sun Gro's performance and remain dedicated to building value for our unitholders over the long term."
(in thousands of dollars except per unit amounts)
For the For the three three For the For the months months year year Statement of distributable ended ended ended ended cash December December December December 31, 2006 31, 2005 31, 2006 31, 2005 Cash flows from operating activities before change in non-cash operating working capital $ 4,629 $ 3,335 $ 22,409 $ 16,675 Adjustments: Realized gain on foreign currency contracts 617 1,538 4,691 5,702 Sustaining capital expenditures (664) (614) (2,650) (2,821) Proceeds from government grants and loans - - 60 688 Repayment of government loans (50) (25) (200) (100) Current income taxes expected to seasonally reverse in the current fiscal year (416) Distributable cash $ 4,532 $ 3,818 $ 24,310 $ 20,144 Distributable cash per unit $ 0.21 $ 0.17 $ 1.10 $ 0.91
Distributions declared per unit $ 0.225 $ 0.225 $ 0.90 $ 0.90
Fourth Quarter Operating Results
In the final three months of 2006, Sun Gro sustained the trend of gross margin improvement it began early in the year. Gross margin for the quarter increased to 46% from 45% in 2005. The gain was mainly due to the positive impact of Sun Gro's pricing strategy and a return to more normal peat harvest volumes in 2006 after an unprecedented two consecutive years of harvest shortfalls.
The company's fourth quarter revenues of $46.5 million were up by $3.8 million, or 9%, from $42.7 million in 2005. The revenue gain was driven by a 4% year-over-year increase in overall sales volumes, including a nearly 13% increase in growing mix volumes, and improved pricing performance. The company's average fourth quarter US dollar prices for growing mixes were up by 4% and Canadian dollar revenue per equivalent bale, or EB (10 cubic feet of peat), of growing mixes was flat from the same period in 2005. In the fourth quarter, peat moss prices were up by 21% year-over-year in US dollars and by 17% in Canadian dollars.
During the fourth quarter of 2006, the value of the Canadian dollar averaged US$0.88, compared to US$0.86 in the same period of 2005. The negative impact of the year-over-year difference in exchange rates was effectively offset by the company's pricing strategy.
Fourth quarter operating income of $2.5 million increased by $0.9 million from $1.6 million in 2005. The gain was primarily due to improved product prices and the production efficiencies that resulted from this year's larger peat harvest. Sun Gro also realized truck loading efficiencies in its West and Central regions as dryer harvest conditions enabled a greater number of pallets to be shipped per truck. Per-EB distribution costs during the quarter were down by 2% year-over-year. General and administrative expenses were up by 20% during the period, due in part to higher professional fees. These were associated with tax matters and the establishment of necessary procedures to satisfy regulatory requirements relating to internal controls and certification of internal controls over financial reporting. In addition, the company incurred interest expense of $0.3 million related to the repayment of an income tax refund received in 2003.
Fourth quarter net earnings were $67,000 in 2006, generating basic and diluted earnings of $0.003 per unit. In the corresponding period of 2005, Sun Gro generated basic and diluted earnings of ($0.54) per unit on a fourth quarter net loss of $11.8 million. The variance between quarters was primarily due to differences in unrealized gains on forward currency contracts and the 2005 impairment of goodwill.
Full-Year Operating Results
For the twelve months ended December 31, 2006, revenue of $197.3 million was down by $1.5 million, or 0.75%, from the $198.8 million reported in fiscal 2005. The slight decrease was primarily due to a 6% decline in annual sales of Sun Gro's higher priced mixes, partially offset by increased sales of peat moss. In 2006, the average US dollar exchange rate was $0.88, compared to $0.83 in 2005. As in the fourth quarter, the negative impact of foreign exchange was effectively offset by Sun Gro's pricing strategy.
Gross profit margin for the twelve months increased to 48% from 46% in 2005. As with the quarterly result, the improvement was primarily due to improved pricing performance and the year's larger peat harvest. Total harvest volumes were up by 9% over 2005.
Annual operating income rose to a record $16.5 million from $9.6 million in 2005, reflecting the year's improved gross margin and a 6% decrease in distribution expenses. The distribution cost decrease was due to the year's lower sales volumes, reduced cross-regional shipments and weather-related truck loading efficiencies. In 2005, a peat harvest shortfall necessitated significant shipments to customers in the central US from other regions, pushing up distribution expenses.
Net earnings increased to $15.9 million, or $0.72 per unit, from a loss of $3.5 million, or ($0.16) per unit, in 2005. The net earnings difference is mainly attributable to the $13.6 million impairment of goodwill that was recorded in 2005 and improved overall performance.
