Sun Gro Horticulture Income Fund Releases 2008 Second Quarter Results

    Fund Reviews Conversion to Corporate Structure

    TRADING SYMBOL: Toronto Stock Exchange - GRO.UN

    Sun Gro Horticulture Income Fund will hold a conference call and webcast
    to discuss 2008 second quarter results on August 14, 2008 at 7:30 am
    Pacific Time (10:30 am Eastern). The call can be accessed by dialing:
    1-866-249-2157 or 416-915-5767 (GTA local & International).

    A replay will be available through August 29, 2008 at: 1-877-289-8525 or
    416-640-1917. Passcode 21279990 followed by the pound sign.

    To access the live and archived webcast, please go to: or to
    the fund's website at:

    VANCOUVER, Aug. 13 /CNW/ - Sun Gro Horticulture Income Fund (the Fund)
today reported financial results for the three and six months ended June 30,
2008. The three-month period represents the second quarter of its 2008 fiscal
year. Copies of management's discussion and analysis, and the unaudited
interim financial statements will be available at and on August 14, 2008. At the same time, the Fund announced it is
considering conversion from an income trust to a corporate structure before
the end of the current fiscal year.

    Proposed Conversion to Corporate Structure:

    After reviewing the merits of continuing to operate under the income fund
structure, the Fund's Board of Trustees is considering the consequences and
benefits of converting to a corporation. As more fully described in
management's discussion and analysis, the Trustees believe that a corporate
structure would better enable Sun Gro to execute its growth strategy and
reduce its debt levels. As a result of current and pending tax regulations,
investor interest in income funds has declined and the income fund structure
greatly limits the Fund's financial flexibility. "We've reached the point
where a corporate structure may be more suitable for Sun Gro," said Mitch
Weaver, President and CEO of Sun Gro, and a Trustee of the Fund. "Under the
current circumstances, we believe there are opportunities for future growth
and acquisitions that are best achieved as a corporation." Weaver added that
the Trustees are conducting a review of strategic acquisitions in connection
with the contemplated conversion and have engaged an investment bank to assist
in this process. If and when the proposed conversion is approved, Sun Gro's
immediate plan would be to use a significant portion of its cash flow to
reduce its debt levels. "We intend to continue cash distributions to
unitholders at the current level until the November 15, 2008 distribution
payment as permitted under our recently amended loan agreements. We are
working to complete the proposed conversion during the fourth quarter," added

    Financial Results:

    During the second quarter, the Fund's wholly owned subsidiary, Sun Gro
Horticulture Canada Ltd. (Sun Gro or the company), continued to benefit from
its 2007 US acquisitions. While "same-store" sales volumes (which exclude the
Florida operations acquired in October 2007) were down by 18% over the same
period in 2007, with the volume reduction concentrated in the retail sector,
overall second quarter sales volumes improved slightly and revenues were
comparable to the 2007 level. For the six-month period, same-store sales
volumes were down by 14%, overall sales volumes improved by 4% and revenues
were 6% lower than in 2007.
    As in each of the past two quarters, the Fund's distributable cash flow
was eroded by the impact of a stronger Canadian dollar on Sun Gro's primarily
US-dollar denominated sales, as well as by the effect of continued general
economic weakness in the US. The average value of the Canadian dollar was 9%
higher than in the second quarter of 2007, effectively reducing Sun Gro's
revenue for the 2008 period by $6.4 million ($0.29 per unit). In addition to
lower same-store sales volumes, Sun Gro saw production inefficiencies at
certain Canadian plants due to a slower than normal start to its annual peat
harvest. The delays were the result of wet weather conditions across Canada.
Total volumes harvested at June 30, 2008 equaled only two-thirds of the 2007
level and were the lowest mid-year volumes since the inception of the Fund. As
a result of these factors, gross margin for both the quarter and the half
declined to 39%, from 43.5% and 45%, respectively.
    "As we work into the third quarter, we continue to concentrate on
containing costs and are working hard to match our production capacity with
current demand," said Weaver. Weaver added that selling prices were adjusted
during the quarter to help offset the stronger Canadian dollar and higher
    In response to the current challenging business environment, Sun Gro has
implemented a wide range of cost and productivity initiatives. During the
first quarter, as previously announced, the company cut compensation for
senior management, trustees and directors by 10%, froze staff salaries and new
hiring, and closed its Kennetcook, Nova Scotia peat production facility.
During the second quarter, harvesting equipment from the Kennetcook site was
redeployed to Sun Gro's Quebec harvest operations. In New Brunswick, Sun Gro
transitioned its St. Raphael facility to a harvest only operation. Baling
equipment from the St. Raphael plant was transferred to the company's Fort
Frances, Ontario production facility. In addition, as planned, Sun Gro
outsourced baling operations at its Rivière du Loup and Port-Cartier peat
plants in Quebec, outsourced distribution operations at its Abbotsford, BC
depot and closed its Niagara, Ontario depot. The Niagara property has been
listed for sale. The company also plans to significantly scale back production
at its Terrell, Texas facility. Peat mixing operations at the plant will be
relocated to one of Sun Gro's Manitoba facilities and production at the Texas
location will be limited to bulk bark mixes more suited to the local
    As announced in May, Sun Gro successfully completed the refinancing of
US$50 million of its term debt facility. The refinancing reduced the company's
exposure to currency exchange and interest rate fluctuations by fixing the
interest rate and denominating the borrowings in US dollars. It also extended
the maturity of the debt. These funds were borrowed from a US lender, subject
to prevailing credit market conditions in the United States. In the interim,
these conditions have become increasingly constrained and Sun Gro's second
quarter financial performance was lower than expected. As a result, in August
2008, the company's credit facilities were amended so as to suspend
distributions after November 30, 2008 if Sun Gro does not comply with certain
financial ratios.
    As expected, the Fund's March 2008 announcement of its decision to reduce
cash distributions to unitholders effective with the April distribution
resulted in a decline in its unit trading price. In June, after completing an
impairment analysis of goodwill, Sun Gro determined that the fair value of
goodwill was nil, and recorded a non-cash impairment charge of $23.4 million.

