Rogers Sugar Inc
TSX:RSI
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
5.15
5.94
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Rogers Sugar Inc
You don't have any saved screeners yet
Good afternoon, ladies and gentlemen, and welcome to the Rogers Sugar First Quarter 2018 Results Conference Call. [Operator Instructions] Please note that this call is being recorded today, February 1, 2018, at 5:30 p.m. Eastern Time. I would now like to turn the meeting over to John Holliday, Chief Executive Officer. Please go ahead, sir.
Thank you, operator, and good afternoon, ladies and gentlemen. Joining me today for this conference call is Manon Lacroix, our CFO and Vice President of Finance. Keeping with our usual format, I will kick off the call and briefly discuss some of the quarter highlights for Lantic and our newly acquired Maple products business. Then I will turn the discussion over to Manon who will review financials in more detail and talk about the outlook for the remainder of the fiscal year. We will then open the phone lines up for any questions you might have.In the Sugar segment, we sold approximately 5,800 metric tonnes or 3.4% more volume this past quarter than the year's comparable quarter. All segments showed comparable quarter growth with the exception of our industrial sales volume, which was down by approximately 1,000 tonnes due to the timing. Liquid volumes were up the most, increasing by approximately 3,800 metric tonnes, sourcing its growth from existing customers and the benefit of a full quarter of shipments to a major Western bottler compared to only 2 months of shipments a year ago. Export sales were up approximately 2,700 metric tonnes, with most of the volume -- most of the growth attributable to Mexico long-term agreement, timing of Canada-specific quota as well as additional high tier sales. And finally, consumer sales increased by approximately 300 metric tonnes. Overall, we were pleased with our improved volumes. Commenting quickly on our agricultural activities in Taber. Our growers realized record yields on 27,000 acres of planted sugar beets. To accommodate the larger crop, our slicing campaign started towards the end of September and will wind down in late February. The quality and plant reliability have been good to date. But as with any extended campaign, weather and sugar beet storage in the last 60 days will be critical to the final sugar production output. We are currently projecting total production to be approximately 125 metric tonnes of refined sugar from this year's crop once our thick juice run is completed later on in the spring. While still on the subject of Taber, we continue to actively develop engineering solutions to meet our -- to meet air emission compliance standards. Our progress is being shared with the Alberta environment officials. To achieve this objective, the company expects to undertake significant capital expenditures for this project starting in the second half of this fiscal year. Current estimates of the net investment required to remediate the noncompliance range between $15 million and $25 million, depending on the projects selected. And that, of course, as we shared earlier or previously, will be over a 24-month period. The final decision has not been made on which project the company will pursue.Turning to the Maple product segment. The company expanded its operational capabilities in maple syrup product offering with the acquisition of Decacer on November 8, 2017. This additional maple syrup bottler further secures and enhances our global leadership position in the maple syrup industry. This acquisition combined with the earlier acquisition of LBMT allows us to create a solid platform, run the company's maple syrup operations and expand its product offering, including unique maple sugar dehydration technology, which will eventually lead to incremental potential offering. Our integration efforts continue to build momentum. That required some adjustments and the time line was somewhat affected by the acquisition of Decacer. However, we maintain our confidence in the identified integration gains outlined in our July '17 short form prospectus, whereby adjusted EBITDA should be approximately $18.4 million for fiscal 2018 before the acquisition of Decacer. Updating you on the plant integration gains. We can share that we have revalidated the operational synergies related to procurement and operating efficiencies. We're in the process of operationally advising them and anticipate they will be in place and delivering value in the second half of the fiscal year, with further gains anticipated in fiscal 2019 as expected.The first quarter results did not see any benefits from these planned actions. Organizational changes relating to integration and shared services have been communicated to affected employees and will begin to provide selling and administrative administration cost savings in the second quarter. Sales integration gains were on track and met our expectations for the first quarter. However, we have observed an increase in competitive activity, which we are monitoring closely. On balance, we continue to believe we can meet the adjusted EBITDA target of $18.4 million for LBMT, but could be slightly lower than anticipated if the competitive pressures become more protracted. Excluding the Taber projection discussed before, in fiscal 2018, capital expenditure plans remain unchanged and as previously communicated are expected to increase compared to fiscal 2017, as the company intends to spend approximately $6 million on operational return on investment projects that support our strategy of operational excellence.Our major ROI projects will lower energy cost, increased client automation and packing capabilities. That will reduce our outsourcing spend. We have little news to report on the market access strategy. Talks on changes to NAFTA continue. We continue to provide technical support to these negotiations through the Canadian Sugar Institute that represents Canadian refiners' interest. TPP negotiations, excluding the USA, have also continued and recently concluded with an agreement. Without the USA, this agreement will deliver little value to the sugar sector. Of course, our acquisition strategy remains an important part of our long-term business plan and vision for broadening our product portfolio and becoming a leading natural sweetener supplier. However, understandably, our focus this fiscal year will be turned towards integration of newly acquired business.Finally, I'm pleased to confirm the corporation declared a dividend of $0.09 per share to shareholders of record on March 31, which will be paid on April 20. The total payout is estimated at $9.5 million.I will now ask Manon Lacroix to provide more financial details for the quarter and an outlook for the balance of the year.
