Rogers Sugar Inc
TSX:RSI
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Rogers Sugar Inc
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Good afternoon, ladies and gentlemen, and welcome to the Rogers Sugar Second Quarter 2019 Results Conference Call. [Operator Instructions] Please note that this call is being recorded today, May 2, 2019, at 5:30 p.m. Eastern time.I would now like to turn the meeting over to Mr. John Holliday, Chief Executive Officer. Please go ahead, Mr. Holliday.
Thank you, operator, and good afternoon, ladies and gentlemen. Joining me for today's conference call is our CFO, Manon Lacroix. Departing from our usual format and in light of the challenging quarter, I wanted to use the opening commentary of the call to take the time to reflect on the evolution of our business strategy. I believe it is important to look at the quarter in a broader context of what the business has achieved over the last 5 years and what lies ahead.Let's talk first about our core sugar business. Results over the last 5 years have shown a consistent improvement in volume and earnings, driven initially by sales to Mexico, and most recently by -- from positive tailwinds associated with the market conversion from high-fructose corn syrups to sugar. Altogether in the last 5 years, volumes have increased nationally by roughly a 100,000 metric tonnes and our EBITDA has increased from roughly $60 million to $80 million -- circuit $80 million over the same time horizon.In response to our market -- to our growth and desire to improve operational efficiencies, we've increased our CapEx spend from roughly $12 million annually with very limited ROI capital to a planned $20 million with 30% ROI leasing. These investments are helping us to lower our operational cost, expand our production capabilities and improve our overall network reliability to help service our increase sales demand. Disappointingly, our below expectation results for sugar in Q2 relate directly to the business critical investment in Vancouver.The unforeseen challenges in commissioning and new decolorization process in Vancouver added roughly $5 million dollars in onetime additional cost to our business in the quarter.After significant efforts by many, the project is beginning to achieve planned performance, but we still foresee some additional financial cost in the third quarter for the tail end of this commissioning.From the results we're seeing, we're confident that the project is capable of delivering on the expectation of lower cost, long-term reliability and access to new customers in our domestic and export markets that require vegan-friendly sugar.Looking now at the Maple business. Despite a difficult quarter, we remain positive on long-term benefits of this business and just as importantly, believed in a diversification strategy is critical to our long-term growth.So what happened in the second quarter? And how will this change going forward? The first issue is cost of goods. On the back of the below average 2018 crop, which was particularly disappointing in Eastern Quebec, we found ourselves low on supply of selected grades. This required us to purchase stocks from the FPAQ strategic reserve at a market premium.Situation was worsened by a 2- to 3-week late start to the 2019 harvest and higher-than-expected demand for these grades during the course of the crop year.Furthermore, our record crop in the U.S.A in 2018, made it impossible to pass along these ingredient cost aggregations or reach agreements to switch customers to alternative more abundant stocks.There are some lessons learned from this situation that will mitigate future reoccurrences. The fundamental one being that a more robust sales and operational planning process is required to actively manage inventory at the start of the every crop year through to the next season. This improved planning process has already been implemented.Commenting briefly on the 2019 crop outlook, although not fully completed, we expect the supply in Quebec to increase by minimum 10% versus last year, thus approaching and potentially exceeding the normal crop production. Pricing for the 2019 crop was finalized with no change for Maple syrup in Quebec for this crop year. The 2019 U.S. crop is expected to be similar to 2018, which was above the average.The second challenge in the quarter and year-to-date has been softer than planned sales. A great deal of analysis has been done to better understand some of the apparent softness in the market and what we should expect going forward.There are 3 overall issues that impacted the sales performance in the quarter and year-to-date.The most significant was a low execution rate on winning new business. Particularly as it related to U.S. retail -- the U.S. retail market where account losses that we incurred in the first 6 months of calendar 2018 which were budgeted to be partially offset by new account growth was not fully realized.The low success rate in securing new retail business can be in part attributable to the more than abundant availability of U.S. syrup in the market and insufficient motivation on the part of the