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Rogers Sugar Inc
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Good afternoon, ladies and gentlemen, and welcome to the Rogers Sugar First Quarter 2020 Results Conference Call. [Operator Instructions] Please note that this call is being recorded today, February 11, 2020 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, Mr. Holliday.
Okay. Thank you, operator, and good afternoon, ladies and gentlemen. Joining me for today's conference call is our CFO, Manon Lacroix. During today's call, I will provide a broader context to the business, some insights on trends or changes in the industry and provide an update on the evolution of our business strategy. Please be reminded that today's call may include forward-looking statements regarding our future operations and expectations. Such statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied today. Please also note that we may refer to some non-GAAP measures in our call. Please refer to the forward-looking disclaimer and non-GAAP measure definitions included in our public filings with the security commissions for more information on these items. Before we get into the first quarter results, I wanted to provide a brief update on our operating plans and explain how we are optimizing our supply chain to limit the impact of the weather conditions in late 2019. As it became clear last fall that we would need to terminate the beet harvest early, we quickly developed a comprehensive plan to bridge Taber sugar shortfall. This plan leverages available manufacturing capacity in our Vancouver and Montreal refineries by supplying Taber packaged goods customers directly in these 2 refineries and shipping bulk sugar from each of them to Taber to supply domestic liquid demand. With this plan in action, we are confident in our ability to continue to service our domestic customers and meet their supply needs. I can confirm we completed our beet campaign in the middle of December, and we are able to advise that our refined sugar production will be within our previously reported range at approximately 65,000 tons once the thick juice campaign is completed. The planning and organizing effort required to reconfigure our manufacturing and supply chain was significant. We have now started to execute on the plan, and I wanted to publicly thank our employees for their cooperation and collaboration. Their commitment and flexibility are most appreciated and have been instrumental in allowing us to meet the needs of our valued customers. Despite the impact of the temporary supply chain reconfiguration on our cost structure, we expect adjusted EBITDA in the Sugar segment to be higher than last fiscal year, given the nonreoccurrence of commissioning costs in Vancouver, lower energy costs, reduced carbon tax and finally, product mix improvements related to increased consumer sales. Now moving to the results for the quarter. Consolidated adjusted EBITDA in the first quarter was approximately $30 million, in line with the same period last year. Overall, the benefit of higher adjusted gross margin in our Sugar segment was mostly offset by the impact of continued but stabilizing competitive pressure in our Maple segment. We are pleased with the results we achieved in our sugar business and feel our supply chain optimization plan and proactive customer communication have positioned us well for the coming quarters. Our cane refinery operations in Vancouver continue to see operational improvement. Plant throughput has increased by 10%, and we are now achieving pre-commissioning levels, which is allowing us to fully leverage the open capacity at this plant to support the Taber plant shortfall. We have a disciplined, continuous improvement process in place and expect to deliver further throughput gains and reduced refinery production costs. Overall, sugar volume for the quarter was comparable to last year. Within the segments, we saw improvements in the consumer and liquid shipments, offset by some slightly lower industrial and planned lower export shipments. Overall, we continue to expect volume growth in the single -- low single digits. But given the short-term changes to our supply chain due to the Taber shortfall, our immediate focus will be placed on producing our expected sales volumes to meet the needs of our current domestic customers. Turning to Maple operations for the quarter. We are pleased with the progress being made. Plant productivity gains were notable at our Degelis plant, where capital investments are now fully commissioned, resulting in a 10% increase in line efficiency. This, coupled with some additional overtime, allowed us to reduce Degelis production backlogs and achieve normal order lead times. Similar progress in this area was achieved across our network, allowing us to start the second quarter with customer order lead times largely within our guidelines and well under control. Granby operations were being run out of both the old and the newly constructed plant, while the footprint optimization project continued to progress. During the quarter, we commissioned a newly automated -- fully automated, plastic bottling line and dismantled and transferred existing lines to the new site from the old facility. Today, our best-in-class plant is fully operational, and we are focused on completing line commissioning and capturing any further efficiency gains. Completion of a total reconfiguration of our Quebec manufacturing footprint is significant and an important milestone for our business. As a global leader in the maple syrup industry, we will leverage this platform and by our nature, continue to look for improvement opportunities and focus on our strategy of being a low-cost, high-quality customer-focused business. As part of this plan, we have revisited our organizational design to optimize workflows. We have updated our reporting structure to be more centralized with the newly appointed general manager responsible for sales, operations and supply chain. We believe this new structure will improve decision making, drive better execution and deliver a greater customer experience. Commenting briefly on other developments for the new Canada-U.S.