Sun Gro Horticulture Income Fund Releases 2007 Third Quarter Results



    Fund Continues to Position Operations for Future Growth

    TRADING SYMBOL: Toronto Stock Exchange - GRO.UN

    Sun Gro Horticulture Income Fund will hold a conference call and webcast
    to discuss 2007 third quarter and nine-month results on November 2, 2007
    at 7:30 am Pacific Time (10:30 am Eastern). The call can be accessed by
    dialing: 1-800-594-3790 or 416-644-3422. A replay will be available
    through November 16, 2007 at: 1-877-289-8525 or 416-640-1917. (Passcode:
    21250880 followed by the number sign)

    To access the live and archived webcast, please go to:
    http://www.vcall.com/IC/CEPage.asp?ID=122413 or to the fund's
    website at: www.sungro.com.

    VANCOUVER, Nov. 1 /CNW/ - Sun Gro Horticulture Income Fund (the Fund)
today reported financial results for the three and nine months ended
September 30, 2007. The three-month period represents the third quarter of the
Fund's 2007 fiscal year. The Fund's strategic focus this year has been to
expand its manufacturing presence into key US horticultural markets. Its third
quarter financial statements include the results of two California businesses
acquired in January 2007.

    Distributable Cash

    In the three months ended September 30, 2007, the Fund generated
distributable cash of $4.2 million, or $0.19 per unit. This compares to
$7.1 million, or $0.32 per unit, in the third quarter of 2006. For the
nine-month period, distributable cash totalled $17.1 million, or $0.78 per
unit, compared to $19.8 million, or $0.90 per unit, in 2006. Distributable
cash paid to unitholders was unchanged at $5.0 million, or $0.225 per unit,
for the quarter and $14.9 million, or $0.675 per unit, for the nine months.

    
    (in thousands of dollars       For the    For the    For the    For the
     except per-unit amounts)       three      three      nine       nine
                                    months     months     months     months
    Statement of distributable      ended      ended      ended      ended
     cash                         September  September  September  September
                                   30, 2007   30, 2006   30, 2007   30, 2006
                                  -------------------------------------------

    Cash flows from operating
     activities                    $  4,436   $  7,066   $ 16,699   $ 18,645
    Adjustments:
      Change in non-cash operating
       working capital(1)               407       (742)       591       (865)
      Realized gain on foreign
       currency contracts(2)          1,263      1,538      2,569      4,074
      Sustaining capital
       expenditures(3)               (1,279)      (300)    (2,760)    (1,986)
      Proceeds from government
       grants(4)                          -         60          -         60
      Repayment of government
       loans(4)                         (56)       (50)      (166)      (150)
      Current income taxes expected
       to seasonally reverse in the
       current fiscal year(5)          (570)      (482)       144          -
                                  -------------------------------------------
    Distributable cash             $  4,201   $  7,090   $ 17,077   $ 19,778
                                  -------------------------------------------
                                  -------------------------------------------
    Distributable cash per unit    $   0.19   $   0.32   $   0.78   $   0.90
                                  -------------------------------------------
                                  -------------------------------------------

    Distributions declared
     per unit                      $  0.225   $  0.225   $  0.675   $  0.675
                                  -------------------------------------------
                                  -------------------------------------------

    (1) Non-cash working capital fluctuates significantly on a quarterly
        basis as a result of the seasonality of our business.

    (2) The majority of our sales occur outside of Canada and the Fund uses
        foreign currency contracts to minimize the impact of exchange rate
        fluctuations. Excluding realized gains and losses arising from the
        foreign currency management program from distributable cash would not
        accurately represent Sun Gro's performance.

    (3) Sustaining capital expenditures are defined as cash outlays, capital
        in nature, required to maintain the business at our current operating
        capacity and efficiency level. Investment capital expenditures are
        those that are for the purpose of business expansion and are not
        recorded as a reduction from distributable cash.

    (4) These loans and grants were received to directly support certain
        capital projects. Proceeds and repayments are included in the
        calculation of distributable cash, as the related capital spending is
        presented on a gross basis.

    (5) Each quarter, Sun Gro records the amount of current income tax
        expense or recovery based on the quarter's taxable income or loss.
        Due to the seasonal nature of our operations, we typically record
        current income tax expense in the first half of the year and current
        tax recoveries in the second half of the year. Accordingly,
        distributable cash is adjusted on a quarterly basis to eliminate this
        seasonality and recognize only the current income tax expense Sun Gro
        expects to incur for the full year.
    