buyers to make supplier changes.In the last half of the year, we will focus our emphasis in the U.S., on strengthening promotions with existing accounts, prospecting to list Maple products or skews where they don't exist already and tempering our reliance on new retail account acquisition from competitors.The next issue was the observation of the slowing of the growth at the Canadian retailers.The latest A.C. Nielsen 52-week results was notice simply softer than the prior 2 52-week periods. In contrast, the box stores sales in Canada were strong and helped more than offset the weak retail performance.And in aggregate, the Canadian market continues to show growth but a more moderate 2% to 3% versus the prior trend line of 5% to 6% . Overall in Canada, we are slightly outperforming the market. Lastly, ingredient sales in the quarter and first half were softer than planned and lower than last year for the quarter, due primarily to reduced product launch volumes with 2 key customers. Sales with these 2 accounts are now starting to recover somewhat. Sales prospecting in this area remain very active and well resourced.As previously mentioned, the ingredient segment is a market area which has complex and long selling cycles.Notwithstanding these facts, we continue to firmly believe in this market segment and are expecting to see new customer growth in this segment in the last half of the fiscal year.Not evident in the results is some of the good progress we made in the quarter on reconfiguring the manufacturing platform. Our St-Honoré-de-Shenley bottling operations were transferred to our Degelis and Granby operations. In Degelis, we commissioned automated packing lines and opened a new 30,000 square foot warehouse in time to receive direct farm deliveries from the 2019 harvest.The completion of the footprint optimization will culminate this fall with a move of the existing Granby plant to a new plant built-for-purpose facility also in Granby. When completed, we will have a low cost, syrup procurement and bottling operation with the capacity to meet growing customer needs.The benefits of this $6 million return-on-investment project will be realized starting in FY '20.Looking beyond sugar and Maple categories, we continue to monitor market trends and gain a better perspective on new opportunities and threats.As previously discussed, adding alternative natural sweeteners to our current portfolio remains an area of interest, but only when the right opportunity, time and integration of the Maple acquisitions are closer to completion.We've also begun to investigate and build an understanding of the risks and potential opportunities in the sugar reduction space. We are seeing increasingly more and new product development in this area.As a natural sweetener industry leader, we want to understand the market potential and how best we can bring innovation -- innovative sugar-based solutions to our customers.Before handing the call over to Manon to review the details of sales and financial results, I want to reemphasize that despite below expectation outcomes in the quarter, we remain confident on our strategies and believe we can overcome the challenges we faced in the quarter and return to a positive continuous improvement and overall long-term trend of improved financial results.I'll now hand the call over to Manon.
Thank you, John. I will now go over the second quarter results, starting with Sugar segment.The second quarter was another strong quarter volume wise with an increase of approximately 7% over the same quarter last year and year-to-date. Looking at the results for the second quarter, volume was higher than the comparable quarter in all categories except for a slight decrease in consumer volume of approximately 500 metric tonnes attributable to timing.The industrial and liquid segments were approximately 8,500 metric tonnes and approximately 38 metric -- 3,800 metric tonnes higher than the second quarter of fiscal 2018.Industrial segment continued to enjoy strong demand from existing customers and benefited from some timing and delivery, while the latter benefited from some recapture of high-fructose corn syrup substitutable agents and additional demand from existing and new customers.The export segment was comparable to last year.Adjusted gross margin for the second quarter amounted to $19.3 million compared to $22 million for the same quarter last year, representing a decrease of approximately $2.7 million.As John mentioned, we have commissioned a capital project during the quarter and experienced significant production issues, which as a result, excluding distribution variances added approximately $4 million in the onetime cost.These operational costs included inefficiencies and refining, such as overtime, additional refining materials, additional and inefficient gas consumption, recycling of sugar and lower sugar yields.The commissioning issues also let us to purchase refined sugar from competitors at a premium to our typical production cost in order to supply our customers and minimize the disruption.In addition, the natural gas supply in Western Canada was very tight during