Sun Gro Horticulture Income Fund Releases 2009 Third Quarter Results

    
    Fund significantly improves year-over-year operating performance,
    continues to reduce debt

    TRADING SYMBOL: Toronto Stock Exchange - GRO.UN

    Sun Gro Horticulture Income Fund will hold a conference call and webcast
    to discuss 2009 third quarter and nine-month results on Thursday,
    November 5, 2009 at 7:30 am Pacific Time (10:30 am Eastern). The call can
    be accessed by dialing: 1-877-974-0470 or 416-915-5650 (Greater Toronto
    Area and International).

    A replay will be available through November 19, 2009 at: 1-877-289-8525
    or 416-640-1917. Passcode 4173722 followed by the number sign.

    To access the live and archived webcast, please go to:
    http://www.investorcalendar.com/IC/CEPage.asp?ID=151403 or to
    the Fund's website at: www.sungro.com.
    

VANCOUVER, Nov. 4 /CNW/ - Sun Gro Horticulture Income Fund (the Fund) today reported financial results for the three months ended September 30, 2009, which represents the third quarter of its 2009 fiscal year. The Fund's wholly-owned subsidiary, Sun Gro Horticulture Canada Ltd. (Sun Gro or the company) recorded operating income of $3.2 million, up from $0.8 million in the third quarter of 2008. Year-over-year, gross margin improved to 46% from 44% in 2008, while EBITDA was up by 31%. Net earnings for the quarter also improved markedly, swinging from a loss of $2.5 million in 2008 to a profit of $3.7 million this year.

As in the first half of the year, the positive results were achieved despite lower sales volumes, largely due to the economic downturn. The performance improvement was driven by a combination of factors. These included the positive impact of a stronger US dollar on Sun Gro's primarily US dollar denominated revenues, the ongoing favourable effect of its 2008 productivity initiatives on operating costs, lower energy prices and transportation costs, and improved peat harvest conditions.

"Although the business environment has not notably improved, we have sustained our performance improvement trend and made a strong start to the seasonally slower second half of the year," said Mitch Weaver, President and CEO of Sun Gro and a Trustee of the Fund. "We remain focused on reducing debt, driving greater operating efficiency by strengthening our infrastructure, and strategically growing our business. We are making good progress."

Third Quarter Financial Results

Third quarter revenues of $45.6 million were only slightly lower than the $45.9 million reported in 2008, despite an 8% decrease in overall sales volumes as measured in equivalent bales (EBs, referring to 10 cubic feet of product). US dollar product pricing remained stable, while the average value of the US dollar in relation to the Canadian dollar was up by 5% from the third quarter of 2008, offsetting much of the effect of the volume decline.

Year-over-year, sales volumes were lower in all product categories except sand-based mixes. Volumes of peat and bark-based growing mixes decreased by 2% due to reduced sales of private label retail products. The lower retail volumes were partially offset by a modest increase in sales to Sun Gro's core professional grower segment. Volumes of straight peat moss decreased by 15%, due to the company's decision not to renew two large contracts. Reduced sales of landscape products also brought bulk bark mix volumes down by 14%. In the sand-based mix category, volumes increased by 17%, due mainly to the successful repositioning of the company's sales focus from new golf course development to golf course and sports field renovation.

EBITDA for the third quarter increased to $5.1 million from $3.8 million in 2008. The gain was driven by Sun Gro's improved cost structure and the positive impact of the stronger US dollar on revenues. The EBITDA growth was achieved despite a $1.0 million realized loss on foreign exchange contracts that was recorded during the quarter. This compares to a gain of $0.3 million in the same period of 2008.

Sun Gro's annual peat harvest benefited from improved weather conditions during the third quarter and had a strong finish in September. Overall harvest volumes were comparable to 2008 levels, but regional yields varied greatly. Harvest volumes in New Brunswick were significantly higher than in 2008 and a modest improvement was seen in Alberta, while wet weather in Manitoba resulted in historically low harvest yields for the second consecutive year. The low harvest volumes in Manitoba resulted in increased costs and production inefficiencies; however, costs in Alberta and New Brunswick were lower than in 2008, due to the improved harvest, as well as the positive impact of Sun Gro's productivity initiatives.