-Mexico agreement. We anticipate that the new agreement may be ratified over the next few weeks, thus providing clarity on future quotas. Under the new agreement, we expect our sugar quota to increase by 9,600 metric tons annually. As quotas are established on a calendar year basis, these additional volumes will be adjusted on a pro rata basis in this calendar year. With our reduced crop in Taber this year, we do not anticipate any additional volume for the current fiscal year and expect any additional calendar year 2020 quota will be delivered in the first quarter of fiscal 2021. Now before handing the call over to Manon to review the financial results, I want to reemphasize that we remain positive on our view for the Sugar segment. With respect to the Maple business, we are seeing good operational improvements at each site where commissioning is completed and are excited to have a best-in-class facility in Granby, which together gives us an excellent platform to maintain our position as a leader in the natural sweetener space. Finally, I want to thank our employees for their ongoing efforts and collaboration. And with that, I will now turn the call over to Manon.
Thank you, John. I will now go over the first quarter results in more detail, starting with the Sugar segment. As John mentioned, our overall sales volume for the quarter was in line with the prior year. As we had anticipated, the consumer volume ended the quarter with approximately 3,600 metric tons of additional volume. These incremental sales were mainly associated with the new business gain in fiscal 2019 from international retail accounts. Also positive is the increase of approximately 4,300 metric tons of liquid sales as a result of incremental volumes from new accounts to gain later in fiscal 2019 and strong demand that continues from existing customers. The impact of increased consumer and liquid volume in the quarter was offset by lower industrial and export volume. Industrial segment sold approximately 5,000 metric tons less than the first quarter last year, partly explained by the nonrecurrence of opportunistic shipments to a competitor that took place in fiscal 2019. The remaining variance is due to timing in deliveries, some of which is related to the short national rail strikes. Finally, the export volume was approximately 2,900 metric tons lower than the first quarter last year due to planned reductions in shipments to Mexico. The postponed shipments have been rolled over to fiscal 2022, allowing us to meet the needs of our domestic customers. Somewhat compensating for the decrease is the faster pace of planned shipments of the existing Canadian quota to the U.S. due to the shortages in that market. For the Sugar segment, adjusted gross margin for the current quarter improved by $1.5 million versus fiscal 2019 comparable quarter, representing an increase of approximately $8 per metric ton. As we have mentioned previously, the carbon tax in Alberta was removed from the new -- with the new government, and we benefited from no taxes in the first quarter when compared to last year. The financial impact associated with a smaller crop in Taber was not significant this quarter other than somewhat increasing operating costs due to deteriorating beets towards the end of the slicing campaign. Distribution costs were $300,000 above last year's comparable quarter due to additional transfers between locations, which were unrelated to the smaller beet crop in Taber. Overall, the Sugar segment's adjusted EBITDA for the quarter was $1.7 million above last year's comparable quarter, of which $600,000 of the improvement is explained by the adoption of IFRS 16. IFRS 16 had a minimal impact on adjusted EBIT as the reduction in operating costs was offset by an increase in depreciation expense in the current year. Now we'll turn to the Maple products segment. We are pleased to report that our revenues in the quarter were $54.5 million, largely in line with last year and the highest level we have generated over the past 12 months. The operational capacity improvements that John just mentioned at our Granby and Degelis locations resulted in additional production and sales as production backlog was reduced. While margins remain relatively stable from the past few quarters, when compared to the first quarter of fiscal 2019, the competitive pressures experienced in the second half of fiscal 2019 negatively affected gross margin. Adjusted gross margin for the quarter decreased by $2 million when compared to last year, representing a decrease of 3.6% in adjusted gross margin percentage. In addition, production capacity was increased temporarily by increasing head count and adding overtime shifts in Granby and in Degelis, which added $300,000 in labor costs when compared to last year. Finally, assets