the winter months, in particular, in February, where we saw natural gas transportation cost increase to unforeseen levels, which compounded the increase in natural gas cost for the quarter.Isolating the issues in Vancouver and excluding the onetime additional cost of $4 million, adjusted gross margin for the quarter would've been $1.3 million above last year, mainly due to additional volume of almost 12,000 metric tonnes for the current quarter versus last year.A capital project commissioned during the quarter is a replacement of the bone char decolorization system that will lead to cost savings in the form of lower energy and water consumption.On a per metric tonne basis, our results were obviously highly impacted by the commissioning issues in Vancouver. As such, including -- excluding these added incremental costs, adjusted gross margin would have been approximately $133 per metric tonne compared to approximately $135 per metric tonne. The impact from the #11 raw sugar values for Taber's beet sales was minimum for the quarter.Distribution cost for the quarter were $1.1 million above last year second quarter of which $800,000 of the increase relates to freight costs incurred to transfer refined sugar from the Montréal refinery and Toronto distribution center to the western market to supply our western customers. The remainder of the increase versus last year is mainly due to the increase in sales volume and some transfers between locations unrelated to the Vancouver issues.Overall, adjusted EBITDA for the quarter was $13.5 million or $18.3 million when excluding the incremental commissioning cost of $4.8 million, which would have been approximately $1.2 million above last year.Year-to-date, volume ended at approximately 26,000 metric tonnes above last year. All segments were higher than the previous year with industrial volume up approximately 14,400 metric tonnes, liquid volume up approximately 7,600 metric tonnes, export volumes up approximately 3,000 metric tonnes and consumer volume up approximately 1,000 metric tonnes.All the increases for the 6-month period are consistent for the reasons explained earlier for the quarter, except for the export segment, which benefited from additional sales to Mexico and U.S. IPR duty sales during the quarter.Adjusted gross margin for the 6-month period amounted to $48.5 million versus $53.2 million last year. Excluding the impact from the commissioning issues in Vancouver and the noncash pension plan income last year of $1.5 million, the adjusted gross margin was $800,000 above last year, explained by the increase in the volume somewhat offset by the impact of lower #11 raw sugar values, especially in the first quarter of the current year.Despite variation in exposure, FX approximately 10% of Lantic total sales volume, which is largely influenced by the value of the number #11 market at the time of the customer's freighting decision. Our per metric tonne basis and excluding the Vancouver commissioning issues, adjusted gross margins stood at approximately $144 per metric tonne.This compares to approximately $153 per metric tonne last year when excluding the noncash pension plan income.The decrease is mainly explained by the impact from the #11 raw sugar values in the first quarter of this year. For the current year, administration and selling costs were $400,000 higher than the comparable period last year, mainly explained by timing.Distribution costs were $1.6 million higher than last year for the same reason as I just explained for the quarter, mainly incremental cost due to the commissioning, higher volume and additional transfers.Overall, adjusted EBITDA for the Sugar segment was $38 million versus $44.2 million for the first half of fiscal 2018.Now I'll turn to the Maple products segment and start with the second quarter.Revenues for the quarter were $2.8 million lower than last year, which is mostly explained, as John has mentioned, by lower new account growth, by reduced customer promotional activities with the Canadian retailers and to a lesser extent, manufacturing and prevention related to syrup grade management towards the end of the quarter.Lastly, production transfers between the St-Honoré-de-Shenley bottling facility, Degelis and Granby, also contributed to some sales delay as certain approval were required from customers, such as label changes and quality assurance for a different plans and/or certification.Adjusted gross margin for the quarter decreased by $1.6 million when compared to last year and ended at 10% of revenues versus 12.5% last year.The largest negative impact on adjusted gross margin relates to the cost of syrup, where we purchased from the Producteurs et ProductricesAcéricoles du Québec, the PPAQ, formerly known as the FPAQ. The purchase out of its Maple syrup reserve warranted a price premium as opposed to a discount last year.The lack of certain grades of syrup also added production challenges and increased overall syrup cost.In addition, lower revenues also contributed to the decrease in adjusted gross margin. Finally, some production inefficiencies related to the startup of the new equipment