Rogers Sugar Inc
TSX:RSI
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Rogers Sugar Inc
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Good morning, ladies and gentlemen, and welcome to the Rogers Sugar's Second Quarter 2020 Results Conference Call. [Operator Instructions] Please note that this call is being recorded today, May 12, 2022 at 8:00 Eastern Time.
I would now like to turn the meeting over to Mike Walton. Please go ahead, Mr. Walton.
Thank you, operator, and good morning, everyone. Joining me for today's call is Jean-Sebastien Couillard, VP of Finance and CFO. During today's call, I will review the second quarter results of 2022 and trends in our industry. 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 disclaimers and non-GAAP measure definitions included in our public filings with the Securities Commission for more information on these items. A replay of this call will be available later today. The replay numbers and passcodes have been provided in our press release, and an archived recording of this call is also available on our website.
During this quarter, our sugar business exceeded our expectations with a record sales volume and a record EBITDA. Our strong volume growth in sugar was due largely to the recovery in our industrial consumer retail segments, as delayed orders from the first quarter of the year were filled during the second. Our Maple business continues to face pressures from lower demand and inflationary price increases along with industry-wide global shipping challenges. While we expect these financial and operating pressures to continue for the remainder of the fiscal year, we are continuing to focus on cost recovery through price increases, which will take effect over the next quarter. We expect margins to improve once new pricing takes effect and COVID-19 volatility and supply chain-driven pressures have abated.
As we move into the second half of the year, underlying demand for sugar remains strong as growth returns to pre-COVID norms. As a result of the strong demand and higher pricing we are experiencing in our Sugar segment, we continue to expect improved financial performance in 2022 as compared to 2021. The strength in our sugar [indiscernible] is expected to more than offset the demand in the Maple segment. With a view to robust market conditions and anticipated continued momentum for sugar demand, we have increased our volume forecast for 2022 by 5,000 metric tonnes to 775,000 metric tonnes.
Now I would like to comment on the impact of COVID-19 on our operations. As we moved into the new calendar year, the Omicron variant affected our employees as it did the broader population across Canada. We continue to uphold our rigorous health and safety standards for the protection of all of our employees, and despite the highly contagious nature of this variance, our operations were not materially impacted. After more than 2 years of COVID, we continue to meet the evolving conditions with high safety standards. We have risen to the challenge to protect our employees to ensure our operations continue without disruption. So we can deliver essential ingredients to our customers.
In the second quarter of 2022, our COVID-19-related costs lowered from the same time last year, but increased slightly from the first quarter as we doubled the omicron variant.
Now let's turn to our second quarter results. As I mentioned, we achieved a record adjusted EBITDA for the second quarter, driven by higher sugar sales margin and volume, partly offset by lower demand and higher costs in Maple.
Now let's dive a bit deeper into our Sugar business. Our sugar volumes reached 196,000 metric tonnes in sales, an improvement of approximately 13,000 metric tonnes on a year-over-year increase of 7%. During the quarter, we saw growth in all 3 of our domestic segments with recovery in our industrial, consumer retail, contributing the largest increases as well as healthy growth in our liquid business. Our consumer business increased by 6,000 metric tonnes, making up close to 50% of the volume growth in the quarter as delayed orders from the first quarter of the year were filled. Meanwhile, our Industrial segment increased by 5,500 metric tonnes compared to the same quarter last year. This is also due to a pickup of customer orders that were temporarily delayed in the first quarter of the year.
As I mentioned last quarter, several large clients face COVID-related stocking shortages, which limited production capacity and led to some delays. In liquid, the business grew by 1,300 metric tonnes from the same period last year mainly due to higher demand from existing customers.
During the second quarter, adjusted gross margin improved as a result of the positive price/mix, higher sales volume and increased byproduct contributions. Additionally, last year, unfavorable weather conditions damaged a portion of the Taber beet crop, which negatively impacted adjusted gross margin. Due to our successful harvest this year, the absence of those conditions favorably impacted our margins in the current quarter. While freight costs are trending higher, we are continuing to fill orders and stay ahead of inflationary pressures. This is supported by our FOB seller stats.
And now a few words about our Taber crop. We had a successful Taber processing campaign, producing 121,000 metric tonnes of sugar for the current fiscal year. This is in line with our forecast. This is a 6,000 metric tonnes increase from last year. We are proud of the work we have done and the strategies implemented over the past 2 years to help mitigate against potential losses and make this year's campaign successful. Lastly, we are pleased to report that we have concluded a new 5-year agreement with our Taber unionized workforce.