    Three-month Operating Results

    During the third quarter, the Fund's wholly owned subsidiary, Sun Gro
Horticulture Canada Ltd., and its wholly owned subsidiaries (collectively Sun
Gro, or the company) generated revenues of $42.7 million, up by $1.7 million,
or 4%, from $41.0 million in 2006. The revenue increase was driven by Sun
Gro's new California operations. The four California plants purchased in
January 2007 added about $4.2 million of revenue from retail co-packing
business and sales of professional mixes and bulk bark landscape mixes. These
revenues were offset by a $2.1 million year-over-year reduction in peat moss
sales, due mainly to lower shipments under a peat supply agreement and some
sales deferred to the fourth quarter.
    The company's primarily US dollar-denominated sales revenues were
moderately affected by a year-over-year strengthening of the Canadian dollar
during the quarter. The average Canadian dollar exchange rate increased to
US$0.96 from US$0.90 in the third quarter of 2006. The difference effectively
decreased Sun Gro's three-month revenue by about 5%. Some of the exchange rate
impact was mitigated by price increases.
    Overall sales volumes for the three months were nearly 3% higher than in
the third quarter of last year. Sales volumes of both peat and bark growing
mixes and bulk bark mixes increased during the third quarter, by 18% and 193%,
respectively. Sales volumes of straight peat moss were down by 15% from the
same period in 2006.
    Peat harvest volumes during the three months were affected by
unfavourable weather in Manitoba. To avoid costly cross-regional shipping of
peat later in the year, and to support its growing mix sales, the company
purchased peat from another producer in Manitoba.
    As anticipated with its strategic expansion in California, Sun Gro saw an
increased cost of goods sold during the third quarter of 2007. The incremental
expense of purchasing external peat and production inefficiencies at some
plants as a result of the reduced harvest volumes also contributed to the
higher cost of goods sold, which exceeded the 2006 third quarter level by 16%.
    Again as expected, Sun Gro's gross margin was reduced by the significant
volumes of lower-margin products added in California. For the three months,
gross margin declined to 47.5% from 52.8% in 2006. Excluding the California
operations, the company's third quarter gross margin would have been 49.7%.
The balance of the year-over-year difference was due to the combined impact of
currency exchange and the reduced peat harvest. The third quarter gross margin
was up from the level achieved in each of the three immediately preceding
quarters.
    "We are continuing to focus on adding higher-margin professional growing
mixes to our California output, as well as on adjusting our prices to offset
the impact of foreign exchange," said Mitch Weaver, President and CEO of Sun
Gro and a Trustee of the Fund. "During the third quarter, as planned, we
completed the installation of an automated mixing line at our Sacramento
facility. This enhancement, together with the new growing mix production line
we commissioned at our McFarland, California plant in the second quarter, will
allow us to also target more profitable business within the California
professional grower market."
    Third quarter operating income of $1.8 million was down by $2.0 million
from the $3.8 million reported for the same period of 2006. The decrease was
primarily due to the lower gross margin coupled with higher operating
expenses. Net earnings for the three months were $5.6 million, generating
basic and diluted earnings of $0.25 per unit. In 2006, the company generated
basic and diluted earnings of $0.15 per unit on third quarter net earnings of
$3.4 million.

    Nine-Month Operating Results

    Revenue for the nine months ended September 30, 2007 was $172.5 million,
up by $21.7 million, or 14%, from the $150.8 million reported in the first
nine months of 2006. As with the quarterly result, the increase was primarily
driven by Sun Gro's new California operations, which contributed about
$15.3 million of sales. The company also saw a $5.9 million increase in its
growing mix sales and a $1.6 million increase in controlled release fertilizer
sales. As with the quarterly result, Sun Gro's nine-month revenue was
moderately impacted by foreign exchange.
    Overall sales volumes for the first three quarters of the year were 11%
higher than in 2006. Due mainly to the increased volumes, cost of goods sold
was up by 22% over the same nine months of 2006.
    Sun Gro's year-to-date gross margin of 45% was down from 49% in the first
nine months of 2006. The difference was due mainly to the significant
lower-margin sales volumes added in California, production inefficiencies
associated with the Manitoba harvest shortfall and the strengthening of the
Canadian dollar. Excluding the California operations, Sun Gro's gross margin
for the nine months would have been 47%.
    Operating income for the first nine months was $12.7 million, down from
$14.0 million in 2006. Net earnings of $15.2 million, or $0.69 per unit, were
comparable to the $15.9 million, or $0.72 per unit, recorded in the first nine
months of 2006.