acquired for the footprint optimization project and the lease of the new Granby location resulted in an increase of $300 million -- $300,000 in depreciation expense. Overall, adjusted gross margin for the first quarter of the current year amounted to $5.8 million, down from the same quarter last year, but higher than the past 3 quarters. Adjusted EBITDA for the first quarter in the Maple products segment amounted to $4.1 million, again, higher than the last 3 quarters, but down from the first quarter of fiscal 2019. Unlike the Sugar segment, the adoption of IFRS 16 on the Maple products segment had a minimal impact for the quarter. Adjusted -- consolidated adjusted EBITDA at $30.2 million was in line with the first quarter last year, as improvements in the Sugar segment was offset by lower adjusted EBITDA in the Maple products segment. Free cash flow for the trailing 12 months decreased by $11.4 million versus the comparable period last year. The decrease is explained by lower adjusted EBITDA, higher capital spending, net of operational excellence CapEx and by higher income taxes paid. This was partially offset by a reduction in funds used for the repurchase of shares and lower interest fees. I should also mention that the adoption of IFRS 16 did not have a significant impact on free cash flow other than for presentation purposes. During the quarter, the company acquired approximately 200,000 common shares under the normal course issuer bid. Prior to quarter end, an automatic share purchase plan was put in place to continue to purchase shares during blackout. Overall, as of today, a total of approximately 1,075,000 common shares were bought since the beginning of the fiscal year at an average price of $4.89 per common share. In addition, we confirmed our ongoing commitment to return value to shareholders with a declaration of a dividend of $0.09 per common share to shareholders of record on March 27, 2020, and payable on/or about April 21, 2020. The total payout is estimated at $9.4 million. I will now turn to the outlook for fiscal 2020, starting with the Sugar segment. Volume expectations for the current year are anticipated to be approximately 6,000 metric tons lower than last year despite producing approximately 60,000 metric tons less than planned in Taber as a result of beet early harvest termination. We continue to expect that export segment should decrease by approximately 15,000 metric tons as contracted volume in Mexico for fiscal 2020 was rolled to the end of the current contract to fiscal 2022 at no cost to us. The Canada-specific U.S. quota of 10,300 metric tons can only be delivered by refined sugar from Taber and is still expected to be exported, given its attractive margin. Also unchanged is our expectations that the consumer volume should increase by approximately 10,000 metric tons from the additional business acquired in April 2019, thus offsetting a portion of the export volume reduction. The remaining 2 segments, industrial and liquids are expected to end the year at comparable levels to fiscal 2019. As a result of the removal of the carbon tax in Alberta and the shorter beet campaign, we expect to realize energy cost savings in our Sugar segment of approximately $2.5 million in the first half of fiscal 2020 versus fiscal 2019. The volume shortfall from the reduced beet crop will have to be produced at our cane refineries. As a result, distribution costs are expected to increase versus fiscal 2019 as we ship all sugar to Taber to mostly service our domestic liquid customers. Overall, despite the challenges resulting from the smaller crop in Taber, we continue to expect that the Sugar segment's adjusted EBITDA should exceed fiscal 2019 results. The reduction in energy costs and the margin improvements from the additional consumer volume are expected to be beneficial for the current year. In addition, the financial impact from the Vancouver commissioning issues encountered in fiscal 2019 are behind us. These 3 elements should more than offset the additional cost expected as a result of the smaller production volume in Taber.Now turning to the Maple products segment. We have experienced a more stable competitive environment over the past few months. And as such, we do not expect any short-term change in gross margin. The relocation to the new Granby facility took place on January 31, and finalization of the commissioning of the equipment should be completed by the end of the second quarter. Notwithstanding the uncertain competitive environment, we would, therefore, expect this return on investment projects to start generating savings in the second half of fiscal 2020. Capital spending for the Sugar segment in the current fiscal year is expected to amount to approximately $20 million, including a high proportion dedicated to return on investment capital projects. In the Maple products segment, approximately $4.7 million is expected to be spent in fiscal 2020, mostly in the first half of the year to complete the footprint optimization projects. There are minimal capital requirements outside of this project. Despite having purchased more than $5 million in shares and the smaller crop in Taber, we expect that free cash flow will cover the company's dividend payment, as improved adjusted EBITDA and lower capital expenditures, net of operational excellence projects, are expected to drive an increase in free cash flow when compared to fiscal 2019.With that, I would like to turn the call back over to the operator for questions.