In our Maple segment, adjusted EBITDA decreased by $1.7 million in the second quarter. This was largely due to lower consumer demand and increased packaging, freight and energy costs as well as increased recruitment, compensation and employee benefit costs. Sales volumes decreased in the second quarter as a result of lower consumer sales as well as timing issues caused by global shipping issues and export carrier shortages. Despite the reduction in sales volume, we have not lost any customers.
The increased costs in the quarter hit us immediately, and there's often a lag in passing through these increased prices. At the end of the quarter, we began implementing an additional updated pricing strategy aimed at recouping these incremental costs as contracts came up for renewal. While we expect financial and operating pressures to continue for the remainder of the fiscal year, we expect our updated pricing strategy will take effect over the next few quarters and lead to improved margin from what we are seeing today.
In previous quarters, we implemented wage increases that help assist with the tight labor market in Quebec. We are seeing a positive impact in terms of employee retention. However, this increase is driving higher labor costs over the same time period of last year. We are reviewing our labor plan to welcome immigrants to the upcoming fiscal year to help support our production in Quebec.
Now I would like to touch on the Maple crop. Due to a lower Maple production last year as a result of poor weather conditions as well as increased industry-wide demand over the past 2 years, the Maple strategic reserve has been heavily depleted. As demand returns to pre cover levels and growth tempers, we expect the reserve should begin to replenish over the next few seasons. This will be helped by the 7 million additional taps that PPAQ has approved to supply the growing global demand for Maple products.
Approximately $1.5 million to $3 million of these taps were installed this year and began to contribute to production in 2022. As of today, we are seeing good to excellent yields from the producer side, which should be sufficient to supply global demand and start rebuilding the reserve inventories.
At this time, we're using several methods to source sufficient Maple syrup to fulfill our orders, including broadening our syrup purchasing network and signing multiple-year agreements with our producers. We remain confident in our ability to fill our contracts this fiscal year and remain competitive in this segment.
Next, I would like to touch on our sugar refining capacity and expansion, evaluation project that is assessing our ability to capture increased demand and future growth opportunities in sugar, particularly in Eastern Canada. As I mentioned last quarter, sugar-containing products manufactured in Canadian plants for exports of the U.S. and EU are driving strong demand growth in Canada with most of that production coming from Eastern Canada. Our assessment continues to advance well, and we plan to update the market with the results of our assessment at the end of the next quarter.
Lastly, I want to provide an update on the positive news on the Canada Border Services Agency's decision to maintain antidumping and countervailing duties on sugar imported into Canada. The CBSA determined that anti-dumping duties will continue to apply to imports of dump sugar from the U.S., Denmark, Germany, Netherlands and the U.K. The CBSA also rule the countervailing duty will continue to apply to imports to subsidized EU sugar. We welcome the CBSA's decision.
Before I turn the call over to JS, I wanted to thank our employees. Our employees continue to manage our operations, the needs of our customers and all other business supporting relations with care and commitment throughout this volatile period. They are the reason we were able to deliver [ essential ingredients ] to the critical supply chain. I continue to be inspired by their efforts and thank them for their continued hard work.
Now I will turn the call over to JS, who will provide additional information on the quarterly results.
Thank you, Mike, and good morning, everyone. In the second quarter of 2022, our adjusted EBITDA was $24 million, an increase of $2.6 million from the same quarter last year. Higher adjusted EBITDA in the quarter was largely driven by higher adjusted gross margin in the Sugar segment, partially offset by weaker results in our Maple segment. For the first 6 months of 2022, adjusted EBITDA was $50.1 million, up $1.1 million from the same period last year, largely as a result of the strong performance of our Sugar segment in the second quarter. For the remainder of 2022, we continue to expect that firm customer demand, improved pricing and stable production output in our Sugar segment will more than offset the current challenges we are experiencing in our Maple business. This should allow us to deliver stronger financial results in 2022 as compared to 2021.
I would like to begin my review by pointing out some financial highlights from our Sugar segment. Total sales volume in the second quarter amounted to 196,600 metric tonnes, almost 13,000 metric tonnes higher than the same quarter last year and over 16,000 metric tonnes higher than the first quarter of 2022. In the current quarter, we were able to make up for the delays we experienced in the first quarter, and thus, we recorded higher industrial, consumer and liquid volumes. The total volume delivered to our customers for the first 6 months of 2022 is higher than last year by 2,400 metric tonnes. Our adjusted gross margin was $31.3 million in the quarter, up $9.5 million from the same quarter last year. This significant improvement was due to higher sales volumes, improved customer pricing and increased byproduct net contribution.