    
    Financial Highlights

    Comparative Statements of Earnings
     and Comprehensive Income
    (In thousands of dollars except       For the three      For the three
     per-unit amounts, number of           months ended       months ended
     units outstanding and EBs(1))      September 30, 2007 September 30, 2006
                                            (unaudited)        (unaudited)
                                        ------------------ ------------------
    Revenue                              $   42,683  100%   $   41,025  100%
    Cost of goods sold                       22,415   53%       19,346   47%
                                        ------------       ------------
    Gross profit                             20,268   47%       21,679   53%

    Distribution expenses                     9,596   23%        9,469   23%
    Selling expenses                          3,988    9%        3,971   10%
    General and administrative expenses       4,844   11%        4,402   11%
                                        ------------       ------------
    Total operating expenses                 18,428   43%       17,842   43%
                                        ------------       ------------
    Operating income                          1,840    5%        3,837    9%

    Other income (expense), net               4,166   10%         (274)  -1%
    Interest expense                         (1,103)  -3%       (1,025)  -2%
                                        ------------       ------------
    Earnings before income taxes              4,903   11%        2,538    6%
    Income tax (provision) recovery
      Current                                 1,172    3%          640    2%
      Future                                   (490)  -1%          223    1%
                                        ------------       ------------
    Income tax (provision) recovery, net        682    2%          863    2%
                                        ------------       ------------
    Net earnings and comprehensive income
     for the period                      $    5,585   13%   $    3,401    8%
                                        ------------       ------------
                                        ------------       ------------

    Basic and diluted earnings per unit  $     0.25         $     0.15
                                        ------------       ------------
                                        ------------       ------------
    Weighted average number of units
     outstanding                         22,023,000         22,023,000
                                        ------------       ------------
                                        ------------       ------------

    Selected supplemental revenue
     information

      Volume in thousands of EBs(1)
      Growing Mixes                           1,317              1,118
      Bulk Bark Mixes                           220                 75
      Peat Moss                               1,411              1,670
      Fertilizer and Minerals                    60                 68
                                        ------------       ------------
      Total company sales                     3,008              2,931
                                        ------------       ------------
                                        ------------       ------------

      Average revenue per EB(1) (US $)
      Growing Mixes                      $    18.18         $    18.08
      Bulk Bark Mixes                          8.03               5.77
      Peat Moss                                9.02               8.22
      Fertilizer and Minerals                 34.00              29.77
                                        ------------       ------------
      Total company sales                $    13.45         $    12.42
                                        ------------       ------------
                                        ------------       ------------

      Average revenue per EB(1)
       (Canadian $)
      Growing Mixes                      $    19.28         $    20.16
      Bulk Bark Mixes                          8.52               6.48
      Peat Moss                                9.57               9.19
      Fertilizer and Minerals                 36.11              33.22
                                        ------------       ------------
      Total company sales                $    14.27         $    13.86
                                        ------------       ------------
                                        ------------       ------------

    (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
     and Comprehensive Income
    (In thousands of dollars except        For the nine       For the nine
     per-unit amounts, number of           months ended       months ended
     units outstanding and EBs(1))      September 30, 2007 September 30, 2006
                                            (unaudited)        (unaudited)
                                        ------------------ ------------------
    Revenue                              $  172,530  100%   $  150,848  100%
    Cost of goods sold                       94,274   55%       77,132   51%
                                        ------------       ------------
    Gross profit                             78,256   45%       73,716   49%

    Distribution expenses                    37,988   22%       34,234   23%
    Selling expenses                         12,424    7%       11,651    8%
    General and administrative expenses      15,192    9%       13,876    9%
                                        ------------       ------------
    Total operating expenses                 65,604   38%       59,761   40%
                                        ------------       ------------
    Operating income                         12,652    7%       13,955    9%

    Other income, net                         7,758    5%        3,309    2%
    Interest expense                         (3,516)  -2%       (3,250)  -2%
                                        ------------       ------------
    Earnings before income taxes             16,894   10%       14,014    9%
    Income tax (provision) recovery
      Current                                  (721)  -1%       (1,312)  -1%
      Future                                   (924)  -1%        3,178    2%
                                        ------------       ------------
    Income tax (provision) recovery,
     net                                     (1,645)  -1%        1,866    1%
                                        ------------       ------------
    Net earnings and comprehensive
     income for the period               $   15,249    9%   $   15,880   10%
                                        ------------       ------------
                                        ------------       ------------