Thank you, John. I will now go over the first quarter results in more detail. The first quarter of this fiscal year brought further changes to Rogers with the acquisition of Decacer on November 18. Since the acquisition, the L.B. Maple Treat or LBMT, we will now report segmented information.I will start with the results of our core business, sugar. It's important to note that a large portion of volume gains expected for the year were recorded in the first quarter. Consequently, results for the first quarter were particularly strong on a relative basis. Adjusted gross margin for the fourth quarter was $31.2 million compared to $29.1 million for the same period last year, an increase of $2.1 million. The main reason for the positive variance is the recording of a noncash pension income of $1.5 million with regards to plan amendments approved during the quarter. The impact of the amendments were fully recorded during the quarter. And therefore, without this, adjusted gross margin was $0.6 million higher than the comparable quarter last year.The increase in volume, just outlined by John, had a favorable impact for the quarter, but was partially offset by additional operating cost, the main one being energy associated with the Alberta carbon tax that took effect on January 1, 2017. In addition, the timing of maintenance spending versus the prior year slightly increased operating cost. Finally, consulting fees were incurred during the current quarter to address the air emission compliance issue in Taber. Adjusted gross margin per metric tonne was $179.19 per metric tonne or $170.70 without the impact of the pension plan amendment. This compared to $172.92 for the first quarter of fiscal 2017. The decrease is mostly explained by the additional operating cost incurred during the current quarter. Administration and selling expenses for the quarter was $0.3 million lower than the comparable period last year, mainly explained by lower employee benefits. There were no acquisition costs attributed to the Sugar segment.Now turning to the Maple products segment. Results include those of LBMT for the full quarter as well as those of Decacer's since November 18, representing approximately 6 weeks of operations under our ownership, including 2 slow weeks during the holiday season. Revenues for the quarter amounted to $49.1 million. Adjusted gross margin was $6.1 million for the period. LBMT also entered into foreign exchange forward contract, which are mark-to-market at quarter-end. And $1.0 million mark-to-market gain was excluded from adjusted gross margin in the same way as it is adjusted in the Sugar segment. Consistent with what was done with LBMT, an expense of $0.3 million was recorded in cost of sales as a result of the purchase price allocation of Decacer, whereby finished goods acquired on November 18 are fair values, which effectively represent selling value minus small distribution profit. At quarter-end, there were no finished goods inventory left from the acquisition date. And therefore, we do not expect any such adjustments in the future. Excluding this accounting entry, adjusted gross margin was $6.4 million, representing 13% of revenues. Administration and selling expenses amounted to $3.2 million, which included $0.7 million incurred related to the acquisition of Decacer and $0.3 million in nonrecurring cost. Distribution costs were $0.9 million. Adjusted EBIT stood at $2.1 million. However, if we adjust for the items I just mentioned, adjusted EBITDA would stand at $4.2 million. On a consolidated basis, adjusted EBIT increased by $4.3 million to $25.9 million for the first quarter of the current year. During the quarter, Lantic amended its credit facility by exercising the accordion feature for the third time to increase its credit as royalty by $40 million to $315 million. The funds were used to finance the acquisition of Decacer. The additional borrowings will mature in June 2022. When we exclude the impact of the mark-to-market adjustment on the interest rate swaps, finance costs were $1.7 million higher than the -- for the first quarter of this year. An amount of $0.8 million is explained by additional financing for LBMT and Decacer, whereby [indiscernible] Québec or the FPAQ offers