[Operator Instructions] Your first question comes from Michael Van Aelst from TD Securities.
I apologize if you've said some of this today. It's been pretty fast, trying to keep up given that the press release came out so late, but what was the nonrecurring item? Or what was the adjustment that was made to get to adjusted earnings? I think it was like about $300,000?
Yes, that's mostly relating to maple, and it's the fact that on October 15, we got -- we took possession of the new location in Granby. And during the quarter, we had 2 locations. So any costs related to the old location were put into the nonrecurring costs.
Okay. So duplicate overhead costs during it?
That's correct, yes.
All right. On the NCIB, I think I heard you say that you bought back 200,000 shares in the quarter and 1.75 million year-to-date -- fiscal year to date. Is that correct?
That's correct, yes.
So that means you -- since the end of the quarter, you bought back almost 900,000 shares?
That's correct, yes.
Okay. And you said you're going to renew that. When does it come up for renewal?
Well, we will see if we will consider to renew it, but the NCIB is in place until late May. And there's still some shares to be bought on the NCIB. So we'll monitor the market and see if we'll continue to buy shares.
Can you remind me what the maximum is on the NCIB?
1.5 million.
Okay. All right. And then what's your balance sheet leverage comfort level? And where do you stand right now?
At the end of the quarter, we're approximately at 2x EBITDA, if you're looking at the revolver. We've mentioned in the past that we would like to go back to 1.5, but it's not going to happen in the next year or 2. At 2x EBITDA, we're still comfortable, but it's just not the historical level that we're used to.
So that just -- that excludes all the convertibles?
That's correct, yes.
Okay. And then can you remind me what the total Vancouver commissioning issues impact was last year?
Last year, it started in the second quarter. Second and third. And overall, on the gross margin. It was $4.6 million and additional $600,000 on the distribution cost. So total, yes, $5.2 million.
Your next question comes from Stephen MacLeod from BMO Capital Markets.
I just had a question about the -- in the Maple products' outlook, it sounded as though you're sort of incrementally maybe more positive with respect to the competitive environment. Is that the right way to read it? And if so, can you talk a little bit about what some of the changes have been in the competitive backdrop between the time you reported your Q4 and now?
So we're characterizing it as more stable. And our characterization is based on our activities, selling activities in the marketplace. So it's underpinned by that.
Okay. Is there any color you can give around specific segments of the market? Or is it just generally becoming -- competitive pressures are easing?
We are successfully renewing businesses where we've been -- where we have business that's being renewed, and we're not seeing the same competitive pressures we saw at the kind of the initial onset of the access or the entry of a new player in the marketplace.
Okay. And I guess, when you look back to where you thought the business would be at the time of the acquisition and where it is now, do you see a bridge to getting back to sort of the targets that you had in place with respect to EBITDA over the next 18 to 24 months or?
Well, you may -- we could kind of point out where we are where we lost ground, if you wish to call that, and what we need to do to get back there. So we have 2 kind of major buckets. We had a bucket which is obviously sales growth and margin either -- continued margin at the margins levels that we had when we bought the business or moderate improvements. That area, we saw a lot of competitive pressure. And we've seen a reduction in the compound annual growth rate of the business. That being said, we continue -- we do see a growth rate. I'd say, right now, we continue to see 3% to 6%. So there's a growth rate. Competitive situation, as we said, we think is more stable. So for us to move to the levels that we might have had in pro forma or have spoken about before, we need to see a continuation of growth, and we would need to see an improvement in the competitive environment from a margin perspective. That's one. The other area that we had in our prospectus was improvements in our manufacturing capabilities, lower cost footprint and lower acquisition of raw material costs, particularly in syrup and some of the consumables like packaging. And in that area, on the footprint, we are now in a good position with having all work done, and we will work towards realizing those goals of efficiency and gains over the course of the next 12 to 24 months. So there's a pathway there, which we can more control than we do on the marketing side. So we'll work on that. But that's the smaller part of the overall change in the results for the business. The bigger change has come from maybe a slowing of growth, not that we projected a lot, but most importantly, a change in the gross margin of business.