    Basic and diluted earnings per unit  $     0.69         $     0.72
                                        ------------       ------------
                                        ------------       ------------
    Weighted average number of units
     outstanding                         22,023,000         22,023,000
                                        ------------       ------------
                                        ------------       ------------

    Selected supplemental revenue
     information

      Volume in thousands of EBs(1)
      Growing Mixes                           5,252              4,410
      Bulk Bark Mixes                           610                155
      Peat Moss                               4,695              4,924
      Fertilizer and Minerals                   225                264
                                        ------------       ------------
      Total company sales                    10,782              9,753
                                        ------------       ------------
                                        ------------       ------------

      Average revenue per EB(1) (US $)
      Growing Mixes                      $    18.48         $    18.35
      Bulk Bark Mixes                          8.04               6.57
      Peat Moss                                9.24               8.32
      Fertilizer and Minerals                 36.80              28.80
                                        ------------       ------------
      Total company sales                $    14.25         $    13.38
                                        ------------       ------------
                                        ------------       ------------

      Average revenue per EB(1)
       (Canadian $)
      Growing Mixes                      $    20.84         $    20.84
      Bulk Bark Mixes                          8.87               7.43
      Peat Moss                               10.32               9.42
      Fertilizer and Minerals                 41.46              32.70
                                        ------------       ------------
      Total company sales                $    16.01         $    15.18
                                        ------------       ------------
                                        ------------       ------------

    (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.
    

    Recent Acquisition Activity

    On August 6, 2007, as previously announced, Sun Gro established a
harvesting capability in Quebec and strengthened its long-term peat supply
through the acquisition of peat moss producer Tourbière Omer Bélanger Inc. for
$3.9 million. The purchase included 1,900 acres of largely undeveloped
professional grade peat bogs, 140 acres of retail grade bogs and three
adjacent production facilities. The transaction was funded through Sun Gro's
existing acquisition line of credit and is expected to be accretive to the
Fund's unitholders beginning in 2008.
    Subsequent to the end of the quarter, as announced on October 1, 2007,
Sun Gro continued to execute its strategy to increase its bulk bark growing
mix business and solidified its leadership in the large and growing Florida
horticultural market by acquiring all of the outstanding shares of GrowBest
Holdings, LLC. The US$20.3 million transaction gave Sun Gro ownership of bulk
bark mix producer Florida Potting Soils, Inc., as well as, Sunshine Peat,
Inc., which supplies organic material to Florida Potting Soils for use in
custom mixes. Both companies are based in Orlando, Florida. In addition to the
outstanding shares, Sun Gro acquired real estate for US$1.2 million. The
purchase was funded through the issuance of US$2.0 million of trust units of
the Fund and borrowings under a new acquisition line of credit established for
the transaction, which matures in June 2008. This acquisition is expected to
be modestly accretive to the Fund's unitholders in the fourth quarter, adding
an estimated US$32.0 million in annual sales beginning in 2008.
    "Through the four acquisitions we have completed since the beginning of
this year, we have strengthened the geographic diversity of our peat
resources, expanded our product offerings, and positioned our plant capacity
to respond to market demands," said Weaver. "We are particularly pleased with
our progress in increasing our market share in the bark-based segment of the
professional market and enhancing our production network. In addition to
holding significant bog resources in all commercially viable harvest regions
of North America, Sun Gro now has manufacturing facilities in each of the four
largest professional markets in the US."

    Outlook

    The information contained in "Outlook" is forward-looking statements.
Please see "Forward-Looking Statements" below for a discussion of the risks
and uncertainties in connection with forward-looking statements.
    In the seasonally slower final quarter of 2007, Sun Gro anticipates that
its overall sales volumes will continue to be higher than in 2006, due to the
contribution of its recent acquisitions in California, Quebec and Florida.
    The company's 2007 peat harvest was substantially complete by the end of
the third quarter and Sun Gro expects that its total harvest will equal
approximately 94% of the 2006 yield. "While somewhat disappointing, we do not
anticipate that this year's harvest results will have a negative impact our
production of growing mixes, and we expect to continue to increase our growing
mix sales in 2008. However, we do anticipate that peat supplies will be tight
until the 2008 harvest season commences," said Weaver.
    "We also expect that our gross margin will continue to track below the
2006 level due to our strategic expansion in the US," Weaver continued. "The
acquired businesses in California and Florida have lower transportation costs
than our Canadian processing operations, and this is reflected in the
delivered selling price. The US net margins after transportation costs are
comparable to those generated in Canada for similar products."
    Sun Gro continues to hold foreign currency contracts to manage the impact
of any further strengthening of the Canadian dollar. For the remainder of
2007, it has entered into foreign currency contracts with a blended rate of
$1.09 (US$0.92) that will offset approximately 85% of its expected net US
dollar cash flows. For 2008, Sun Gro has thus far entered into foreign
currency contracts with a blended rate of $1.07 (US$0.93) that will offset
approximately 70% of its expected US dollar cash flows through December 2008.
Of the contracts outstanding, $16.1 million relates to contracts that mature
in 2007. Unrealized gains on these contracts were $1.3 million at
September 30, 2007.
    Weaver said the company will continue to closely monitor and actively
manage its foreign exchange exposure through both its product pricing and its
currency management program.