and first-time production of transferred volume led to higher operating cost, which also reduced adjusted gross margin.As a result of lower revenues and lower adjusted gross margin, adjusted EBITDA ended at the second quarter at $3.1 million versus $4.9 million last year. Now turning to the year-to-date results, revenues were $2.9 million above last year, which is explained by the full first quarter of Decacer in fiscal 2019, somewhat offset by second quarter reduction in revenues.Adjusted gross margin ended at $12.8 million, which is just slightly above last year as the impact from Decacer was mostly offset by the second quarter results.Administration and selling costs were $0.2 million above last year when excluding the nonrecurring cost of both years, which is mainly explained by the first quarter impact of Decacer, somewhat offset by savings of operational excellence undertaken last year.Adjusted EBITDA for the first 6 months of the current year was $8.8 million compared to $9.1 million last year.On a consolidated basis, adjusted EBITDA for the quarter was $16.6 million or $5.4 million lower than last year. Year-to-date, adjusted EBITDA was $46.8 million or $6.5 million lower than the first half of last year.Consistent with the first quarter, we have modified our free cash flow table to present a trailing 12 months free cash flow as opposed to the quarterly cash flow.We believe that a trailing 12 month is more indicative of the company's performance and reduces the timing effect within the free cash flow.Therefore, for the current trailing 12 months, free cash flow amounted to $38.5 million or $5.6 million lower when compared to the previous trailing 12 months. The decrease is mostly explained by the payment of $4 million to purchase and cancel under our normal -- sorry, purchase and cancel shares under our normal course issuer bid. We are pleased to confirm that the Corporation declared a dividend of $0.09 per share to shareholders on record June 29, 2019, and payable on or about July 19, 2019. The total payout is estimated at $9.5 million.I will turn to the outlook for the remainder of fiscal 2019.Once again, I will start with the Sugar segment. Our volume expectations for the remainder of the year remains unchanged and we, therefore, expect that the -- we should end the year approximately 25,000 metric tonnes higher than fiscal 2018.As such, we expect that our volume for the second half of the year should be comparable to last year when we started being a more pronounced growth in the last half of fiscal 2018.We should continue to see an increase in liquid segment as a result of new accounts contracted in the first quarter as well as some additional conversions from high-fructose corn syrup to liquid sucrose.We anticipate an overall increase versus fiscal 2018 of approximately 15,000 metric tonnes.We expect that the consumer volume should increase by approximately 5,000 metric tonnes as a result of the incremental volume gain from the addition of new regions with an existing customer.For the full year, industrial segment should increase by approximately 7,000 metric tonnes and export should be comparable to last year.As we have mentioned, although the commissioning issues in Vancouver are largely behind us, we are still estimating additional cost of approximately $1 million in the third quarter as a result of suboptimal production cost.As for the Maple products segment, our fiscal 2019 expectations for adjusted EBITDA was decreased from approximately $21 million to $19 million when excluding nonrecurring cost as a result in the second quarter performance for the segment.Capital spending for the Maple -- for the sugar segment will increase this year, due to the execution of the air emission project in Taber, whereby a range of $5 million to $7 million should be spent in the current year.The remaining spend on capital project should be comparable to the prior year.The air emission project started in April and is expected to be completed by the end of the fiscal year. In addition, the Maple products segment is expected to spend approximately $6 million in fiscal 2019 in Granby and in Degelis for the footprint optimization project.With that, I'd like to turn the call back over to the operator for the question session.
[Operator Instructions] Your first question comes from the line of George Doumet from Scotiabank.
Just wanted to clarify the Vancouver operational issues. So if I understand correctly, there would have been -- EBITDA would have been higher by $5 million this quarter and it's expected to have a $1 million impact next quarter. Is that right?
That's correct, yes.
Okay. Great. After normalizing for this, do you expect gross margins to be consistent with last year? Or are there any other items that we should be aware of in the back half of the year?
No, they should be fairly comparable, the sales mix could have a bit of a positive impact versus last year, because we will have more consumer and like industrial somewhat. And also, the effect of the #11 raw sugar values in -- on Taber sales. It really started in the second half of last year. So we've kind of...