payment terms to bottlers for the purchase of maple syrup at primary plus 1% interest. The remainder of the increase is due to the additional leverage compounded by an increase in interest rate. For the quarter, free cash flow amounted to $17.4 million versus $14.7 million in fiscal 2017, an increase of $2.7 million. The increase for the quarter is mainly explained by the improvements in adjusted EBITDA of $3.7 million net of the noncash pension plan adjustment and an increase -- a decrease in income taxes paid. Partially offsetting this positive variance is higher interest paid, capital expenditures and pension plan contribution. I will now turn to the outlook for fiscal 2018. Once again, I will start with the Sugar segment. We now expect total volume for the current year to be approximately 10,000 metric tonne higher than fiscal 2017, 5,000 metric tonne higher than our previous expectations. As indicated before, a large portion of the expected gain for the year will realize in the first quarter. The main increase is expected in the liquid market segment, where we anticipate the recovery of some volume lost in fiscal 2017 to high fructose corn syrup and additional demand from existing customers to have a positive impact when compared to 2017, potentially resulting in an increase of approximately 10,000 metric tonnes. We still expect industrial volume to decrease slightly. We anticipate that export volumes should be approximately 5,000 metric tonnes higher than last year due to additional sales to Mexico and high tier sales booked during the quarter. Finally, consumer volume should be comparable to fiscal 2017.From a cost point of view, we expect natural gas expense to increase in Taber by approximately $1.5 million as a result of the increase in carbon tax from $1.011 to $1.517 per gigajoule, compounded by the fact that the company did not have any carbon tax to pay in the first quarter of fiscal 2017. Defined pension plan expense should decrease in fiscal 2018 by approximately $2.4 million due to a reduction in discount rates at year-end and an amendment to one of the company's defined benefit pension plan with a significant portion of the decrease having been recorded in the first quarter. I will now turn to the Maple products segment. As John just mentioned, we anticipate that adjusted EBITDA for fiscal 2018 should be approximately $18.4 million, but could be slightly lower than expected. Expected EBITDA includes approximately $2.9 million in customer gains and LBMT's integration gains, as described in the short form prospectus dated July 21, 2017. Also, we expect to incur approximately $1 million in nonrecurring costs related to severance costs during fiscal 2018, which is excluded from the expected adjusted EBITDA. In addition, as mentioned previously, Decacer annualized adjusted EBITDA is approximately $5.1 million. With a combination of increased leverage and higher interest rates, we expect interest expense to increase in fiscal 2018. With that, I would like to turn the call back to the operator for the question session.
Your first question comes from the line of George Doumet from Scotiabank.
I'd like to spend a little bit of time on the adjusted gross margin per tonne at the legacy business. It was a strong number, $170 for the quarter. I think you guys mentioned the last quarter, there are some inefficiencies that you expect to continue to Q1. Just wondering why this big number? Is it purely higher volumes that are happening there? Or is there anything else that was contributing positively to the margin?
No, the volume definitely contributed positively. There was some continuation of the issue from Q4, but it was not significant.
Okay, so it's purely volumes. Okay, great. If you were to look for the rest of the year, I think the guidance there, 10,000 higher volumes, like how should we think of the evolution of the margins there? Are there any other pressures that we'll see in the rest of the year that can kind of offset that volume gain on the margin side? Or is it -- so far we've got indication of kind of a normalized rate for the rest of the year?
Yes, I would say that probably normalized rate for the rest of the year.
Okay. So just the positive benefit from the volumes?
Yes.