    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 and interest rates, changes in tax
laws, the impact of adverse weather conditions on harvesting operations, an
increase in freight rates, the impact of an increase in fuel rates, failure to
successfully implement its strategies of adding mix products and targeting the
professional grower market, failure of acquisitions to be accretive to
unitholders or to be accretive within its anticipated timeframes, inability to
refinance acquisition debt, the impact of an increase in fuel costs, reduced
consumer demand from natural disasters and economic factors and competitive
activity. 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, except as required by law.

    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 on March 27, 2002. Units of the Fund are listed for
trading on the Toronto Stock Exchange. At October 31, 2007, there were
22,284,681 units of the Fund issued and outstanding. 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 currently has approximately 65,000 acres of peat bogs under
lease. The company's North America-wide production network now comprises 14
Canadian peat and peat-mixing plants and 13 US peat and bark-mixing plants.


    
    Sun Gro Horticulture Income Fund
    Consolidated Balance Sheet
    (in thousands of dollars)
    (unaudited)

                                                       As at        As at
                                                   September 30, December 31,
    Assets                                              2007         2006
                                                   ------------  ------------

    Current assets
      Accounts receivable                           $   34,820    $   38,338
      Inventories                                       34,996        33,874
      Unrealized gain on foreign currency contracts      4,259             -
      Prepaid expenses and other assets                  3,895         3,522
                                                   ------------  ------------
                                                        77,970        75,734

    Property, plant and equipment                      123,956       122,459
    Unrealized gain on forward currency contracts          371             -
    Intangible assets                                   34,579        33,653
    Goodwill                                            13,753        11,202
    Other assets                                           260           442
                                                   ------------  ------------
                                                    $  250,889    $  243,490
                                                   ------------  ------------
                                                   ------------  ------------
    Liabilities and Unitholders' Equity

    Current liabilities
      Bank indebtedness                             $    1,690    $      649
      Operating line                                    30,945        31,146
      Accounts payable and accrued liabilities          17,117        15,781
      Unrealized loss on foreign currency contracts          -           824
      Current portion of long-term debt                    619           221
      Distribution payable to Unitholders                1,652         1,652
                                                   ------------  ------------
                                                        52,023        50,273

    Other liabilities                                    4,908         4,561
    Long-term debt                                      36,070        27,511
    Future income taxes                                 16,768        13,678
                                                   ------------  ------------
                                                       109,769        96,023
    Unitholders' equity
      Capital contributions                            209,733       209,733
      Cumulative translation account                   (22,445)      (15,717)
      Cumulative earnings                               72,644        57,395
      Cumulative distributions declared               (118,812)     (103,944)
                                                   ------------  ------------
                                                       141,120       147,467
                                                   ------------  ------------
                                                    $  250,889    $  243,490
                                                   ------------  ------------
                                                   ------------  ------------



    Sun Gro Horticulture Income Fund
    Consolidated Statements of Earnings and Comprehensive Income 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       nine        nine
                                 months      months      months      months
                                 ended       ended       ended       ended
                                Sept 30,    Sept 30,    Sept 30,    Sept 30,
                                  2007        2006        2007        2006
                             ------------------------------------------------

    Revenue                   $   42,683  $   41,025  $  172,530  $  150,848
    Cost of goods sold            22,415      19,346      94,274      77,132
                             ------------------------------------------------
    Gross profit                  20,268      21,679      78,256      73,716

    Distribution expenses          9,596       9,469      37,988      34,234
    Selling expenses               3,988       3,971      12,424      11,651
    General and
     administrative expenses       4,844       4,402      15,192      13,876
                             ------------------------------------------------
    Total operating expenses      18,428      17,842      65,604      59,761
                             ------------------------------------------------
                             ------------------------------------------------
    Operating income               1,840       3,837      12,652      13,955