We are in the cycle.
Exactly.
Okay. Okay, that's good. Just shifting over to the Maple syrup business. Just wondering, why you lowered guidance, I mean, I think we've known for a while that, that was a back crop year and that the FPAQ had a premium to their reserves. So, I'm just wondering, why, kind of -- why we waved for this quarter, do that, like what -- was the shortage worse than expected? And maybe you could point to us why specifically it was lower than expectation this quarter?
Well the -- on the cost of syrup, I would say that in the quarter, the impact just this -- the increase in cost was roughly a $1 million. We certainly did not expect to have that much of an impact previously. We knew that we were short in certain grades and we have to purchase and we didn't expect that our results were going to be that impacted.
And we on the -- and in the kind of, the point of acquiring the syrup from a strategic reserve. We don't have a absolute clear indication from them until they actually issue a strategic reserve as to what if the premium would be if there is one. In prior years, I think we had discussed, I mentioned earlier, it was offered out of the strategic reserve and actually a discount. So interpreting what that number was, would've been difficult for us to do. Interpreting the exact amount we needed, would've also been difficult for us to do.
Yes, and also, George, if I could add is that we like, overall, total wise, like we had enough syrup, but we didn't have enough syrup of certain grades. So we ended the crop with leftover from last season even though the crop was slightly less than a normal crop simply overall. By -- like our issue was more grade related as opposed to we ran out of syrup completely.
Okay, okay. If we really look, I think -- in the last conference call, you guys had mentioned a $25 million EBITDA run rate figure in fiscal '20. Should that also come down by $2 million as well?
Well, we've never given like a -- we've always said that we...
[indiscernible]
We still -- yes, we still expect that we'll get there but it will take us longer to get there. If I look ahead to next year, we do expect additional savings from the footprint prior to reshuffling eventually. Granby, for example, it's only going to be finalized by the fall and also the St-Honoré-de-Shenley, the restructuring really occurred at the end of the quarter. So you will see some savings next year.
So I think, if you wind back what we shared with you last quarter, we probably not going give you a specific at this point in time, this is going to occur. We gave you a confidence level or tried to provide you with a confidence level that we believe in the business. We think it has the capacity to deliver the kind of the EBITDA that we thought it would. I think we're going to probably find that there are some different levers in that business that are going to help us that we might not have seen when we got started. But we are not as a management team, whatsoever abandoning the possibility or the potential that this business has to achieve that sort of an EBITDA level. But we've never -- we were not specific last quarter on that -- the specific timing. But one thing as Manon pointed out, that we are specific on, is we have $6 million worth of capital. It's ROI capital, it's within our kind of norms of 4 to 5 years ROI and that will deliver value back to us in FY 2020.
Okay. And just one last one, if I may. Your commentary pointed a little bit to some happening in the U.S. I'm just wondering, if higher crops in general, coming out of U.S., could that be structural in nature? I mean, can they essentially raise the supply, as the demand is pretty high and potentially gain share over time? I'm just wondering what gives you confidence that that's not a trend there and kind of, I'll just refer it back to a more normalized nature in the coming year.
Well. What gives them a larger crop? There's 2 things that give a larger crop: one is there's more trees tapped and the other is the harvest season and how the weather events and weather patterns influence the quantity of Maple syrup that comes from every single tree.So in Canada, and in the U.S., the bigger influence on volume increases or decreases is not by a number of trees that are tapped, but rather the amount of sap that comes from each tree, which is weather dependent. And maybe we -- I would say, we definitely know this much better than we did before we started but that can be very regional and in Québec, you can see significant differences between one region to next. And in the U.S., we could see the same situation and the U.S. is vulnerable if you wish to call it, as much as Canada is to, weather patterns that might be present at any one harvest. So it's mainly pounds per tree that impacts the quantity, not the number of trees.
And also, we have our operations in Vermont. So we do have access to U.S. throughout the fall.
