Americas Gold and Silver Corporation press release

Sun Gro Horticulture Income Fund Releases 2009 Fourth Quarter and Year-End Results

2010-03-17

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VANCOUVER, Mar. 17, 2010 (Canada NewsWire Group) -- /CNW/ -- Sun Gro Horticulture Income Fund (the Fund) today reported financial results for the three and 12 months ended December 31, 2009. The three-month period represents the fourth quarter of the Fund's 2009 fiscal year. Annual revenues were up by 3%, as a stronger US dollar offset a 10% decline in sales volumes, which the company measures in equivalent bales, or EBs (referring to 10 cubic feet of product). Increased revenues, combined with the ongoing benefits of Sun Gro's 2008 productivity initiatives and lower transportation costs, drove a tripling of operating income and a 39% improvement in EBITDA. The higher EBITDA, along with reduced use of working capital, supported an aggressive term debt reduction program and allowed the Fund to further reduce leverage by making substantial restricted cash deposits. Net earnings for the year were also significantly higher.

The year-over-year drop in sales volumes, as measured in EBs, was a result of the continued economic downturn in Sun Gro's principle US markets. The positive impact of a weaker Canadian dollar on its primarily US dollar denominated revenues was concentrated in the first nine months of the year, as this favourable exchange rate trend reversed in the final quarter of 2009. Results were also favorably impacted by lower energy costs.

"We are pleased with our overall performance in 2009," said Mitch Weaver, President and CEO of Sun Gro and a Trustee of the Fund. "In particular, we are proud of the excellent progress we have made in reducing our debt, which allowed us to improve our senior leverage ratio at year-end to 3.2 from 5.5 at the end of 2008. As a result, we were able to enter the new year with a much stronger balance sheet and lower interest rates on our outstanding debt."

Fourth Quarter Financial Results

Fourth quarter revenues of $49.9 million were down by 7% from the $53.7 million reported in 2008. The decrease was mainly due to the effect of the stronger Canadian dollar on Sun Gro's US dollar sales, as well as a 5% reduction in sales volumes. During the fourth quarter, the average value of the Canadian dollar in relation to the US dollar was up by 16% from 2008.

Fourth quarter EBITDA of $4.5 million was slightly higher than the 2008 level and was the highest fourth quarter amount posted by Sun Gro since 2006.

While overall sales volumes were down from the 2008 level, Sun Gro saw a 7% improvement in sales volumes of its higher-value peat and bark-based growing mixes. However, volumes of straight peat moss decreased by 9%, due to lower demand, and volumes of bulk bark mixes were down by 23%, as a result of reduced sales to growers of foundation and ornamental plants. Demand for these nursery products is largely driven by new home construction, which was severely depressed throughout 2009. Similarly, volumes of sand-based mix declined by 23% to 101,000 EBs, about half the quarterly rate they had been running in 2009. The higher sales of sand-based mixes in the first nine months of the year were driven by US government stimulus funded projects in the Southeastern US that had been completed or were slowing by the fourth quarter.

Gross margin was significantly affected by the less favourable exchange rates, declining to 38% from 46% in 2008. The negative impact of foreign exchange in the final quarter of 2009 was partially offset by lower distribution expenses and realized gains on foreign currency contracts. In the fourth quarter of 2008, the Canadian dollar weakened sharply, resulting in higher operating income and realized losses on foreign currency contracts.

Annual Financial Results

Sun Gro's annual revenues of $229.4 million were $7.5 million higher than the $221.9 million reported in 2008, despite the 10% decline in overall sales volumes. The revenue increase was primarily due to the relative weakness of the Canadian dollar during the first nine months of 2009, as well as stable customer pricing. For the full year, the average value of the Canadian dollar in relation to the US dollar was down by 7% from 2008.