[Operator Instructions] Your next question comes from Endri Leno from National Bank Financial.
Just a few for me. I just wanted to, kind of, go over, first of all, in the Maple products. I mean, you mentioned that you had done this quarter was the best in the last 4. I was wondering if there is any seasonality in the business. And then you could -- any sort of kind of seasonal uptick for Q1?
No, the business is relatively flat from a seasonality perspective. So it would be the answer to that question.
Okay. And next question I had. I mean you said that when you're looking at the outlook for Maple products -- to kind of improve the business through new sales volume and the pursuit of new markets. I was wondering if you can talk a little bit about what new markets you are pursuing. Or where do you think there is an opportunity for you to gain volumes?
I don't think we'll -- well, I'd say, here's where we are today on the maple business. We are -- we have new assets in place. We're commissioning those assets. We've got a great -- we've made good progress in the -- improving the operating efficiency. We made good progress in addressing what was clearly an issue for us, which was the customer backlog. Our first step in growing the business today is to build the confidence back with our customers and to look at opportunities for -- promotional opportunities, so with customers that exist. And then we will begin to look at new opportunities as business is renewed in the marketplace in all geographies, the geographies, you know we currently participate in, in the most of the U.S., Europe and Asia. So those 3 markets, we will continue to look for opportunities.
Okay. All right. Great. And last one for maple and just 1 more then on sugar. But on the maple side, you said that you saw the competitive pressure was -- or competition was rather stable in the quarter. Would that be in all the geographies that you operate? Or was there one more, kind of, stabilized than the other? And was there any difference between geographies, basically?
No, no.
Okay. Great. And the competitor on the sugar side, and maybe I missed it if you commented on this one, was there any activity from them in Q1?
No activity, whatsoever, in Q1.
Your next question comes from Michael Van Aelst from TD Securities.
So when you talk about the maple business being like the competitive level having stabilized and your margins, you're more comfortable that your margins will be stable for the next few quarters? Is that because you have visibility through the contracts that you've signed? Or are there still contracts that need to be signed for the next few quarters?
Well, typically, the contract renewal period is in the spring. So we do have longer contracts. But there is a big crunch in the springtime. So lately in the past quarter or 2, we're saying that things have stabilized, but we will have to see in the coming quarters.
So you'll renew it. You'll start negotiations for renewals in the spring?
Every customer has their own kind of renewal date. I think Manon was pointing out that there's probably more renewal activity in the springtime, which is coincident with harvest, so kind of makes sense that people would do that. That being said, again, we have renewed business during this quarter and the quarter before. And our view is that the competitive environment is more stable than it was previously. That's the best way for us to describe it.
And do you have any sense as to why it stabilized all of a sudden?
I'd be speculating quite frankly.
Okay. When you look at your export opportunities for maple, are you still looking at global opportunities? Are you more focused on the U.S.? Have you had any more success in gaining new U.S. customers than you did in your initial quarters?
We've seen growth in the U.S., and we've seen growth in Europe during the quarter.
Okay. And just finally, on the sugar side, with the new trade agreement? Well, I mean, you're thinking it's going to be signed in the next few weeks, and we've heard different -- I guess, different viewpoints. But assuming it is signed in the next month or so, what's the process that you would have to go through to secure the additional quota and, I guess, secure new customers in the U.S.?
So the quota is specific to sugar of Canadian origin. So we are the only deep refiner who has sugar Canadian origin. So it would be -- under that rule, we would be the ones who it would be allocated to. In terms of finding customers in the U.S., there's an abundance of opportunities in the U.S. for us to participate and grow the business. We're -- even though it's an extra 10,000 tons, it's 10,000 tons against 12 million metric ton market that's suffering the same challenges that we did with short beet crop. So we don't see any risks or any challenges in trying to market and sell that.
Okay. And I guess, there's no real opportunities for you guys to -- given the shortages at Taber, there's no real opportunities for you to take advantage of the lower supply in the U.S. this year. And in Mexico, I think it's also lower.