Okay, great. And just shifting over to the maple syrup business, can you maybe give us a sense of magnitude or color, anything you can share on what you label as a competitive response and the issues there? And if those amplify, can you maybe give us a sense of the potential kind of risk on the $18.4 million EBITDA number that you guys guided for?
Yes, we won't give you any kind of number for that. But I think what we are trying to indicate is, first off, this is a new business for us. So we're trying to understand the marketplace. But I think what we've seen from the acquisition is we are now 25%, 26% of the global market. So there is a change in the marketplace, and we have seen some of our competitors just trying to make sure that they can secure up their -- sure up their business. So I don't know if it's something that we'll face long term. But it's a bit of a learning curve, and we've been a disruptor quite frankly.
Maybe is the competition coming from lower-priced products? I was just wondering what you mean by they sure up. Is there maybe anything you can give us there in terms of a little bit more detail that you want to share?
I don't have any more detail than that.
Okay, fair enough. And just so you're looking at...
Question there, George, on the magnitude. I think we don't provide any further information other than saying that we still believe that we're going to be approximately $18.4 million. So any difference would not be significant.
Okay. So we don't expect a significant risk or shortfall there because of the competitive response. There's more of kind of landscape oriented and kind of a realignment of strategy than a big risk at this point?
Yes. And monitoring the situation and a bit of a learning curve. Obviously, in the first quarter, we've acquired Decacer, so we're focused with -- there we're still learning the business. But I think it's something to watch.
Okay, that's helpful. And just kind of just one more, if I may, on the capital allocation side of things. I mean, a big movement of overall free cash flow post these 2 deals and no moving of dividend. Can you maybe share your thoughts in terms of capital allocation? Like are we keeping the gunpowder dry for more M&A? Is that kind of more accretive at this point to shareholders or are you guys kind of looking to eventually kind of adjust for the lower payout ratio on the dividend yield side?
I think our focus will be mostly on deleveraging and also capital expenditures. Obviously, we've talked about the $20 million that we would be spending on the Sugar segment. But there is also Taber project that we still need to sort out and figure out exactly what will be the project that we'll go through, which could bring in an additional cash flow. So I think it's too early. Obviously, dividend, we review that quarterly and we know it's important for our shareholders. But at this point, no intention of increasing it.
Your next question comes from the line of Mike Van Aelst from TD Securities.
Just a couple of quick ones to start. The consulting fees, how much longer do you expect those to last?
Probably next 6 months. Like, until we make our decisions, we'll incur some. So I would say Q2 more and maybe a bit in Q3, but minimal. Then it will just become capitalizable, and I think we're still in a position where we're evaluating our options and it's not capitalizable.
Okay. And you mentioned both with existing customers in your liquid business. Is this -- can you give us an idea of where that's coming from? Is it, I guess, a customer that's got new products that are successful and they are adding on or are they are taking volume away from somewhere else and giving it to you? Or what's the source of that?
One of the customers is bringing manufacturing capability from another geography into our geography. So that's providing some of the lift. Some of that, as we said, is full week -- or the full month of volume. So some of it will be where we might have had part of the customer. We have more -- a larger share of that customer.
And looking at the opportunistic sales into this, seems like -- I understood you correctly. There are only -- you're only including the high tier sales that you've already booked for Q1. How about going into...
Actually we're -- like, in our forecast, we've got sales for the rest of the year. So like whatever we've booked in, in opportunistic sales that we know will be coming is in our own expectations right now.
Okay. So that's just what you've been able to lock in and, I guess, hedge at this point and...
That's right.
Okay. Given that the conditions still seem favorable for that, at least in December, the last I looked, do you expect that you might be able to increase that or just aren't willing to...
Right.
Sorry, you do think that's possible?
It's hard to say, but it's -- I mean, obviously it's something that we watch very closely. And if there are opportunities, we'll definitely jump on them.
And then just finally, is there much of a risk from NAFTA? Like, if NAFTA were to be torn up, how does that affect the maple syrup business? All the product that's made in the area, that's -- are you selling to the U.S., is made in U.S. and best of it is made in Canada and goes out -- and goes international?