Operational Highlights
Of Sun Gro's total sales in 2006, professional and retail growing mixes accounted for 64% of revenues, peat moss contributed 30%, and fertilizers and minerals made up the remaining 6%. In keeping with its strategic focus on the higher margin professional growing mix market, Sun Gro launched a number of initiatives designed to increase sales of its value-added peat and bark-based growing mix products to professional growers. One initiative was the development of new products, such as the lighter-weight line of Metro-Mix(R) bark-based growing mixes that are more cost-effective to deliver to customers. The company also continued to build sales momentum for the Multicote(R) controlled release fertilizers that Sun Gro added to its professional product offerings in 2005. Revenues for the Multicote(R) line in 2006 were $1.9 million, up from $0.3 million in 2005.
In August 2006, Sun Gro enhanced its long-term peat supply by acquiring substantially all of the operating assets of Fort Frances, Ontario peat moss producer Normiska Peat Inc. Funded through the company's existing acquisition line of credit, the $3.4 million transaction gives Sun Gro an expanded presence in Central Canada. The acquired assets included a peat processing plant and related harvesting equipment, inventory on hand, and 1,440 acres of largely undeveloped professional grade peat bogs.
In September, Sun Gro strengthened its financial position by negotiating an amendment to its credit facilities with its lenders. The amendment extended the maturity of the company's term loans to November 1, 2009 and its revolving operating facility to November 1, 2008. Maturity of both the term loans and operating facility may be further extended by one year annually, subject to the approval of the lender.
In the final months of the year, Sun Gro entered into agreements for two acquisitions in California, North America's largest horticultural market. Both transactions were successfully completed early in 2007. On January 16, Sun Gro acquired all of the outstanding shares of Sun-Up Horticulture in Sacramento, adding two peat-mixing plants and a bark-processing plant to its North America- wide production network. On January 24, Sun Gro purchased the operating assets of Kellogg-Rich Grow, LLC. in Santa Maria, including an additional peat-mixing plant. The four newly acquired plants have significantly enhanced the company's ability to increase its share of both the professional and retail growing mix markets in California.
Income Tax Settlements
In March 2007, Sun Gro reached the basis of a settlement with the United
States Internal Revenue Service (IRS) regarding the proposed adjustment of the interest rate charged between the Fund's Canadian and US subsidiaries on $18.2 million of inter-company notes established at the Fund's inception. The IRS proposed to reduce the deductible portion of the interest rate on the notes from 13% to approximately 7%. Sun Gro has agreed with the IRS to settle the matter at an interest rate of 10.5% and has recorded an accrual of $0.7 million in its financial statements based on the settlement.
As previously announced, through an internal review of tax matters Sun Gro determined that it had filed an income tax return for 2002 that incorrectly carried back operating losses in that year to a prior period. This resulted in an income tax refund of $1.1 million that was received in 2003. The operating losses should have been carried forward to offset taxable income in subsequent years. The company has reached an agreement with the Canada Revenue Agency and to repay the $1.1 million tax refund plus $0.3 million of accrued interest. Payment will be made in March 2007 with funds drawn on Sun Gro's revolving operating facility. The company has restated its 2005 balance sheet to reflect a reclassification of this income tax asset. The benefit of these operating losses will be available to offset taxes payable in future years. The reclassification did not affect earnings or distributable cash in 2005 and 2006.
Proposed Changes to Tax Legislation Affecting Income Trusts
On October 31, 2006, the Canadian federal government announced proposed changes to the way in which income trusts are taxed. Under the proposed changes, a portion of the distributions that are currently paid out and taxed in the hands of unitholders would first be subject to tax at the trust level. If passed into legislation, the proposed changes to the existing tax treatment of trust income and distributions will take effect in 2011 for existing income trusts like the Fund.
Current Tax Position
Sun Gro is subject to income tax in both Canada and the Unites States. The total income tax recovery of $3.4 million for 2006 consists of a recovery of $3.9 million in Canada and an expense of $0.6 million in the United States. In 2006, Sun Gro utilized $0.9 million of non-capital loss carryforwards to offset taxable income in Canada. This leaves Sun Gro with $9.9 million of loss carryforwards as at December 31, 2006 to offset future taxable income in Canada. Of this total, $5.4 million expire in 2010 and $4.5 million expire in 2015. By utilizing these loss carryforwards, the company has not yet needed to take any tax deduction for depreciation. These deductions will still be available to offset future taxable income in Canada after the loss carryforwards are utilized.
In 2006, Sun Gro paid income taxes of $0.8 million, most of which was for income taxes in the United States. Management anticipates that U.S. income taxes will continue to comprise the majority of Sun Gro's income tax payments for the next several years and that Sun Gro's Canadian current income tax exposure will not be significant for the near future.