As part of the ongoing strategic rationalization of its operations in Eastern Canada, Sun Gro permanently closed its Kennetcook, Nova Scotia production facility in September and released its harvest rights to the adjacent bog. As a result, the value of all remaining assets and the bog were written off and the Fund recorded a one-time charge of $2.9 million in the third quarter. The Kennetcook facility was temporarily closed in March 2008. Equipment from the plant was relocated at that time for use at other Sun Gro production facilities.

Nine Month Financial Results

For the first nine months of 2009, revenues of $179.5 million were up by 7% over 2008, despite an 11% decline in overall sales volumes. As with the quarterly result, the revenue increase was primarily due to the stronger US dollar, as well as stable pricing. Gross margin improved to 44% from 40% in 2008. Operating income increased significantly to $16.6 million from $2.4 million in 2008, while EBITDA was up by 50% and net earnings improved to $16.0 million from a loss of $25.0 million in 2008.

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

                                     Three      Three       Nine       Nine
                                     months     months     months     months
    (in thousands of dollars)        ended      ended      ended      ended
                                    Sept 30,   Sept 30,   Sept 30,   Sept 30,
                                      2009       2008       2009       2008
                                  -------------------------------------------
    Net earnings (loss) for
     the period                    $  3,658   $ (2,461)  $ 16,011   $(25,014)

    Adjustments:
      Interest expense                2,139      1,853      7,176      5,262
      Depreciation, depletion
       and accretion                  2,397      2,308      8,872      8,562
      Amortization of intangibles       595        578      1,833      1,843
      Goodwill and asset
       impairments                    2,855          -      2,855     24,945
      Unrealized (gain) loss on
       foreign currency contracts    (3,799)     1,306    (12,486)     4,134
      Unrealized foreign exchange
       (gain) loss on US dollar
       assets and liabilities        (2,913)       874     (4,911)       974

      Loss (gain) on disposal of
       property, plant and
       equipment                        (61)       106     (1,135)       140
      Income tax provision
       (recovery), net                  180       (715)     3,674     (6,248)
                                  -------------------------------------------
    EBITDA                         $  5,051   $  3,849   $ 21,889   $ 14,598
                                  -------------------------------------------
                                  -------------------------------------------
    

Balance Sheet Improvements

During the third quarter, Sun Gro reduced its long-term debt by $1.0 million. In addition, complying with the terms of its senior note agreement, it deposited $0.8 million to a restricted cash account. Drawings on the Fund's revolving operating facility at the end of the third quarter were $24.0 million, down by $10.1 million from $34.1 million at the beginning of the year. The reduction was due to reduced sales activity and more efficient use of working capital. At September 30, 2009, the Fund was in compliance with all of its debt covenants and had improved its senior leverage ratio to 3.3 from 5.3 a year ago.

"I am pleased with the excellent progress we have made with repaying our long-term debt and reducing the usage of our revolving operating facility," said Weaver. "We expect to be in compliance with our debt covenants at year-end. However, due to the seasonal nature of our business, we are forecasting that we will likely exceed our required senior leverage ratio of 3.0 at March 31, 2010 and be temporarily out of compliance. We expect that a suitable modification to our covenant will be made prior to then with the lender, and that the Fund will return to compliance with existing covenants during the second quarter, and for the balance of 2010."

Distributable Cash

After the $1.8 million of debt repayments and the restricted cash deposits, the Fund generated distributable cash of $0.3 million, or $0.02 per unit, in the three months ended September 30, 2009. Under its credit facility, the Fund is prohibited from making distributions. All available funds are being used to strengthen the Fund's balance sheet, which in recent years was leveraged to acquire key peat resources and build out Sun Gro's US plant network.

By comparison, in the third quarter of 2008, the Fund generated distributable cash of $1.3 million, or $0.06 per unit, and declared distributions of $1.7 million, or $0.075 per unit.