Year-over-year, sales volumes were lower in all product categories except sand-based mixes. Volumes of peat and bark-based growing mixes declined by 2%, due to reduced sales of private label retail mixes. The reduction in retail mix volumes was partially offset by volume growth in Sun Gro's higher-value core professional mix business, particularly later in the year. As expected, volumes of straight peat moss decreased by 22%, due mainly to the company's decision not to renew a large peat supply contract, as well as lower sales to the golf course industry. Volumes of bulk bark mixes declined by 12% year-over-year, due to the reduced sales of nursery products. In the sand-based mix category, volumes increased by 15%.

Gross margin for the 12 months increased to 43% from 42% in 2008. The improvement was due to the combined impact of the productivity initiatives Sun Gro implemented in 2008 and the stronger US dollar during the first three quarters of the year. Operating income increased to $18.3 million from the $6.0 million reported in 2008. EBITDA increased to $26.4 million from $19.1 million in 2008. The EBITDA improvement was achieved despite the $4.3 million of realized foreign currency contract losses that were recorded in 2009, compared to a gain of $1.1 million in 2008. Net earnings swung from a loss of $42.1 million in 2008 to a profit of $18.9 million in 2009.

Reconciliation of net earnings (loss) to earnings before interest, taxes, depreciation and amortization (EBITDA)

Three Three months months Year ended Year ended ended ended December December December December (in thousands of dollars) 31, 2009 31, 2008 31, 2009 31, 2008 Net earnings (loss) for the period $ 18,921 $ (42,061) $ 2,910 $ (17,047) Adjustments: Interest expense 9,251 7,440 2,075 2,178 Depreciation, depletion and accretion 10,965 10,904 2,093 2,342 Amortization of intangibles 2,422 2,450 589 607 Goodwill and asset impairments 2,855 24,945 - - Unrealized (gain) loss on foreign currency contracts (14,511) 13,999 (2,025) 9,865 Unrealized foreign exchange (gain) loss on US dollar assets and liabilities (7,090) 10,429 (2,179) 9,455 Loss (gain) on disposal of property, plant and equipment (1,135) 212 - 72 Income tax provision (recovery), net 4,747 (9,216) 1,073 (2,968) EBITDA $ 26,425 $ 19,102 $ 4,536 $ 4,504

Balance Sheet Strengthened

During 2009, Sun Gro reduced its debt obligations by a total of $13.4 million, repaying principal of $8.4 million on term and other debt, and depositing US$4.6 million to a restricted cash account. In addition, drawings on the Fund's revolving operating facility (net of cash on hand and bank overdrafts) at the end of 2009 were reduced to $24.7 million from $29.6 million at the 2008 year-end. The $4.9 million reduction was due to more efficient working capital management and improved earnings. At December 31, 2009, the Fund was in compliance with all of its debt covenants.

In December 2009, the Fund completed the planned amendment of its credit facilities. In addition to extending the maturity of the Fund's revolving operating facility to 2011, the amendment decreased its borrowing limits to better match the Fund's reduced requirements. Subsequent to year-end, the Fund added Bank of America to its syndicate of lenders, joining existing lenders Bank of Montreal and Prudential Capital Group. "We are pleased to add the broad US presence of Bank of America to our lending group and we look forward to many years of working together," said Weaver.

"In 2009, we utilized our cash flows to significantly reduce our debt, and we are targeting a similar scale of debt reduction in 2010," stated Weaver. "We expect to remain in compliance with existing covenants for the balance of 2010 as we continue to work to reduce our debt further."

Distributable Cash

After the $13.4 million of debt repayments and restricted cash deposits, the Fund generated distributable cash of $0.5 million, or $0.02 per unit, in the 12 months ended December 31, 2009. Under the terms of its credit facility, the Fund is currently prohibited from making distributions to unitholders. All 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 2008, the Fund generated distributable cash of $8.4 million, or $0.38 per unit, and declared distributions of $9.2 million, or $0.41 per unit. However, debt repayments were only $0.5 million in 2008.