Financial Highlights
Comparative Statements of Earnings (In thousands of dollars except per For the three For the three unit amounts and months ended months ended number of units December 31, 2006 December 31, 2005 outstanding and EBs) (unaudited) (unaudited) Revenue $ 46,459 100% $ 42,730 100% Cost of goods sold 25,029 54% 23,448 55% Gross profit 21,430 46% 19,282 45%
Distribution expenses 10,176 22% 10,001 23% Selling expenses 3,680 8% 3,496 8% General and administrative expenses 5,066 11% 4,210 10% Total operating expenses 18,922 41% 17,707 41% Operating income 2,508 5% 1,575 4%
Other income (expense), net (2,860) -6% (497) -1% Goodwill impairment - 0% (13,572) -32% Interest expense (1,066) -2% (812) -2% Earnings (loss) before income taxes (1,418) -3% (13,306) -31% Income tax (provision) recovery Current 356 1% 565 1% Future 1,129 2% 964 2% Income tax (provision) recovery, net 1,485 3% 1,529 3% Net earnings (loss) for the period $ 67 0% $ (11,777) -28% Basic and diluted earnings (loss) per unit $ 0.00 $ (0.54) Weighted average number of units outstanding 22,023,000 22,023,000
Selected supplemental revenue information
Volume in thousands of EBs (1) Growing Mixes 1,578 1,401 Peat Moss 1,152 1,215 Fertilizer and Minerals 60 66 Total company sales 2,790 2,682 Average revenue per EB(1) (US $) Growing Mixes $ 18.31 $ 17.67 Peat Moss 9.22 7.61 Fertilizer and Minerals 36.30 25.62 Total company sales $ 14.94 $ 13.31 Average revenue per EB(1) (Canadian $) Growing Mixes $ 20.67 $ 20.59 Peat Moss 10.41 8.87 Fertilizer and Minerals 41.00 29.87 Total company sales $ 16.86 $ 15.52
(1) An EB, or equivalent bale, is Sun Gro's standard unit of measure referring to 10 cubic feet of peat. Average revenue per EB calculation does not include transportation-related surcharges.
Comparative Statements of Earnings (In thousands of dollars except per For the For the unit amounts and year ended year ended number of units December 31, 2006 December 31, 2005 outstanding and EBs) (audited) (audited) Revenue $ 197,307 100% $ 198,761 100% Cost of goods sold 102,161 52% 107,317 54% Gross profit 95,146 48% 91,444 46%
Distribution expenses 44,410 22% 47,441 24% Selling expenses 15,331 8% 15,954 8% General and administrative expenses 18,942 10% 18,425 9% Total operating expenses 78,683 40% 81,820 41% Operating income 16,463 8% 9,624 5%
Other income, net 449 0% 602 0% Goodwill impairment - 0% (13,572) -7% Interest expense (4,316) -2% (2,896) -2% Earnings (loss) before income taxes 12,596 6% (6,242) -4% Income tax (provision) recovery Current (956) 0% (553) 0% Future 4,307 2% 3,335 2% Income tax (provision) recovery, net 3,351 2% 2,782 2% Net earnings (loss) for the year $ 15,947 8% $ (3,460) -2% Basic and diluted earnings (loss) per unit $ 0.72 $ (0.16) Weighted average number of units outstanding 22,023,000 22,023,000
Selected supplemental revenue information
Volume in thousands of EBs(1) Growing Mixes 6,143 6,509 Peat Moss 6,076 6,044 Fertilizer and Minerals 324 345 Total company sales 12,543 12,898 Average revenue per EB(1) (US $) Growing Mixes $ 18.05 $ 16.70 Peat Moss 8.49 7.38 Fertilizer and Minerals 30.17 23.07 Total company sales $ 13.73 $ 12.50
Average revenue per EB(1) (Canadian $) Growing Mixes $ 20.46 $ 20.25 Peat Moss 9.61 8.94 Fertilizer and Minerals 34.22 27.98 Total company sales $ 15.56 $ 15.16
1) An EB, or equivalent bale, is Sun Gro's standard unit of measure referring to 10 cubic feet of peat. Average revenue per EB calculation does not include transportation-related surcharges.
Outlook
The information contained in "Outlook" is forward-looking information. Please see "Forward-Looking Statements" below for a discussion of the risks and uncertainties in connection with forward-looking information.
Industry-wide, supply is expected to remain tight until the 2007 harvest begins. Assuming that the new harvest commences in line with last year's and normal harvest levels are achieved, Sun Gro expects that overall sales volumes will be slightly higher than in 2006, largely due to the bog resources added by the Normiska peat acquisition and the company's recent expansion in California.
"Through our strategic acquisitions of the past several years, we have enhanced and strengthened the geographic diversity of our peat resources, while expanding our product offerings," said Weaver. "We are moving forward on a very solid footing, and remain confident in our ability to generate sufficient distributable cash to continue to meet the current rate of distributions, as well as provide for other corporate purposes."
Sun Gro holds foreign currency contracts to manage the near-term impact of a strengthening of the Canadian dollar. For 2007, the company has entered into foreign currency contracts with a blended rate of $1.14 (US$0.88) that will offset approximately 70% of its expected net US dollar cash flows.
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. Important factors that could cause actual results to differ materially from Sun Gro's expectations include, among other things, fluctuations in currency exchange rates, changes in tax laws, the impact of adverse weather conditions on harvesting operations, an increase in freight rates, and the impact of an increase in fuel costs. You should specifically consider these factors, including the risks and uncertainties described in the Fund's most recent annual information form. 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.
Non-GAAP Measures
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.