    
    Statement of Distributable Cash

                                     Three      Three       Nine       Nine
                                     months     months     months     months
    (in thousands of dollars         ended      ended      ended      ended
     except per-unit amounts)       Sept 30,   Sept 30,   Sept 30,   Sept 30,
                                      2009       2008       2009       2008
                                  -------------------------------------------

    Cash flows from operating
     activities                    $  6,054   $    302   $ 17,866   $  9,290

    Adjustments:
      Change in non-cash operating
       working capital               (3,135)     1,963     (4,016)      (717)

      Sustaining capital
       expenditures                    (782)      (802)    (1,618)    (2,410)

      Payments on capital leases
       and other term loans            (103)      (123)      (388)      (692)
      Restricted cash                  (835)         -     (3,795)         -
      Repayments on term loans         (862)         -     (5,459)         -
                                  -------------------------------------------
    Distributable cash             $    337   $  1,340   $  2,590   $  5,471
                                  -------------------------------------------
                                  -------------------------------------------
    Distributable cash per unit    $   0.02   $   0.06   $   0.12   $   0.25
                                  -------------------------------------------
                                  -------------------------------------------
    Distributions declared
     per unit                      $      -   $  0.075   $      -   $ 0.4125
                                  -------------------------------------------
                                  -------------------------------------------


    Operating Results for the three months ended September 30, 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, number of units     September 30,      September 30,
     outstanding and EBs(1))                   2009               2008
                                        ------------------ ------------------

    Revenue                              $   45,614  100%   $   45,871  100%
    Cost of goods sold                       24,716   54%       25,783   56%
                                        ------------       ------------
    Gross profit                             20,898   46%       20,088   44%

    Distribution expenses                     8,412   18%       10,272   22%
    Selling expenses                          4,335   10%        4,077    9%
    General and administrative expenses       4,989   11%        4,927   11%
                                        ------------       ------------
    Total operating expenses                 17,736   39%       19,276   42%
                                        ------------       ------------
    Operating income                          3,162    7%          812    2%

    Other income (expense), net               5,670   12%       (2,135)  -5%
    Asset impairment                         (2,855)  -6%            -    0%
    Interest expense                         (2,139)  -5%       (1,853)  -4%
                                        ------------       ------------
    Earnings (loss) before income taxes       3,838    8%       (3,176)  -7%
    Income tax (provision) recovery
      Current                                     7    0%          269    1%
      Future                                   (187)   0%          446    1%
                                        ------------       ------------
    Income tax (provision) recovery, net       (180)   0%          715    2%
                                        ------------       ------------
    Net earnings (loss) for the period        3,658    8%   $   (2,461)  -5%
    Other comprehensive income (loss):
      Unrealized gain (loss) on
       translating financial statements
       of self-sustaining foreign
       operations                            (2,607)  -6%          916    2%
                                        ------------       ------------
    Comprehensive income (loss)
     for the period                      $    1,051    2%   $   (1,545)  -3%
                                        ------------       ------------
                                        ------------       ------------

    Basic and diluted earnings (loss)
     per unit                            $     0.16         $    (0.11)
                                        ------------       ------------
                                        ------------       ------------
    Weighted average number of units
     outstanding                         22,284,681         22,284,681
                                        ------------       ------------
                                        ------------       ------------

    Selected supplemental revenue
     information

      Volume in thousands of EBs(1)
      Peat and Bark-based Growing Mixes       1,084              1,102
      Peat Moss                               1,010              1,182
      Bulk Bark Mixes                           539                625
      Fertilizer and Minerals                    63                 72
      Sand-based Mixes                          197                168
                                        ------------       ------------
      Total                                   2,893              3,149
                                        ------------       ------------
                                        ------------       ------------

      Average revenue per EB(1) (US $)
      Peat and Bark-based Growing Mixes  $    19.60         $    19.94
      Peat Moss                               10.83              10.17
      Bulk Bark Mixes                          9.08               8.91
      Fertilizer and Minerals                 41.67              46.97
      Sand-based Mixes                         9.64              11.07
                                        ------------       ------------
      Total                              $    14.37         $    14.22
                                        ------------       ------------
                                        ------------       ------------

      Average revenue per EB(1)
       (Canadian $)
      Peat and Bark-based Growing Mixes  $    21.75         $    20.43
      Peat Moss                               12.03              10.41
      Bulk Bark Mixes                         10.07               9.11
      Fertilizer and Minerals                 46.48              47.99
      Sand-based Mixes                        10.81              11.30
                                        ------------       ------------
      Total                              $    15.97         $    14.56
                                        ------------       ------------
                                        ------------       ------------