Your next question comes from the line of Michael Van Aelst from TD Securities.
I just wanted to follow up on the U.S. So you talked about having to target accounts using, I guess, stronger promos. I mean, won't that just catch your margin on the product and reduce your long-term EBITDA potential?
Yes, well, what we're wanting to find is growth in the United States, we have been, I think, we described it, less successful than we had anticipated in acquiring business that is already with other bottlers.So that, if we pursue that to its finite point, that might have an impact on margins. We don't think that we want that it's -- we've been successful nor do we think we're going to give, we can find a significant enough incentive to convert that business and have a margin on our business that's satisfactory to us.So we do believe that increasing promotional activity will drive additional consumption, we see that in Canada for sure and we're prepared to make that investment to get to additional growth in the marketplace and yes, it might have an impact. But we don't think it's an impact, that's as material that's not doing, not getting the growth that we wanted to get for the business.
So that's as simple as increasing promotional activity, syrup promotional support to you at the retailers that you're selling through?
Yes, that's one of the -- that's correct. And then the other lever, we said we want to pursue is to pursue accounts. Well, there are accounts in the U.S. that don't have Maple syrup and find ways to introduce it to, kind of, be first on the shelf in those marketplaces. So that's a second opportunity that we'll be pursuing. And we're not -- don't get me wrong, we're not giving up on the opportunity fund to win business in the U.S., where we don't have it. But we're just not putting as large a place marker on that approach.
Okay. And then you talked about having a more robust sales and marketing planning process. Can you give us a little more color on what you did to improve that?
Some of this, back office IT capabilities, whereby we had 4 separate businesses, also in Canada, 3 separate businesses on different platforms. We had a forecasting model on sales. It was driving -- driven by dollars and it wasn't coupled to volume, pounds or grade. So part of the process that we've been going through is building that into the sales forecasting model, not just the dollars figure, which comes out at the end. But also, specific grades of product and quantities of product in sales numbers. So now we have a much better visibility of sales demand and absolute clarity of what our actual inventories are. We were not -- we did not have that in the first quarter of this year. We got it basically starting in January of this year.
So the grades that you're low on, who is the end customer for those kind of grades?
Variety of retail customers.
Okay. And then Canadian -- so the slower growth in Canada, you're suggesting has to do with less promos from -- by the Canadian retailers, rather than just consumer trends?
We see less promos. We know that we can -- when we looked at the A.C. Nielsen number, we could see that. So that's, yes.
And the big box stores, do they not carry your product?
They absolutely do. And because they do and they had a very good for 6 months of the year, we actually ended up with a result, if you looked at the growth rate slightly above what we think is the growth rate in Canada at this juncture.
Okay, so the volume that you -- yes, the decrease in volume year-over-year, is that something you think you can recapture? Or is that something that is like more of a longer-term initiative?
I would think, we're -- I'd say we're inspired to recapture it. But I don't want to put the place marker that we're going to recapture it in a quarter or recapture it in half year. So we're operating from I'd say a disadvantaged position into the United States, because some of the supply constraints that we had and concerns we had and we're not -- we won't have that position in front of us. But looking forward, we're not -- we're going to continue to try and find ways to grow in the U.S. market.Maybe a little more tactfully than we might have done in the first half. But we're not giving up on that growth opportunity. I think it was just -- I think the answer to your question is, it's going to take more time, more time than we thought.
Okay. And on the Sugar in Vancouver. I didn't quite catch what you said that the 2 major capital projects were that had problems. Can you just clarify it?
Oh, it was the bone char decolorization system, which is the main system, and there was, like another capital project that was just a replacement on an equipment in the same area of the refinery and the 2 combined cost are issues in Vancouver for the commissioning.
I mean, when you say that it's critical investment, is that because the plants are old and they're at the end of their lifecycle?
What we were using for decolorization was turn-of-the-century technology that needed to be replaced quite frankly.It was, kind of, heart of the decolorization system. And yes, we needed to upgrade that capability at the facility and we undertook to do that. And disappointingly, we ran into some challenges in that process. But if I look at this point in time, we're hitting our stride on throughputs, we're hitting our stride on the operating cost, we're building confidence so we can do that out into the future. But we didn't get there -- didn't get to that place very easily, obviously. Cost...