    Distributable Cash

    In the three months ended June 30, 2008, the Fund generated distributable
cash of $2.2 million, or $0.10 per unit. This compares to $6.3 million, or
$0.28 per unit, in the second quarter of 2007. With the reduction in the
Fund's monthly distribution amount in April 2008, distributions declared to
unitholders in the second quarter decreased to $2.5 million, or $0.11 per
unit, from $5.0 million, or $0.225 per unit, in 2007. For the six months ended
June 30, 2008, distributable cash totalled $4.4 million, or $0.20 per unit,
compared to $12.9 million, or $0.58 per unit, in 2007. Distributions declared
to unitholders in the first half of 2008 totalled $7.5 million, or $0.34 per
unit, compared to $9.9 million, or $0.45 per unit, in 2007. The distributable
cash shortfall was funded from temporary borrowings under the Fund's credit

    Statement of Distributable Cash

                                For the     For the     For the     For the
                                 three       three        six         six
                                 months      months      months      months
    (in thousands of             ended       ended       ended       ended
     dollars except             June 30,    June 30,    June 30,    June 30,
     per-unit amounts)            2008        2007        2008        2007

    Cash flows from
     operating activities     $   17,968  $   19,649  $    8,988  $   13,569
      Change in non-cash
       operating working
       capital(1)                (15,155)    (12,857)     (2,680)        184
      Sustaining capital
       expenditures(2)              (506)       (860)     (1,608)     (1,481)
      Repayments on
       government loans(3)           (55)        (55)       (110)       (110)
      Repayments on
       equipment loans(4)            (47)          -         (91)          -
      Repayments on capital
       lease obligations(5)          (34)          -         (68)          -
      Current income taxes
       expected to seasonally
       reverse in the current
       fiscal year(6)                  -         374           -         714
    Distributable cash        $    2,171  $    6,251  $    4,431  $   12,876
    Distributable cash
     per unit                 $     0.10  $     0.28  $     0.20  $     0.58

    Distributions declared
     per unit                 $   0.1125  $    0.225  $   0.3375  $    0.225

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

    (2) Sustaining capital expenditures are defined as cash outlays, capital
        in nature, required to maintain the business at its 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.

    (3) Government grants and loans 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.

    (4) As part of the acquisition of GrowBest Holdings, LLC, Sun Gro assumed
        loans related to equipment which is required to maintain the current
        operating capacity. Repayment of these equipment loans is included in
        the calculation of distributable cash.

    (5) Capital leases are used to finance certain harvesting equipment.
        Repayment of the capital leases is included in the calculation of
        distributable cash.

    (6) 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 its operations, the company typically
        records 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.