     (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 nine months ended September 30, 2009 and 2008

    Comparative Statements of Earnings
     (Loss) and Comprehensive Income
     (Loss)                                Nine months        Nine months
    (In thousands of dollars except           ended              ended
     per-unit amounts, number of units     September 30,      September 30,
     outstanding and EBs(1))                   2009               2008
                                        ------------------ ------------------

    Revenue                              $  179,468  100%   $  168,281  100%
    Cost of goods sold                      100,662   56%      100,320   60%
                                        ------------       ------------
    Gross profit                             78,806   44%       67,961   40%

    Distribution expenses                    29,911   17%       38,320   23%
    Selling expenses                         14,500    8%       12,376    7%
    General and administrative expenses      17,746   10%       14,844    9%
                                        ------------       ------------
    Total operating expenses                 62,157   35%       65,540   39%
                                        ------------       ------------
    Operating income                         16,649    9%        2,421    1%

    Other income (expense), net              13,067    8%       (3,476)  -2%
    Goodwill and asset impairments           (2,855)  -2%      (24,945) -15%
    Interest expense                         (7,176)  -4%       (5,262)  -3%
                                        ------------       ------------
    Earnings (loss) before income taxes      19,685   11%      (31,262) -19%
    Income tax (provision) recovery
      Current                                  (863)   0%         (763)   0%
      Future                                 (2,811)  -2%        7,011    4%
                                        ------------       ------------
    Income tax (provision) recovery, net     (3,674)  -2%        6,248    4%
                                        ------------       ------------
    Net earnings (loss) for the period       16,011    9%   $  (25,014) -15%
    Other comprehensive income (loss):
      Unrealized gain (loss) on
       translating financial statements
       of self-sustaining foreign
       operations                            (5,510)  -3%        2,278    1%
                                        ------------       ------------
    Comprehensive income (loss)
     for the period                      $   10,501    6%   $  (22,736) -14%
                                        ------------       ------------
                                        ------------       ------------
    Basic and diluted earnings (loss)
     per unit                            $     0.72         $    (1.12)
                                        ------------       ------------
                                        ------------       ------------
    Weighted average number of units
     outstanding                         22,284,681         22,284,681
                                        ------------       ------------
                                        ------------       ------------

    Selected supplemental revenue
     information

      Volume in thousands of EBs(1)
      Peat and Bark-based Growing Mixes       4,472              4,697
      Peat Moss                               2,813              3,763
      Bulk Bark Mixes                         1,850              2,005
      Fertilizer and Minerals                   225                258
      Sand-based Mixes                          622                497
                                        ------------       ------------
      Total                                   9,982             11,220
                                        ------------       ------------
                                        ------------       ------------

      Average revenue per EB(1) (US $)
      Peat and Bark-based Growing Mixes  $    20.11         $    19.90
      Peat Moss                               10.87              10.62
      Bulk Bark Mixes                          8.45               8.87
      Fertilizer and Minerals                 43.17              44.63
      Sand-based Mixes                        10.67              11.15
                                        ------------       ------------
      Total                              $    15.28         $    15.00
                                        ------------       ------------
                                        ------------       ------------

      Average revenue per EB(1)
       (Canadian $)
      Peat and Bark-based Growing Mixes  $    23.87         $    19.97
      Peat Moss                               12.72              10.69
      Bulk Bark Mixes                          9.94               8.93
      Fertilizer and Minerals                 51.05              44.82
      Sand-based Mixes                        12.49              11.20
                                        ------------       ------------
      Total                              $    18.05         $    15.06
                                        ------------       ------------
                                        ------------       ------------

    (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

Until there is a substantial improvement in general economic conditions and a resurgence of US new home construction activity, Sun Gro does not anticipate any significant growth in its sales volumes and operating income. It expects to continue to benefit from generally lower transportation costs. The lower costs are due to lower freight rates resulting from reduced demand and lower energy prices, as well as more efficient truck loading and routing. Sun Gro believes that peat supply currently on hand will be sufficient to support sales at current levels until the 2010 harvest begins. It does not expect to incur significant additional costs for cross-regional shipments of peat as a result of the 2009 Manitoba harvest shortfall.