Statement of Distributable Cash

Three Three months months Year ended Year ended ended ended (in thousands of dollars December December December December except per-unit amounts) 31, 2009 31, 2008 31, 2009 31, 2008 Cash flows from operating activities $ 20,160 $ 10,717 $ 2,294 $ 1,427 Adjustments: Change in non-cash operating working capital (4,497) 1,056 (481) 1,773 Sustaining capital expenditures (2,985) (2,901) (1,367) (491) Payments on capital leases and other loans (486) (493) (98) (101) Restricted cash payments (4,978) - (1,183) - Repayment of term loans (6,674) - (1,215) - Distributable cash $ 540 $ 8,379 $ (2,050) $ 2,608 Distributable cash per unit $ 0.02 $ 0.38 $ (0.09) $ 0.12 Distributions declared per unit $ - $ 0.4125 $ - $ -

Operating Results for the three months ended December 31, 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 and number of December 31, December 31, units outstanding 2009 2008 Revenue $ 49,884 100% $ 53,654 100% Cost of goods sold 30,992 62% 28,764 54% Gross profit 18,892 38% 24,890 46% Distribution expenses 8,597 17% 10,744 20% Selling expenses 4,155 8% 3,977 8% General and administrative expenses 4,449 9% 6,599 12% Total operating expenses 17,201 34% 21,320 40% Operating income 1,691 4% 3,570 6% Other income (expense), net 4,367 8% (21,407) -40% Interest expense (2,075) -4% (2,178) -4% Earnings (loss) before income taxes 3,983 8% (20,015) -38% Income tax (provision) recovery Current (648) -1% 874 2% Future (425) -1% 2,094 4% Income tax (provision) recovery, net (1,073) -2% 2,968 6% Net earnings (loss) for the period $ 2,910 6% $ (17,047) -32% Other comprehensive income (loss): Unrealized gain (loss) on translating financial statements of self-sustaining foreign operations (1,943) -4% 8,190 15% Comprehensive income (loss) for the period $ 967 2% $ (8,857) -17% Basic and diluted earnings (loss) per unit $ 0.13 $ (0.76) Weighted average number of units outstanding 22,284,681 22,284,681 Selected supplemental revenue information 2009 2008 Increase (decrease) Volume in thousands of EBs(1) Peat and Bark-based Growing Mixes 1,515 1,417 98 7% Peat Moss 744 818 (74) -9% Bulk Bark Mixes 518 675 (157) -23% Fertilizer and Minerals 66 62 4 6% Sand-based Mixes 101 131 (30) -23% Total 2,944 3,103 (159) -5% Average revenue per EB(1) (US $) Peat and Bark-based Growing Mixes $ 20.61 $ 20.71 $ (0.10) 0% Peat Moss 10.77 11.26 (0.49) -4% Bulk Bark Mixes 8.57 8.02 0.55 7% Fertilizer and Minerals 38.09 40.63 (2.54) -6% Sand-based Mixes 10.09 10.83 (0.74) -7% Total $ 16.04 $ 15.44 $ 0.60 4% Average revenue per EB(1) (CDN $) Peat and Bark-based Growing Mixes $ 22.23 $ 23.31 $ (1.08) -5% Peat Moss 11.60 12.77 (1.17) -9% Bulk Bark Mixes 9.24 9.07 0.17 2% Fertilizer and Minerals 40.95 46.60 (5.65) -12% Sand-based Mixes 10.91 12.51 (1.60) -13% Total $ 17.29 $ 15.58 $ 1.71 11% (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 12 months ended December 31, 2009 and 2008 Comparative Statements of Earnings (Loss) and Comprehensive Income (Loss) Year ended Year ended (In thousands of dollars except ended ended per-unit amounts and number of December 31, December 31, units outstanding 2009 2008 Revenue $ 229,352 100% $ 221,935 100% Cost of goods sold 131,654 57% 129,084 58% Gross profit 97,698 43% 92,851 42% Distribution expenses 38,508 17% 49,064 22% Selling expenses 18,655 8% 16,353 8% General and administrative expenses 22,195 10% 21,443 9% Total operating expenses 79,358 35% 86,860 39% Operating income 18,340 8% 5,991 3% Other income (expense), net 17,434 7% (24,883) -11% Asset impairment (2,855) -1% (24,945) -11% Interest expense (9,251) -4% (7,440) -4% Earnings (loss) before income taxes 23,668 10% (51,277) -23% Income tax (provision) recovery Current (1,511) -1% 111 0% Future (3,236) -1% 9,105 4% Income tax (provision) recovery, net (4,747) -2% 9,216 4% Net earnings (loss) for the period $ 18,921 8% $ (42,061) -19% Other comprehensive income (loss): Unrealized gain (loss) on translating financial statements of self-sustaining foreign operations (7,453) -3% 10,468 5% Comprehensive income (loss) for the period $ 11,468 5% $ (31,593) -14% Basic and diluted earnings (loss) per unit $ 0.85 $ (1.89) Weighted average number of units outstanding 22,284,681 22,284,681 Selected supplemental revenue information 2009 2008 Increase (decrease) Volume in thousands of EBs(1) Peat and Bark-based Growing Mixes 5,987 6,114 (127) -2% Peat Moss 3,557 4,581 (1,024) -22% Bulk Bark Mixes 2,368 2,680 (312) -12% Fertilizer and Minerals 291 320 (29) -9% Sand-based Mixes 723 628 95 15% Total 12,926 14,323 (1,397) -10% Average revenue per EB(1) (US $) Peat and Bark-based Growing Mixes $ 20.24 $ 20.09 $ 0.15 1% Peat Moss 10.85 10.73 0.12 1% Bulk Bark Mixes 8.48 8.66 (0.18) -2% Fertilizer and Minerals 42.02 43.86 (1.84) -4% Sand-based Mixes 10.59 11.08 (0.49) -4% Total $ 15.45 $ 15.09 $ 0.36 2% Average revenue per EB(1) (CDN $) Peat and Bark-based Growing Mixes $ 23.45 $ 20.74 $ 2.71 13% Peat Moss 12.49 11.06 1.43 13% Bulk Bark Mixes 9.79 8.96 0.83 9% Fertilizer and Minerals 48.75 45.17 3.58 8% Sand-based Mixes 12.27 11.47 0.80 7% Total $ 17.88 $ 15.58 $ 2.30 15% (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

