Business UpdateAug 2011
PRT Growing Services Ltd.
Forward Looking Statements
This business update contains forward-looking statements that involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations for customer orders; the outlook for the forest industry, US and Asian housing markets, and future reforestation programs; and other statements that are not historical fact. Risks and uncertainties include, but are not limited to, future commodity prices and exchange rates, agricultural risks, our ability to grow and supply products in accordance with defined specifications, customer credit risks, and other risks identified from time to time in the Fund’s annual report, and annual information return. These risks and uncertainties may cause actual results to differ materially from the expectations expressed herein. As such, readers are cautioned to not to place undue reliance on forward-looking statements.
Forward-looking statements are based on current expectations and neither the Fund nor PRT assumes any obligation to update such information to reflect later events or developments, except as required by law.
PRT – The Legal Stuff
• The largest producer of container grown forest seedlings in North America
• 23 year operating history – over 2 billion seedlings grown
• Annually contracted production
• 181 million seedlings in 2011 – 153 core forestry; approximately 190 million expected in 2011.
• 13 nursery sites; over 375 employees
• Market leader in key market regions
PRT – Company Profile
• Multiple locations - reduces risks
• Most diverse range of growing climates and species
• Contract delivery reliability rating is high
• Extensive experience with container growing
• Largest producer
scale economies
capacity to handle large customer needs
Attract and retain the best people
PRT Oregon
PRT Corporate Office
PRT Campbell River
PRT SummitPRT Red Rock
PRT Beaverlodge
PRT Coldstorage
PRT Dryden
PRT Coldstorage
PRT Kirkland Lake
PRT HarropPRT Armstrong
PRT Coldstream
PRT
Cold storage
PRT Vernon
Competitive Advantage
Contracted Revenue System
Customers contract with PRT before sowing seedlings
Annual take-or-pay service contracts, with progress payments
Approximately one-third of seedling volume is from multi-year contracts
Diverse customer base
Typically 600 – 700* million seedlings planted per year in Canada
* Note that national statistics are not available for 2010 which reflects further impact of the recession of the forest industry which began at the end of 2008. In 2009 the report indicates that planting fell by approximately 6% over 2007 in PRT’s core Canadian markets. The seedlings planted total shown above in 2008 includes a 26% increase in planting by the province of Quebec for that year.
Source: National Forestry Database Program & Management Estimates
Harvested Area Seedling Demand
In PRT’s Canadian market region – there is typically a two year lag between harvest and replanting – this is demonstrated below
Seedling Demand – lag between harvest and replanting
Source: National Forestry Database Program & Management Estimates
Dominant Market Position in Key Forestry Markets
* Management Estimates
Geographically Diversified Markets
More Stable Pricing versus Forest Industry
PRT Annual Contracted Seedling Blocks Volume (000’s)
- Excludes effect of mid period acquisitions
Historically Increasing Volume as a Result of Growth Strategies
PRT Annual Contracted Seedling Blocks Volume (000’s)
US Housing Market
Collapse
Revenue and EBITDA History
Operating Income Before Site Consolidation Charges
Financial Performance
Higher energy prices and F/X US Housing
Market Collapse
Low and predictable capital maintenance requirements
Maintenance and Sustaining Capital Expenditures as a Percentage of Revenue (10 year history)
Efficient Long-Term Assets
Dec. 31, 2010 June 30, 2011
Net working capital* $6.9 $8.8
Total assets $47.4 $50.3
LTD & equivalent $ 1.5 $ 1.3
Equity $40.1 $41.8
Term Debt: equity ratio 0.037:1 0.031:1
Millions of dollars
Financial Position – PRT Inc.Maintaining Low Leverage in Current Cycle - Capacity for Growth as Markets Recover
*excludes current portion of term debt.
Key Risks
• Forest Industry customers – financial (credit) risk
• US housing market Are we starting to see a rebound? Timing/pace of recovery is uncertain
• Asian markets – sustainability
• Expansion into new markets – timing and profitability
Managing Financial (Credit) Risk
• Credit risk management includes: credit policy progress payments contract language protection possession of trees
• Layers of protection through government – unique aspects of protection arising from public land tenures in Canada forest company reforestation obligation with attachment
to tenures Ontario trust funds PRT’s experience with past forest company bankruptcies
• Historical losses are extremely low (0.05% of total revenue since 1997)
• Market recovery from cyclical lows
• Entry into new market areas
Exploit PRT’s reliability and technology advantages
• Backlog in reforestation exists
Under-stocked plantations, pine beetle and fire damage
• Industry consolidation – industry currently fragmented
• Responses to climate change Biofuels Carbon sequestration Green up projects
Key Growth Opportunities
Increasing demand from Pacific Rim offsets lower US Seedling Demand
0.5
1
1.5
2
2.5
3
100
150
200
250
300
Sta
rts
(mil
lio
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Se
ed
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gs
(mil
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PRT Seedling Order Forecast vs. Housing Starts Equiv.(US+Cda+China Equiv.)
PRT Orders Starts
A US Housing Recovery Will Drive Later Seedling Demand
Million U.S. Starts
APA Forecast 2009 2010 2011Single Family 445,100 525,000 800,000Multifamily 108,900 90,000 135,000 Total 554,000 615,000 935,000
Forecasts (000) 2010 2011
RISI (4/26/’10) 720 1,040
FEA* (4/8/’10) 702 1,029
Freddie Mac (5/11/’10) 680 1,100
RBC* (4/17/’10) 661 884
NAR* (5/10/‘10) 659 980
Wells Fargo (4/24/’10) 650 760
NAHB (4/23/’10) 646 991
WWPA (3/8/’10) 618 719
APA (4/1/‘10) 615 935
Average 660 940
*FEA: Forest Economic Advisors.
*NAR: National Assoc. of Realtors.
*RBC: Royal Bank of Canada
Updated May 2010 APA U.S. Housing ForecastSingle Family & Multifamily Only*
Market Expansion Opportunities
Increasing Reforestation Backlog in BC • The MPB has destroyed 692 million
cubic meters of merchantable Pine (51%) to date.
• 56% is expected to be destroyed by 2016
1980
1985
Increasing Concerns over Climate Change
• Diversify markets to take advantage of emerging opportunities
PRT Promotional Products initiative
PRT Energy Crops: carbon sequestration and offset projects
• Undervalued Assets - Trading at a significant discount to fair value
• Earnings are cyclically depressed
• Positive free cash flow through cycle
• Restructuring and cost reduction efforts mostly complete
• Strong financial & operational risk management strategies in place
Diversified production locations Reduced US currency exposure Forward natural gas buying program Term debt reduced to extremely low levels Interest rates fixed on term debt
Compelling Valuation
• Solid competitive position – industry leader
• Experienced management team
• Proven track record in business – 23years and over 2 billion trees
• Contracted cash flow with low maintenance and capital expenditures
• Managing balance sheet – very low leverage
• Results impacted by the unprecedented cyclical downturn in the forest industry
• Poised for significant growth opportunities as markets recover
Summary