"While we are optimistic about our capacity to sustain the stronger financial performance we have delivered for the last four quarters, the foreign exchange environment remains volatile. Further strengthening of the Canadian dollar could put significant pressure on our margins," said Weaver. "We will continue to closely monitor our exposure and use forward exchange contracts to help manage currency exchange risk."

Foreign exchange contracts for the remainder of 2009 total US$9.0 million at an average rate of $1.10 (or US$0.91). For 2010, Sun Gro has entered into foreign exchange contracts totaling US$45.0 million at an average rate of $1.15 (or US$0.87).

Copies of management's discussion and analysis (MD&A) and the Fund's audited financial statements for the three months ended September 30, 2009 will be available at www.sedar.com and www.sungro.com on or about November 12, 2009.

Forward-Looking Information

This news release contains "forward-looking information". Forward-looking information relates to future events or future performance and reflects the Fund's expectations regarding Sun Gro's growth, results of operations, performance, business prospects, opportunities or industry performance, or trends. In some cases, forward-looking information 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. In particular, the disclosure in the "Outlook" section above includes forward-looking information regarding Sun Gro's anticipated sales volumes for the balance of 2009. Forward-looking information is also included in the "Balance Sheet Improvements" section, including management's expectation that Sun Gro will be temporarily out of compliance with its senior leverage ratio at the end of the first quarter of 2010, as well as management's expectation that a suitable modification of the debt covenants under Sun Gro's credit facilities will be negotiated with Sun Gro's lenders prior to March 31, 2010. These statements are intended to provide investors with information that reflects management's reasonable expectations regarding the anticipated financial performance of Sun Gro and the Fund. Readers are cautioned that these statements may not be appropriate for other purposes. Any forward-looking information included in this news release reflects Sun Gro's current internal projections, expectations or beliefs and is based on information currently available. A number of factors could cause actual events or results to differ materially from those discussed in any forward-looking information. Important factors that could cause actual results to differ materially from Sun Gro's expectations include, among other things, risks associated with 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, failure to meet certain financial covenant requirements, the impact of an increase in fuel costs, reduced consumer demand due to natural disasters and economic factors, and competitive activity. Readers should specifically consider these factors, including the risks and uncertainties described in the 2008 year-end MD&A filed on SEDAR. Although Sun Gro believes that any forward-looking information contained in this news release is 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 information. Any forward-looking information provided in this news release is provided as of the date of the news release and Sun Gro assumes no obligation to update or revise the information to reflect new events or circumstances, except as required by law.

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.

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, sustaining capital expenditures, government grants and government loans, other loans for certain production equipment, capital lease obligations, repayments on term loans, restricted cash payments 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 November 4, 2009, there were 22,284,681 units of the Fund issued and outstanding.

Company Profile

Sun Gro is the largest producer and distributor of peat and bark-based growing mixes to professional plant growers in the US and Canada. It is also North America's largest producer and distributor of sphagnum peat moss, with approximately 65,000 acres of peat bogs under lease. Sun Gro sells its professional products primarily to greenhouse, nursery and specialty crop growers. The company also sells peat moss and potting mixes to retail customers, either by way of private label partnerships or under its own brand names. In addition, Sun Gro sells sand-based mixes to golf course developers and landscapers. The US accounts for approximately 80% of its sales volumes. The company's North America-wide production network now comprises 12 Canadian operating plants and 13 US operating plants.