And what were -- when you look through the plants, are there other components that are getting close to critical investment status?
We have investments in the facilities that have been increasing and you've seen that we're spending $20 million in capital versus $10 million or $12 million. So I think we're addressing them, in a probably proactive fashion, maybe a little more aggressive than we had 5 years ago, but I don't see anything that would red flag and say, we have to do this tomorrow. And we have a good -- we have now a good process for identifying the risk and prioritizing where we spend our money. This one that we talk about to be -- the complicating factor was it -- from an engineering perspective, at the facility and maybe that's why we end up with more risk. It was very complicated to do. And I guess, that has shown. But as I said, we're happy where we are, it just wasn't a fun trip to get here.
And I didn't catch what you had said about vegan-friendly sugar. Was that of any relevance?
It's relevance in the sense that we were unable to supply that vegan-friendly sugar. There's a market for it. We had made sales actually in export sales into the United States a year ago and when we went through the final approval process, they just realized we were not.So we weren't able to participate that -- in that sale.So it's a material market, it's a growing -- I think, it's a growing market, a growing requirement from consumers who voice an interest or voice desire to have that sort of certification -- or not certification but that sort of compliance, if you wish to call it that. So it's growing.
So did you say, you actually have it now or you are working towards it or...
We've got it. Yes, yes, we're there. We're done.
If I could just simply removing the char out of our system that -- and replacing it with a different way of decolorizing the sugar, that's what makes a vegan.
Your next question comes from the line of Stephen MacLeod from BMO Capital Markets.
I just wanted to follow up on the Vancouver facility. You mentioned that like presumably, I just want to understand the way it's warded. Presumably, you lost some volumes because of the commissioning issues, do you have...
If I could interrupt, we did not, because we did everything to supply our customers. So that's why we brought in sugar from Montréal and Toronto and we bought from competitor and we did not lose any volume.
Oh, you didn't lose any of your refined sugar volumes?
No, we did not.
Okay. Okay. That's helpful. I thought you had. And then secondly, just with respect to that associated impact on gross margin for per metric tonne. I just want to clarify, the impact on the quarter was $4 million, is that correct?
On gross margin, yes.
But it was higher on EBITDA. It was -- I guess, $5 million on EBITDA?
Yes, roughly, yes.
Because of distribution.
Right. Okay, okay. And then on, did I understand correctly, previously, in the answer to previous question, you suggested, I think, that adjusted gross margin per metric tonne should be flat in the back half of the year. Did I understand that correctly?
Well, it should be fairly comparable to last year or slightly better because of the mix of the products and less of an impact on the -- while the #11 would be comparable to the previous year.
Yes, okay, okay. I understand. And then just shifting to the Maple business. Obviously, with some -- your guidance came down on the back of Q2. I just wanted to get a sense of what confidence level you have in the back half of this year to continue to strive to meet that revised EBITDA number?
Or if you look at our revenues in our plan, we had obviously -- our growth was strong in our budget. So in light of that, we've tempered our expectation for the back half on the revenue side. We are obviously, expecting a regular crop. So we're not expecting that we are going to have additional premiums from syrup cost. So that's how the back half is structured.
Okay. So little bit of route tempering on the top line, but some -- but you won't -- you don't expect to incur these higher prices?
On the syrup side, we feel confident with the crop that we've got. That we will not incur the same issues that we had in the first half or specifically the last quarter.
Right. Okay, okay. And I would've thought that the PPAQ would have provided surplus inventories to producers at a discount to the market price. I was surprised to hear that there was a premium. Is that just based on supply-demand in any given quarter?
Yes, exactly -- that's correct. So they, and again, since we probably experience, and maybe the first 1.5 year, we were buying on a discount to FPAQ or PPAQ. And in this quarter, because of the -- I would say, the general marketplace tightness on those grades, they felt that they should be charging a premium to the bottlers for those grades.