    Comparative Statement of Earnings and Comprehensive Income

    (In thousands of dollars
     except per-unit amounts,         For the three         For the three
     number of units outstanding       months ended          months ended
     and EBs(1)) (unaudited)          June 30, 2008         June 30, 2007
                                  ---------------------- --------------------
    Revenue                        $      62,053   100%  $      63,181   100%
    Cost of goods sold                    37,609    61%         35,712    57%
                                  ---------------        --------------
    Gross profit                          24,444    39%         27,469    43%

    Distribution expenses                 14,984    24%         14,436    23%
    Selling expenses                       4,129     7%          4,225     7%
    General and administrative
     expenses                              4,906     8%          4,677     7%
                                  ---------------        --------------
    Total operating expenses              24,019    39%         23,338    37%
                                  ---------------        --------------
    Operating income                         425     0%          4,131     6%

    Other income, net                        209     0%          3,320     6%
    Goodwill impairment                  (23,373)  -37%              -     0%
    Interest expense                      (1,776)   -2%         (1,238)   -2%
                                  ---------------        --------------
    Earnings (loss) before
     income taxes                        (24,515)  -39%          6,213    10%
    Income tax (provision)
      Current                               (673)   -1%           (436)   -1%
      Future                               3,996     6%           (882)   -1%
                                  ---------------        --------------
    Income tax (provision)
     recovery, net                         3,323     5%         (1,318)   -2%
                                  ---------------        --------------
    Net earnings (loss) for
     the period                    $     (21,192)  -34%          4,895     8%
    Other comprehensive
     income (loss):
      Unrealized (loss) on
       translating financial
       statements of self-
       sustaining foreign
       operations                           (866)   -1%         (4,362)   -7%
                                  ---------------        --------------
    Comprehensive income for
     the period                    $     (22,058)  -35%   $        533     1%
                                  ---------------        --------------
                                  ---------------        --------------
    Basic and diluted earnings
     (loss) per unit               $       (0.96)         $       0.22
                                  ---------------        --------------
                                  ---------------        --------------
    Weighted average number of
     units outstanding                22,284,681            22,023,000
                                  ---------------        --------------
                                  ---------------        --------------

    Selected supplemental revenue

      Volume in thousands of EBs(1)
      Growing Mixes                        1,702                 1,881
      Bulk Bark Mixes                        800                   280
      Sand Mixes                             188                     -
      Peat Moss                            1,433                 1,951
      Fertilizer and Minerals                 90                    71
                                  ---------------        --------------
      Total                                4,213                 4,183
                                  ---------------        --------------
                                  ---------------        --------------

      Average revenue per
       EB(1) (US $)
      Growing Mixes                $       19.59          $      18.36
      Bulk Bark Mixes                       8.39                  8.17
      Sand Mixes                           11.43                     -
      Peat Moss                            10.70                  9.04
      Fertilizer and Minerals              43.48                 37.58
                                  ---------------        --------------
      Total                        $       14.59          $      13.66
                                  ---------------        --------------
                                  ---------------        --------------

      Average revenue per
       EB(1) (Canadian $)
      Growing Mixes                $       19.82          $      20.47
      Bulk Bark Mixes                       8.49                  9.03
      Sand Mixes                           11.51                     -
      Peat Moss                            10.82                 10.04
      Fertilizer and Minerals              43.98                 41.54
                                  ---------------        --------------
      Total                        $       14.75          $      15.20
                                  ---------------        --------------
                                  ---------------        --------------

    (1) An EB, or equivalent bale, is Sun Gro's standard unit of measure,
        referring to 10 cubic feet of product. 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 per-unit amounts,          For the six           For the six
     number of units outstanding       months ended          months ended
     and EBs(1)) (unaudited)          June 30, 2008         June 30, 2007
                                  ---------------------- --------------------
    Revenue                        $     122,410   100%   $    129,847   100%
    Cost of goods sold                    74,537    61%         71,859    55%
                                  ---------------        --------------
    Gross profit                          47,873    39%         57,988    45%

    Distribution expenses                 28,048    23%         28,392    22%
    Selling expenses                       8,299     7%          8,436     7%
    General and administrative
     expenses                              9,917     8%         10,348     8%
                                  ---------------        --------------
    Total operating expenses              46,264    38%         47,176    37%
                                  ---------------        --------------
    Operating income                       1,609     1%         10,812     8%