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

                                                     As at          As at
                                                 September 30,   December 31,
                                                      2009           2008
                                                 -------------  -------------
    Assets
    Current assets
      Cash                                       $          -   $      2,277
      Accounts receivable                              33,717         43,838
      Inventories                                      41,084         43,003
      Unrealized gain on foreign currency
       contracts                                        2,354              -
      Prepaid expenses and other assets                 1,892          4,200
                                                 -------------  -------------
                                                       79,047         93,318

    Property, plant and equipment                     111,762        123,492
    Intangible assets                                  41,570         44,853
    Unrealized gain on foreign currency contracts         247              -
    Restricted cash                                     3,774              -
    Other assets                                        1,292          1,379
                                                 -------------  -------------
                                                 $    237,692   $    263,042
                                                 -------------  -------------
                                                 -------------  -------------
    Liabilities and Unitholders' Equity

    Current liabilities
      Bank overdraft                             $      1,397   $          -
      Operating line                                   24,026         34,109
      Accounts payable and accrued liabilities         16,520         21,204
      Unrealized loss on foreign currency
       contracts                                            -          8,843
      Current portion of long-term debt                 7,573          6,598
                                                 -------------  -------------
                                                       49,516         70,754

    Other liabilities                                   5,770          5,518
    Unrealized loss on foreign currency contracts           -          1,042
    Long-term debt                                     60,614         76,455
    Future income taxes                                13,558         11,540
                                                 -------------  -------------
                                                      129,458        165,309
                                                 -------------  -------------
    Unitholders' equity
      Capital contributions                           211,726        211,726
      Accumulated other comprehensive loss            (17,710)       (12,200)
      Cumulative earnings                              47,236         31,225
      Cumulative distributions declared              (133,018)      (133,018)
                                                 -------------  -------------
                                                      108,234         97,733
                                                 -------------  -------------
                                                 $    237,692   $    263,042
                                                 -------------  -------------
                                                 -------------  -------------


    Sun Gro Horticulture Income Fund
    Consolidated Statements of Earnings (Loss) and Comprehensive Income
    (Loss)
    (in thousands of dollars except per-unit amounts and number of units
    outstanding)
    (unaudited)

                                 Three       Three        Nine        Nine
                                 months      months      months      months
                                 ended       ended       ended       ended
                                Sept 30,    Sept 30,    Sept 30,    Sept 30,
                                  2009        2008        2009        2008
                              -----------------------------------------------

    Revenue                   $   45,614  $   45,871  $  179,468  $  168,281
    Cost of goods sold            24,716      25,783     100,662     100,320
                              -----------------------------------------------
    Gross profit                  20,898      20,088      78,806      67,961

    Distribution expenses          8,412      10,272      29,911      38,320
    Selling expenses               4,335       4,077      14,500      12,376
    General and administrative
     expenses                      4,989       4,927      17,746      14,844
                              -----------------------------------------------
    Total operating expenses      17,736      19,276      62,157      65,540
                              -----------------------------------------------
    Operating income               3,162         812      16,649       2,421

    Other income (expense), net    5,670      (2,135)     13,067      (3,476)
    Goodwill and asset
     impairments                  (2,855)          -      (2,855)    (24,945)
    Interest expense              (2,139)     (1,853)     (7,176)     (5,262)
                              -----------------------------------------------
    Earnings (loss) before
     income taxes                  3,838      (3,176)     19,685     (31,262)
    Income tax (provision)
     recovery
      Current                          7         269        (863)       (763)
      Future                        (187)        446      (2,811)      7,011
                              -----------------------------------------------
    Income tax (provision)
     recovery, net                  (180)        715      (3,674)      6,248
                              -----------------------------------------------
    Net earnings (loss) for
     the period                    3,658      (2,461)     16,011     (25,014)
    Other comprehensive income
     (loss):
      Unrealized (loss) gain
       on translating financial
       statements of
       self-sustaining foreign
       operations                 (2,607)        916      (5,510)      2,278
                              -----------------------------------------------
    Comprehensive income
     (loss) for the period    $    1,051  $   (1,545) $   10,501  $  (22,736)
                              -----------------------------------------------
                              -----------------------------------------------
    Basic and diluted earnings
     (loss) per unit          $     0.16  $    (0.11) $     0.72  $    (1.12)
                              -----------------------------------------------
                              -----------------------------------------------
    Weighted average number
     of units outstanding     22,284,681  22,284,681  22,284,681  22,284,681
                              -----------------------------------------------
                              -----------------------------------------------



    Sun Gro Horticulture Income Fund
    Consolidated Statements of Changes in Unitholders' Equity
    (in thousands of dollars) (unaudited)