[Operator Instructions] Your next question comes from the line of Endri Leno from National Bank.
I just wanted to start off very quickly with Vancouver, I just wanted to clarify something because you said that the issues are largely behind us, meaning that there is a little bit of a bleed in Q3. Is that just the efficiency that you mentioned? Or is that something -- work's still being done?
I think that's a good way -- what you've described, I think, is a good way to describe it. There's just some trailing efficiencies or building up of efficiencies that have been getting better. The first week of the quarter they weren't there, second week of the quarter maybe they weren't there. But we're getting better and better. And it's hard for us to, I would say, precisely calculate those day-by-day because of the way we can measure some of our productivity figures.So we expected some carryover, we are viewing it as up to $1 million and that's probably the best way to describe it.
And also the, like let's say, the supply from Montréal or Toronto to the Western market has stopped like weeks ago. So it's -- Vancouver is supplying its own market. So there's no issue.
Yes, it's fully self-sufficient.
Okay. Great. Now just moving onto the other investment projects that you have ongoing or you are planning. There's a little bit of a changing in the wording for Taber. So you expect some cost associated, some of those have shifted in fiscal 2020. Does this mean that the retrofitting will continue into fiscal 2020? Or will it still be completed in '19?
It will be completed in '19, because -- like, it should be like towards the end of the fourth quarter, that it's going to be completed, but the way we're presenting our cash flow, it's on a cash basis effectively and so there will be some payments to the contractors through outperforming the project that will bleed into the next calendar year, but really the project will be commissioned and ready to strive for the next campaign.
Okay. And has this started already? Because I think, we mentioned last time, the call that it'd start in the Spring, I mean, imminently, I'm assuming or has it already?
It's started.
It just started in April.
Okay. And you estimate you will not need to extend or get a new variance, right?
That is correct.
Okay. And the last one, just on the Granby new build, has that construction started already? Or it has yet to be?
It is started, we are just directing our framing now, yes.
Okay. Great. And finally, on the -- so the relocation and the reconfiguration of all the other plants that I'm assuming it's on track as well? Or has it been completed?
It's the work associated with St-Honoré-de-Shenley that all those products have been moved to the desired or the anticipated location and as Manon had mentioned to you, the only issue -- while what we've been doing with that, which has been bit of a disruption is first time running product in different facilities.So it's -- we have to go through a small learning curve to adopt or onboard those products.
Your next question comes from the line of Frederic Tremblay from Desjardins Capital Markets.
Just to follow up on that last question. John, how long do you think that learning curve will take on the Maple side and related to the relocation of some production?
How long? I hope through this quarter, I guess, say.
Okay. And just the last question I had. I think in your prepared remarks, you mentioned that you were starting to look at the sugar reduction space, wonder if you could elaborate a bit on that?
Yes, well, as a business, we continue to see obviously, what you do read in the paper and see solutions that people are coming forward with relative to sugar reduction systems. Most of the ones, we've seen are almost exclusively what we've seen so far are using high-intensity sweeteners and other combined with, I guess, other fillers if you wish to call it that in their product solutions. And we are looking at some technology -- beginning to explore technology that is in the sugar space, that will allow us to accomplish some of those objectives.So it's more of a research at this point then it is a business but it's being reviewed or being -- we're looking at it as an opportunity to participate as opposed to be threatened by that marketplace.
And do you view that as a near-term option to you or it's more of a long-term potential project?
I think we will work its way through this, the process it will be, something that we will look at in the next 6 to 12 months, I would say, if we're successful in finding the solution, the marketplace solution.
There are no further questions at this time. I turn the call back over to management for closing remarks.
Okay. That's the end of the call, thanks for the questions. I appreciate that and as I said, we recognize we had a difficult quarter. We feel we're through it. And we think we will get over this and move back to, kind of, the results that we've seen in the past, which is consistent trend towards improving our business.So thanks, everybody, we'll speak to you next quarter.
Thank you.
This concludes today's conference call. You may now disconnect.