    Other income (expense), net           (1,341)   -1%          3,592     3%
    Asset and Goodwill impairments       (24,945)  -20%              -     0%
    Interest expense                      (3,409)   -3%         (2,413)   -2%
                                  ---------------        --------------
    Earnings (loss) before
     income taxes                        (28,086)  -23%         11,991     9%
    Income tax (provision)
      Current                             (1,032)   -1%         (1,893)   -2%
      Future                               6,565     6%           (434)    0%
                                  ---------------        --------------
    Income tax (provision)
     recovery, net                         5,533     5%         (2,327)   -2%
                                  ---------------        --------------
    Net earnings (loss) for
     the period                    $     (22,553)  -18%          9,664     7%
    Other comprehensive income:
      Unrealized gain on
       translating financial
       statements of self-
       sustaining foreign
       operations                          1,362     1%         (4,921)   -4%
                                  ---------------        --------------
    Comprehensive income (loss)
     for the period                $     (21,191)  -17%   $      4,743     3%
                                  ---------------        --------------
                                  ---------------        --------------
    Basic and diluted earnings
     (loss) per unit               $       (1.02)         $       0.44
                                  ---------------        --------------
                                  ---------------        --------------
    Weighted average number of
     units outstanding                22,284,681            22,023,000
                                  ---------------        --------------
                                  ---------------        --------------

    Selected supplemental revenue

      Volume in thousands of EBs(1)
      Growing Mixes                        3,595                 3,935
      Bulk Bark Mixes                      1,380                   390
      Sand Mixes                             329                     -
      Peat Moss                            2,581                 3,284
      Fertilizer and Minerals                186                   165
                                  ---------------        --------------
      Total                                8,071                 7,774
                                  ---------------        --------------
                                  ---------------        --------------

      Average revenue per
       EB(1) (US $)
      Growing Mixes                $       19.83          $      18.58
      Bulk Bark Mixes                       8.76                  8.05
      Sand Mixes                           11.15                     -
      Peat Moss                            10.77                  9.34
      Fertilizer and Minerals              43.69                 31.82
                                  ---------------        --------------
      Total                        $       15.24          $      14.56
                                  ---------------        --------------
                                  ---------------        --------------

      Average revenue per
       EB(1) (Canadian $)
      Growing Mixes                $       19.76          $      21.36
      Bulk Bark Mixes                       8.75                  9.07
      Sand Mixes                           11.11                     -
      Peat Moss                            10.75                 10.64
      Fertilizer and Minerals              43.56                 43.39
                                  ---------------        --------------
      Total                        $       15.20          $      16.68
                                  ---------------        --------------

    (1) An EB, or equivalent bale, is Sun Gro's standard unit of measure,
        referring to 10 cubic feet of product. Average revenue per EB
        calculation does not include transportation-related surcharges or the
        cost of early payment discounts.


    Sun Gro's business for the second half of the year will be concentrated
in the professional sector. The company expects that it will continue to see
lower same store-sales volumes in the third quarter, and that the decline will
again be offset by the sales volumes added by its acquired Florida operations.
Sun Gro anticipates that its gross margin will track below the third quarter
2007 level as a result of changes to its business model from the 2007 Florida
acquisition. In the event of poor harvest conditions through the balance of
the season, the margin would be further reduced. However, despite initial
concerns about its ability to raise prices in the current marketplace, Sun Gro
successfully implemented price increases in the second quarter. Going forward,
if the recent strengthening of the US dollar is sustained, it will help
relieve pressure on the company's gross margins in the coming quarters.
    "Despite decreased demand for 'green goods' at the end-user consumer
level, we have been able to maintain our core professional grower business.
Going into the third quarter, we are concerned about the weak early harvest
and look forward to improved conditions," said Weaver. "We are pleased to see
some improvement in our performance in Florida, where we had down-graded our
expectations due to the current economic conditions, and are now also
beginning to get some traction in California."
    He concluded, "We remain confident about the long-term outlook for Sun
Gro as we continue to build on our industry-leading position and believe that,
if approved, our proposed conversion to a corporate structure will better
position Sun Gro to pursue our growth strategy."

    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, failure to successfully implement Sun Gro's
strategies of adding mix products and targeting the professional grower
market, failure of acquisitions to be accretive to unitholders or to be
accretive within Sun Gro's anticipated time frames, 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.
Readers should specifically consider these factors, including the risks and
uncertainties that are described in the Fund's 2008 second quarter MD&A,
available on SEDAR on or about August 14, 2008. 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. Accordingly, readers are cautioned against
placing undue reliance on forward-looking 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
    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, terms loans for
certain production equipment, capital lease obligations and such reserves as
the Board of Directors of Sun Gro 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 July 31, 2008, 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
12 Canadian peat and peat-mixing plants and 13 US peat and bark-mixing plants.

    %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:, Website:

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