    Other income, net              4,166        (274)      7,758       3,309
    Interest expense              (1,103)     (1,025)     (3,516)     (3,250)
                             ------------------------------------------------
    Earnings before income
     taxes                         4,903       2,538      16,894      14,014
    Income tax (provision)
     recovery
      Current                      1,172         640        (721)     (1,312)
      Future                        (490)        223        (924)      3,178
                             ------------------------------------------------
    Income tax (provision)
     recovery, net                   682         863      (1,645)      1,866
                             ------------------------------------------------
                             ------------------------------------------------
    Net earnings and
     comprehensive income
     for the period                5,585       3,401      15,249      15,880
    Cumulative earnings -
     beginning of period          67,059      53,927      57,395      41,448
                             ------------------------------------------------
    Cumulative earnings -
     end of period            $   72,644  $   57,328  $   72,644  $   57,328
                             ------------------------------------------------
                             ------------------------------------------------

    Basic and diluted
     earnings per unit        $     0.25  $     0.15  $     0.69  $     0.72
                             ------------------------------------------------
                             ------------------------------------------------

    Weighted average number
     of units outstanding     22,023,000  22,023,000  22,023,000  22,023,000
                             ------------------------------------------------
                             ------------------------------------------------



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

                                For the     For the     For the     For the
                                 three       three       nine        nine
                                 months      months      months      months
                                 ended       ended       ended       ended
                                Sept 30,    Sept 30,    Sept 30,    Sept 30,
                                  2007        2006        2007        2006
                             ------------------------------------------------

    Cash flows from
     operating activities
    Net earnings and
     comprehensive income
     for the period           $    5,585  $    3,401  $   15,249  $   15,880
      Items not affecting
       cash
        Depreciation,
         depletion and
         accretion                 2,546       2,469       7,702       7,239
        Amortization of
         intangible assets           465         491       1,494       1,473
        Gain on foreign
         currency contracts       (4,213)        200      (8,023)     (3,622)
        Gain on disposal of
         property, plant
         and equipment               (30)        (14)        (56)        (12)
        Future income tax
         provision (recovery)        490        (223)        924      (3,178)
                             ------------------------------------------------
                                   4,843       6,324      17,290      17,780
      Change in non-cash
       operating working
       capital                      (407)        742        (591)        865
                             ------------------------------------------------
                                   4,436       7,066      16,699      18,645
    Cash flows from
     investing activities
      Acquisitions                (2,918)     (3,366)     (9,258)     (3,366)
      Realized gain on
       foreign currency
       contracts                   1,263       1,538       2,569       4,074
      Additions to property,
       plant and equipment        (1,697)       (300)     (4,015)     (1,986)
      Proceeds from disposal
       of property, plant
       and equipment                  62          14         124          16
                             ------------------------------------------------
                                  (3,290)     (2,114)    (10,580)     (1,262)
    Cash flows from
     financing activities
      Distributions paid to
       Unitholders                (4,956)     (4,956)    (14,868)    (14,868)
      Proceeds from term loans     3,900       3,350      10,335       3,350
      Decrease in operating
       line                         (349)     (1,571)       (201)     (3,608)
      Proceeds from government
       grant and loan                  -         165           -         165
      Repayment of government
       loans                         (56)        (50)       (166)       (150)
                             ------------------------------------------------
                                  (1,461)     (3,062)     (4,900)    (15,111)

    Effect of exchange rate
     changes on cash                (621)       (251)     (2,260)       (732)
                             ------------------------------------------------

    (Increase) decrease in
     bank indebtedness              (936)      1,639      (1,041)      1,540
    Bank indebtedness -
     beginning of period            (754)     (1,152)       (649)     (1,053)
                             ------------------------------------------------
    Cash and cash equivalents
     (Bank indebtedness) -
     end of period            $   (1,690) $      487  $   (1,690) $      487
                             ------------------------------------------------
                             ------------------------------------------------

    Supplemental cash flow
     information
      Interest paid           $      961  $      673  $    3,423  $    2,973
      Income taxes paid       $       32  $      229  $      300  $      612
    

    %SEDAR: 00017490E




For further information:

For further information: Bradley A. Wiens, Vice-President, Finance and
CFO, Sun Gro Horticulture Income Fund, Tel: (425) 373-3603, Email:
bradw@sungro.com, Website: www.sungro.com

Organization Profile

SUN GRO HORTICULTURE INCOME FUND

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