Sun Gro Horticulture Income Fund Releases 2007 Second Quarter Results - Fund Continues to Grow Revenues and Position Operations for Future Growth
TSX - Toronto Stock Exchange
TRADING SYMBOL: Toronto Stock Exchange - GRO.UN
Sun Gro Horticulture Income Fund will hold a conference call and webcast
to discuss 2007 second quarter and first half results on August 3, 2007
at 7:30 am Pacific Time (10:30 am Eastern). The call can be accessed by
dialing: 1-800-594-3790 or 416-644-3419. A replay will be available
through August 19, 2007 at: 1-877-289-8525 or 416-640-1917. (Passcode:
21242321 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)119230 or to the fund's
website at: www.sungro.com.
VANCOUVER, Aug. 2 /CNW/ - Sun Gro Horticulture Income Fund (the Fund) today reported financial results for the three and six months ended June 30, 2007. The three-month period represents the second quarter of the Fund's 2007 fiscal year.
Distributable Cash
In the three months ended June 30, 2007, the Fund generated distributable cash of $6.25 million, or $0.28 per unit. This compares to $6.15 million, also $0.28 per unit, in the second quarter of 2006. For the six-month period, distributable cash totalled $12.9 million, or $0.58 per unit, compared to $12.7 million, or $0.58 in 2006. Distributable cash paid to unitholders was unchanged at $5.0 million, or $0.225 per unit, for the quarter and $9.9 million, or $0.45 per unit, for the six months.
"We have built on the positive momentum that began in 2006 and gathered strength through the first quarter of this year," said Mitch Weaver, President and CEO of Sun Gro Horticulture Canada (Sun Gro, or the company) and a Trustee of the Fund. "Sun Gro's second quarter revenues were up by 22%, setting a new record for the period as we continued to enjoy healthy growth in sales volumes, and to implement our growth and geographic diversification strategies."
(in thousands of dollars except per unit amounts) For the For the For the For the three three six six months months months months ended ended ended ended Statement of June 30, June 30, June 30, June 30, distributable cash(1) 2007 2006 2007 2006 Cash flows from operating activities $ 18,232 $ 16,605 $ 12,263 $ 11,579 Adjustments: Change in non-cash operating working capital (12,857) (11,813) 184 (123) Realized gain on foreign currency contracts 1,417 2,045 1,306 2,536 Sustaining capital expenditures (860) (672) (1,481) (1,686) Repayment of government loans (55) (50) (110) (100) Current income taxes expected to seasonally reverse in the current fiscal year 374 32 714 482 Distributable cash $ 6,251 $ 6,147 $ 12,876 $ 12,688 Distributable cash per unit $ 0.28 $ 0.28 $ 0.58 $ 0.58
Distributions declared per unit $ 0.225 $ 0.225 $ 0.45 $ 0.45 (1) Distributable cash is not an earnings measure recognized by Canadian generally accepted accounting principles (GAAP) and does not have a standardized meaning prescribed by GAAP. The table above shows the Fund's method of calculating distributable cash. See also "Non-GAAP Measures" below.
Three-month Operating Results
Revenues for the three months ended June 30, 2007 were a record $63.2 million, up by $11.3 million, or 22%, from $51.9 million in 2006. Overall sales volumes for the second quarter were also up by 22% over last year. The revenue growth came primarily from sales generated by Sun Gro's recently-acquired California operations. The four plants purchased in January 2007 added about $7.0 million of revenue from retail co-packing business and sales of bulk bark landscape mixes.
Due in part to the greater proportion of lower-margin products from the new California facilities in its sales mix, Sun Gro's second quarter gross margin declined to 43% from 48% in 2006. Excluding the California operations, the company's second quarter gross margin would have been 46%. Weaver noted that Sun Gro is in the process of adding higher-margin professional growing mixes to its California output, as well as adjusting prices.
"During the second quarter, as planned, we completed the installation of a new growing mix production line at our McFarland, California plant, and we are now in the process of installing an automated mixing line at our Sacramento facility. These enhancements will allow us to target more profitable business within the California professional grower market," said Weaver.
Gross profit for the second quarter was also negatively impacted by a slower than normal start to harvesting in Manitoba due to persistent wet weather during the spring and early summer of this year. However, in New Brunswick, Sun Gro achieved nearly twice its targeted second quarter harvest volume, demonstrating the benefits of the company's growing geographic diversification. Sun Gro is one of only a few peat industry participants with significant bog resources in all commercially viable harvest regions of North America.
The company's primarily US dollar-denominated sales revenues were moderately impacted by a year-over-year strengthening of the Canadian dollar during the quarter. The average Canadian dollar exchange rate increased to US$0.90 from US$0.89 in the second quarter of 2006. The difference effectively decreased Sun Gro's three-month revenue by about 1%.
In tandem with the expansion of its business into California, the company saw an increased cost of goods sold during the second quarter of 2007. The strengthening of the Canadian dollar and slower start to the Manitoba peat harvest also contributed to the increased costs. As a result, Sun Gro's cost of goods sold for the quarter was up by 32% over 2006. Distribution costs were also higher, increasing by 20% over last year due to the larger sales volumes.