Yes. Our focus is looking after domestic accounts, so that's number one. And if we're -- something fortuitous comes along, no doubt, we'll look at opportunities, but clearly, right now, focus is ensuring that we look after the domestic requirements that if something ever did come along fortuitous, then clearly, we'd be on it because there's plenty of opportunities in that market.
Your next question comes from Frederic Tremblay from Desjardins.
On the Maple segment you mentioned that manufacturing throughput increased in the quarter. Can you give us an indication of where throughput is at versus level that you expect to reach once the transition to the new manufacturing network has been completed? Are you at 75% of the way, 90% from a throughput perspective? And then in your view, what are the main steps needed to be accomplished to get to 100% throughput?
So we have 2 facilities that undertook or underwent a significant amount of change digitally, which we mentioned has increased its throughput by 10%, and we have rebuilt some manufacturing capabilities by looking at some of our, I'll call it, operating plans for the facility. So that work is done -- largely done. So we're there where we have a facility that's able to support new business opportunities and growth. In Granby, we moved in on January 31. So some 14 days ago. And we have -- we're in the process of commissioning lines, and some of which are lines we transferred over, some what you're brand new, and I think we need -- but we do need this quarter to continue and complete that work and be in a position where we're comfortable with our reliability of the lines and can leverage growth. Net-net, which we said all along, the investment that we made is going to give us best-in-class global manufacturing capability in the maple syrup space, and when fully complete, will give us an opportunity to actually double our business if that opportunity ever came along.
Your next question comes from Endri Leno from National Bank.
Just a quick one for me. In terms of -- you said you're working through the backlog on the maple. I was wondering, like, are you able to quantify how much of the backlog has been clear. And what was the contribution of that backlog in Q1? I'm just basically trying to estimate what would be a run rate at this stable, kind of, level with minimal competition in the business.
Do you want to give that a shot, Manon?
Well I think that the biggest backlog was in Granby. So we were able to reduce it probably by half, let's say. On a run rate basis, I would say that this quarter is -- was a good quarter. It's comparable to last year. So I don't see much movement going forward from this other than, like, obviously, pursuing growth opportunities. I don't know if you have any thoughts there.
Yes. Maybe I'll -- and I'm going to add a little bit to that. So we said going back to Degelis quickly. Degelis done. There is no backlog. We're fully caught up. We have opportunities for growth. We actually have inventory positions, small inventory positions for key accounts to ensure that we have smooth supply chain, good supply with accounts. Granby, we've got more -- we had more change going there on -- or going on there in the quarter, moving from one facility to the next. We have plastic and glass production in Granby. We're in excellent shape on our plastic and our glass production, which is the smallest portion of our business relative to glass piece, is the piece we're just settling down. So a small portion left to look after, but it's under control. We know where we're going. We're in good shape.
Okay. So basically then this quarter's run rate should -- this quarter should be like a good run rate for the next ones for the maple, more or less?
Yes.
Yes, more or less. Yes.
Your next question comes from Michael Van Aelst from TD Securities.
Last question. So Q1, you're lapping your toughest comp in the Maple business. They start to get much easier going forward. Does that mean that you're comfortable that you're also going to grow your EBITDA on the maple side?
Well, the footprint optimization was an ROI project. So definitely, from that point of view, we in the first -- in the second half, we will reduce our costs and should improve the AFDA. We're well positioned to be able to grow the business. As John mentioned in the past, we can double our capacity. We've got additional capacity at this point. So we could grow the business and, therefore, grow the adjusted EBITDA. The only thing that we're prudent is, yes, the marketplace has stabilized the competitive aspect, but we're rain prudent.
Right. Because I mean, if you just look -- if you're saying that there's no real seasonality in the maple business and you're running at $4 million of EBITDA, right, or -- yes, close to $4 million of EBITDA right now, and then you're expecting some returns in the second half of the year from your investments, it certainly sounds like you're going to be well above your $14 million from last year.
And I think that's a fair way to look at it.
We have no further questions. I turn the call over to the presenters for closing remarks.
Okay. Thanks, everybody, for your questions, and we look forward to speaking to you at the end of the next quarter.
Thank you.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.