Yes, it has no bearing -- NAFTA has no bearing on maple syrup.
Okay. So you could still ship product into the U.S.?
Absolutely.
[Operator Instructions] Your next question comes from the line of Stephen MacLeod from BMO Capital Markets.
Just want to circle back on some of the volume comments that you made in the call. Specifically, I know you mentioned that a lot of your volumes have already been booked in Q1. Like how do you see that -- the balance that you have in your forecast, do you see that kind of coming through in Q2 or is it more evenly spread? Like, should we expect volumes to be very much front-end-loaded?
I think it's probably a more front-end-loaded than the back-end.
Yes, okay. And then, I guess, the flow through to adjusted gross margin per metric tonne would be roughly in line with that. You probably see, with higher volumes, better margins front-loaded versus back-loaded, at least from...
Yes. Yes, obviously, yes. The higher volume will be beneficial on the gross margin basis. And other than the other -- some of the cost items that we've mentioned that will impact gross margin, we don't foresee anything major.
Right, okay. Okay, that's helpful. And then I just want to make sure I understand your capital expenditure program for the year. Is it sort of safe to assume that you take -- you kind of would spend in line with what you spent in 2017? And then you're having an incremental $6 million on top of that from operational activities?
Sorry, Stephen, you broke up when you were asking that question. Can you repeat it, please?
Sure. I just wanted to get a better understanding of your capital expenditure program for 2018. Is the incremental $6 million plus the $15 million to $25 million on top of what you would ordinarily spend in the $15 million to $20 million range?
Incremental $6 million is incremental to what we had been doing in the last several years, and it's focused on ROI. The $15 million to $25 million is a separate envelope specifically for a onetime event that we need to address -- onetime issue we need to address in Taber.
And also, I think, just to clarify further, ultimately for the Sugar segment, we're expecting $20 million -- to spend $20 million, excluding the Taber issue. So we would be approximately $3 million, I believe, versus last year.
Right. $3 million higher than what we spent last year. That's the starting point.
Yes.
Okay, okay. And in terms of, just circling back around on the syrup business, the competitive pressures that you've seen in the quarter. Like, have those accelerated in early 2018 or were they also present in late calendar 2017 as well?
I really can't say -- be quite frank with you. If I can say I've got a particular point in time that they started, they're just -- we're -- I would say, the feedback we're getting from sales team, as we bring that sales team together, has been -- we've got to be mindful that we're seeing some competitive response to our consolidation.
Your next question comes from the line of Frederic Tremblay from Desjardins Capital Markets.
First question on the maple. Was wondering If you can comment on if you've seen areas of strength or weaknesses in terms of private label versus branded and then Canada versus the rest of the world. I was wondering if there were any trends worth noting in those areas?
We don't have those sort of data points at this juncture, not available to us.
Okay. Maybe then an update on your efforts to leverage Lantic's strong retail presence to grow the maple syrup business in retail.
Yes, we are actively -- we're pursuing that. Obviously, we've presented to a couple of accounts now the opportunity to leverage -- to be able to leverage that. And I obviously won't talk about accounts, but we're starting to -- start to see some evidence of success. I think we all have to remember, guys, we bought the Decacer business November 17. We had businesses before. Everybody had sales -- a sale team that was attached to one company. And so now we've had, what, 6, 8 weeks where we've now started to be able to bring the sales team together, coordinate who is responsible for what account, who is responsible for every geography. So we're really very early on in this process. And the expectations that we have are the same expectations I have. But the timing is -- you've got to be -- you've just got to put that in perspective, please.
Sure, understood. And then staying on the maple business, adjusted EBITDA margin in the quarter was 9%. Just wondering if you had a range or a ballpark figure where you're -- that you're targeting for margin there?
No, I think that we're more focused on delivering the synergies. And obviously, that will improve the gross margin through that. But I think it's still early on as to what should be our target gross margin.
There are no further questions at this time. I'll turn the call back over to the presenters.
Okay. Thank you for everybody's questions. And we'll catch up to you on the next quarter. Have a good night.
Thank you.
This concludes today's conference call. You may now disconnect.