Second quarter operating income of $4.1 million was consistent with the $4.1 million reported for the same period of 2006. As expected, the higher sales revenues from the company's new California locations did not have a meaningful impact on operating income. Sun Gro will continue to focus sales efforts over the balance of the year on adding more higher-margin professional business to the new California plants.
Net earnings for the three month period were $4.9 million, generating basic and diluted earnings of $0.22 per unit. In 2006, the company generated basic and diluted earnings of $0.38 per unit on second quarter net earnings of $8.4 million. The year-over-year difference is primarily attributable to differences in future taxes.
Six-Month Operating Results
Revenue for the six months ended June 30, 2007 was $129.8 million, up by $20.0 million, or 18%, from the $109.8 million reported in the first half of 2006. Overall sales volumes for the first half were 14% higher than in 2006. As with the quarterly result, the revenue gain was primarily driven by the new California operations, which added about $11.1 million of revenue during the six months.
Sun Gro's gross margin of 45% for the first half of 2007 was down from 47% in the same six months of 2006, due mainly to the significant lower-margin sales volumes added in California. Excluding the California operations, gross margin for the first half would have been 46%. Operating income for the first half increased to $10.8 million from $10.1 million in 2006. Net earnings of $9.7 million, or $0.44 per unit, were down from $12.5 million, or $0.57 per unit, in the first six months of 2006. The net earnings difference is attributable to this year's higher sales volumes and revenue, offset by differences in future taxes.
Financial Highlights
Comparative Statements of Earnings (In thousands of dollars For the three For the three except per unit amounts, months ended months ended number of units outstanding June 30, 2007 June 30, 2006 and EBs) (unaudited) (unaudited) Revenue $ 63,181 100% $ 51,926 100% Cost of goods sold 35,712 57% 27,006 52% Gross profit 27,469 43% 24,920 48%
Distribution expenses 14,436 23% 12,045 23% Selling expenses 4,225 7% 3,900 8% General and administrative expenses 4,677 7% 4,827 9% Total operating expenses 23,338 37% 20,772 40% Operating income 4,131 6% 4,148 8%
Other income, net 3,320 6% 3,875 7% Interest expense (1,238) -2% (1,176) -2% Earnings before income taxes 6,213 10% 6,847 13% Income tax (provision) recovery Current (436) -1% (867) -2% Future (882) -1% 2,400 5% Income tax (provision) recovery, net (1,318) -2% 1,533 3% Net earnings for the period $ 4,895 8% $ 8,380 16%
Basic and diluted earnings per unit $ 0.22 $ 0.38 Weighted average number of units outstanding 22,023,000 22,023,000
Selected supplemental revenue information
Volume in thousands of EBs(1) Growing Mixes 1,881 1,486 Bulk Bark Mixes 280 42 Peat Moss 1,951 1,794 Fertilizer and Minerals 71 93 Total company sales 4,183 3,415
Average revenue per EB(1) (US $) Growing Mixes $ 18.36 $ 18.30 Bulk Bark Mixes 8.17 7.43 Peat Moss 9.04 8.23 Fertilizer and Minerals 37.58 28.49 Total company sales $ 13.66 $ 13.16
Average revenue per EB(1) (Canadian $) Growing Mixes $ 20.47 $ 20.73 Bulk Bark Mixes 9.03 8.37 Peat Moss 10.04 9.30 Fertilizer and Minerals 41.54 32.30 Total company sales $ 15.20 $ 14.89
(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 or the cost of early payment discounts.
Comparative Statements of Earnings (In thousands of dollars For the six For the six except per unit amounts, months ended months ended number of units outstanding June 30, 2007 June 30, 2006 and EBs) (unaudited) (unaudited) Revenue $ 129,847 100% $ 109,823 100% Cost of goods sold 71,859 55% 57,786 53% Gross profit 57,988 45% 52,037 47%
Distribution expenses 28,392 22% 24,765 22% Selling expenses 8,436 7% 7,680 7% General and administrative expenses 10,348 8% 9,474 9% Total operating expenses 47,176 37% 41,919 38% Operating income 10,812 8% 10,118 9%
Other income, net 3,592 3% 3,583 3% Interest expense (2,413) -2% (2,225) -2% Earnings before income taxes 11,991 9% 11,476 10% Income tax (provision) recovery Current (1,893) -2% (1,952) -2% Future (434) 0% 2,955 3% Income tax (provision) recovery, net (2,327) -2% 1,003 1% Net earnings for the period $ 9,664 7% $ 12,479 11%
Basic and diluted earnings per unit $ 0.44 $ 0.57 Weighted average number of units outstanding 22,023,000 22,023,000
Selected supplemental revenue information
Volume in thousands of EBs(1) Growing Mixes 3,935 3,293 Bulk Bark Mixes 390 79 Peat Moss 3,284 3,254 Fertilizer and Minerals 165 196 Total company sales 7,774 6,822
Average revenue per EB(1) (US $) Growing Mixes $ 18.58 $ 18.44 Bulk Bark Mixes 8.05 7.33 Peat Moss 9.34 8.37 Fertilizer and Minerals 31.82 28.47 Total company sales $ 14.56 $ 13.80
Average revenue per EB(1) (Canadian $) Growing Mixes $ 21.36 $ 21.07 Bulk Bark Mixes 9.07 8.33 Peat Moss 10.64 9.53 Fertilizer and Minerals 43.39 32.53 Total company sales $ 16.68 $ 15.75
(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 or the cost of early payment discounts.