Although general economic conditions have not improved markedly, and US new home construction activity remains sluggish, Sun Gro's sales volumes for the first two months of 2010 reflect renewed optimism on the part of its grower customers. Based on current demand, Sun Gro believes that the peat supply currently on hand will be sufficient to support sales until the anticipated start of the 2010 harvest in May. It also expects to continue to benefit from generally lower transportation costs and the productivity initiatives Sun Gro implemented in 2008.

"While we are moving forward with the benefit of a significantly stronger balance sheet, the foreign exchange environment continues to reflect weakness in the US dollar. Further strengthening of the Canadian dollar could significantly erode our operating income," said Weaver. "We have expanded our hedge position going into 2010 and will continue to closely monitor our foreign exchange exposure over the course of the year."

Foreign currency contracts for 2010 total US$50.0 million at an average rate of $1.14 (US$0.88), representing substantially all of Sun Gro's anticipated purchases of Canadian dollars. For the first half of 2011, the Fund has entered into foreign currency contracts totaling US$17.0 million at an average rate of $1.06 (US$0.94).

Copies of management's discussion and analysis (MD&A) and the Fund's audited financial statements for the three and 12 months ended December 31, 2009 will be available at www.sedar.com and www.sungro.com on or about March 26, 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. The forward-looking statements or information relates to, among other things: compliance with Sun Gro's debt covenants; the adequacy of Sun Gro's peat supply to support sales until the 2010 harvest; and the expected benefits associated with lower transportation costs and productivity initiatives commenced in prior periods. 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, 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 (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.