                                    Accumu-
                                    lated
                                    Other
                          Unit-     Compre-             Cumulative
                        holders'   hensive   Cumulative   Distri-
                         Capital     Loss     Earnings    butions     Total
                       ------------------------------------------------------
    Balance -
     December 31,
     2007              $ 211,726  $ (22,668) $  73,286  $(123,825) $ 138,519

      Loss for the year        -          -    (42,061)         -    (42,061)
      Other comprehensive
       income for the
       year                    -     10,468          -          -     10,468
      Distributions for
       the year                -          -          -     (9,193)    (9,193)
                       ------------------------------------------------------
    Balance -
     December 31,
     2008              $ 211,726  $ (12,200) $  31,225  $(133,018) $  97,733
      Earnings for the
       period                  -          -     16,011          -     16,011
      Other comprehensive
       loss for the
       period                  -     (5,510)         -          -     (5,510)
                       ------------------------------------------------------
    Balance -
     September 30,
     2009              $ 211,726  $ (17,710) $  47,236  $(133,018) $  108,234
                       ------------------------------------------------------
                       ------------------------------------------------------



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

                                 Three       Three        Nine        Nine
                                 months      months      months      months
                                 ended       ended       ended       ended
                                Sept 30,    Sept 30,    Sept 30,    Sept 30,
                                  2009        2008        2009        2008
                              -----------------------------------------------
    Cash flows from
     operating activities
    Net earnings (loss) for
     the period               $    3,658  $   (2,461) $   16,011  $  (25,014)
      Items not affecting
       cash
        Depreciation, depletion
         and accretion             2,397       2,308       8,872       8,562
        Amortization of
         intangible assets           595         578       1,833       1,843
        Asset impairment           2,855           -       2,855       1,572
        Goodwill impairment            -           -           -      23,373
        Unrealized (gain) loss
         on foreign currency
         contracts                (3,799)      1,306     (12,486)      4,134
        Unrealized foreign
         exchange (gain) loss
         on US dollar assets
         and liabilities          (2,913)        874      (4,911)        974
        Loss (gain) on disposal
         of property, plant
         and equipment               (61)        106      (1,135)        140
        Future income tax
         (recovery) provision        187        (446)      2,811      (7,011)
                              -----------------------------------------------
                                   2,919       2,265      13,850       8,573

      Change in non-cash
       operating working
       capital                     3,135      (1,963)      4,016         717
                              -----------------------------------------------
                                   6,054         302      17,866       9,290
    Cash flows from investing
     activities
      Instalment note payment
       for business acquisition        -           -        (496)       (392)
      Additions to property,
       plant and equipment          (782)       (802)     (1,618)     (2,410)
      Proceeds from disposal
       of property, plant and
       equipment                      68          49       1,438          64
                              -----------------------------------------------
                                    (714)       (753)       (676)     (2,738)
    Cash flows from
     financing activities
      Distributions paid to
       unitholders                     -      (2,508)          -     (10,864)
      Proceeds from term loans         -           -           -      50,425
      Restricted cash payments      (835)          -      (3,795)          -
      Repayment of term loans       (862)          -      (6,213)    (39,790)
      Decrease in
       operating line             (3,848)      4,456     (10,083)     (3,427)
      Payments on capital
       leases and other
       term loans                   (103)       (123)       (388)       (392)
                              -----------------------------------------------
                                  (5,648)      1,825     (20,479)     (4,048)
    Effect of exchange rate
     changes on cash                  18         196        (385)       (477)
                              -----------------------------------------------
    Decrease (increase) in
     bank indebtedness              (290)      1,570      (3,674)      2,027
    Cash (bank indebtedness) -
     beginning of the period      (1,107)     (1,509)      2,277      (1,966)
                              -----------------------------------------------
    Cash (bank indebtedness)
     - end of the period      $   (1,397) $       61  $   (1,397) $       61
                              -----------------------------------------------
                              -----------------------------------------------
    Supplemental cash flow
     information
      Interest paid           $    2,116  $    1,718  $    7,114  $    5,024
      Income taxes paid
       (refund), net          $      (47) $       34  $      (69) $      405
    

%SEDAR: 00017490E

SOURCE SUN GRO HORTICULTURE INCOME FUND

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

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SUN GRO HORTICULTURE INCOME FUND

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