Acquisition Activity
As previously reported, Sun Gro entered into an agreement during the quarter to acquire Quebec-based peat moss producer Tourbiere Omer Belanger Inc. for $3.9 million. The purchase includes 1,900 acres of largely undeveloped professional grade peat bogs, 140 acres of retail grade bogs and three adjacent production facilities. The transaction is expected to close on August 6, 2007 and will be funded through Sun Gro's existing acquisition line of credit. The transaction, the company's third acquisition since the beginning of 2007, is anticipated to be accretive to the Fund's unitholders beginning in 2008.
"In addition to giving us a physical presence in Quebec, the Tourbiere Omer Belanger acquisition has strengthened our long-term peat supply in Eastern Canada and enhanced the geographic diversity of our peat harvest resources," said Weaver. "The new bogs will help ensure our ability to provide high-quality peat to our core professional grower customers, who remain our primary focus."
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.
For the first six months of 2007, Sun Gro's combined growing mix and peat moss sales volumes were 14% higher than the level achieved in the first half of 2006. Moving through 2007, the company expects that its overall sales volumes will continue to be higher than in 2006, due both to the availability of additional bog acreage, and the contribution of its recent acquisitions in California and Quebec. The expected volume growth is based on Sun Gro achieving 2007 peat harvest levels that are in line with its 2006 experience.
"Through our acquisitions of Sun-Up Horticulture and Kellogg-Rich Grow in the first quarter of this year, we have established manufacturing capability in California," said Weaver. "While these new facilities were dedicated to retail co-packing and bulk-bark landscape mixes this spring, we are now in the process of adding high-margin professional mix products to their product lines. This will significantly enhance our ability to target greenhouse growers, ornamental nurseries, landscapers and vegetable transplant growers throughout the large California market. Our installation of a new growing mix production line at the recently acquired McFarland, California plant is part of this strategy. We are also now installing an automated mixing line at our Sacramento, California plant, expected to be completed this year."
Weaver noted that Sun Gro has increased its acquisition line of credit to support on-going growth initiatives, adding a further $10.0 million to the line. The company has also amended its credit facilities to extend the maturity of its term loans to November 1, 2010 and its revolving operating facility to November 1, 2009, giving it added financial flexibility.
Sun Gro continues to hold forward currency contracts to help manage the near-term impact of any further strengthening of the Canadian dollar. For the second half of 2007, the company has entered into forward currency contracts with a blended rate of $1.11 (US$0.90) that will offset approximately 70% of its expected net US dollar cash flows. For the first six months of 2008, Sun Gro has entered into foreign currency contracts with a blended rate of $1.07 (US$0.93). These will offset approximately 70% of its expected 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, failure to successfully implement our strategies of adding higher-margin products and targeting the professional grower market, failure of acquisitions to be accretive to unitholders or to be accretive within our anticipated time frames, 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 for the year ended December 31, 2006. 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.
The calculation of distributable cash is based on cash flows from operating activities, adjusted for changes in non-cash operating working capital, realized gains and losses on foreign currency contracts, sustaining capital expenditures, government grants and government loans, and such reserves as the Board of Directors 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 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 Sheet (in thousands of dollars) (unaudited)
As at As at June 30, December 31, Assets 2007 2006
Current assets Accounts receivable $ 46,523 $ 38,338 Inventories 24,969 33,874 Unrealized gain on foreign currency contracts 1,680 - Prepaid expenses and other assets 4,600 3,522 77,772 75,734
Property, plant and equipment 120,933 122,459 Intangible assets 35,200 33,653 Goodwill 13,468 11,202 Other assets 377 442 $ 247,750 $ 243,490 Liabilities and Unitholders' Equity
Current liabilities Bank indebtedness $ 754 $ 649 Operating line 31,294 31,146 Accounts payable and accrued liabilities 18,236 15,781 Unrealized loss on foreign currency contracts - 824 Current portion of long-term debt 647 221 Distribution payable to Unitholders 1,652 1,652 52,583 50,273
Other liabilities 4,696 4,561 Long-term debt 33,261 27,511 Future income taxes 14,912 13,678 105,452 96,023 Unitholders' equity Capital contributions 209,733 209,733 Cumulative translation account (20,638) (15,717) Cumulative earnings 67,059 57,395 Cumulative distributions declared (113,856) (103,944) 142,298 147,467 $ 247,750 $ 243,490
Consolidated Statements of Earnings and Cumulative Earnings (in thousands of dollars except per unit amounts and number of units outstanding) (unaudited)
For the For the For the For the three three six six months months months months ended ended ended ended June 30, June 30, June 30, June 30, 2007 2006 2007 2006