In addition, this year, our beet crop was not affected by poor weather and the quality and quantity of the beet sugar production positively impacted our financial results. The higher production cost of 2022 were mainly attributable to higher volume produced along with annual labor cost increases and market-based price increases for goods and services used in our refining process. On a per unit basis, adjusted gross margin improved by $40 per metric tonne to $159 per metric tonne in the second quarter of 2022. This reflects the improvements mentioned above, driven by strong underlying demand and stable production process.
For 2022, our production output reflects the good performance of our beet sugar facility in Taber, following 2 years of difficult results attributable to unforeseen weather-related events. Distribution costs increased by $1.7 million in the second quarter due to higher freight costs and additional logistical costs incurred to support our supply chain. The incremental costs include market base freight price increases, along with the financial impact of higher-than-expected movement of [indiscernible] sugar from the west of the east to meet customer demand.
Administration and selling expenditures increased by $3.6 million compared to the same quarter last year, primarily as a result of an improved share price, which led to a noncash increased share-based compensation expense for the second quarter. This volume was partially offset by lower COVID-related health and safety costs. Our outlook for the Sugar segment remained strong for 2022. At this time, given the strong customer demand we are anticipating, we are increasing our sales volume forecast for 2022 by 5,000 metric tonnes to 775,000 metric tonnes. The combination of higher volumes and pricing action from recent customer negotiation along with the stability of our operations, are expected to drive improved profitability and stronger financial performance over the prior year.
Let's now move our financial discussion to our Maple segment. As Mike mentioned previously, the financial results of the Maple segment have been challenging in the first 2 quarters of 2022. Adjusted EBITDA decreased by $1.7 million from the same period last year, as volumes were lower due to decreased demand and timing issues related to shipment delays. In addition to lower volume sales, adjusted EBITDA was also impacted by higher packaging and energy costs as well as higher administration and selling expenses, all of which were driven by inflationary market-based price pressures. These challenges also drove the reduction in adjusted gross margin, which at 8% was 140 basis points lower than the same period last year. Administration and selling expenses increased by $0.5 million from the prior year, largely due to higher labor costs. Distribution costs increased by $0.2 million, largely due to higher net freight costs related to market-based price increases. We expect these inflationary pressures, which we believe are impacting the whole Maple syrup industry to continue for the remainder of 2022.
In order to mitigate this short-term negative financial impact, we recently began implementing an updated pricing strategy to recoup these incremental costs, with new pricing expected to take effect over the next 2 quarters.
In closing, I would like to highlight a few other related financial items. Our adjusted net earnings for the second quarter were $9.1 million or $0.09 per share, compared to $7.8 million or $0.07 per share for the comparable period last year. For the first 6 months of 2022, adjusted net earnings were largely unchanged at approximately $20 million or $0.19 per share. Free cash flow for the last 12 months was $46.6 million, fairly stable compared to the same period last year. Our capital expenditures for the quarter were $2.9 million lower than last year, mainly due to timing. Once again this year, we expect to spend approximately $25 million on various capital projects with approximately 1/4 allocated to return on investment projects in 2022.
Today, we are also announcing that the Board of Directors approved a payment of a $0.09 per share dividend in relation with the results of the second quarter. This is consistent with the dividend paid in previous quarter for the last several years. We are anticipating maintaining our dividend payout practice for the foreseeable future. I would like to conclude by reiterating our confidence in delivering improved financial results for 2022. This is supported by the positive outlook of our Sugar segment based on strong customer demand, higher margin and stable production output from our three production facilities, which we believe will more than compensate for the current challenges we are experiencing in our Maple segment.
With that, I would like to turn the call back over to the operator for questions.
[Operator Instructions] Our first question is from George Doumet with Scotiabank.
Congrats on a good quarter. On the Sugar business, can you maybe quantify the gross margin impact from the better production fees compared to last year? Number one. Number two, I think you might have answered this last call, but would you expect byproduct contributions to run at about $1.5 million per quarter over the next couple of quarters?
Yes, George, JS here. Well, it's a bit difficult just to put a number on the improvement. I think there is an impact on our -- I think from a production standpoint, we did about 6,000 metric tonnes more than we did last year out of our Taber facility. And so I would probably use that number as the improved productivity from our Taber facility.
As for the your second portion of the question in relation to the byproduct revenue, we wouldn't expect that in every quarter going forward. I think what we've seen is mainly in the first 2 quarters of the year, most of this product has already been processed and a lot of it has been already sold. And so we're not expecting this to continue for the next 2 quarters. I mean, it might be a little bit left over. But -- and maybe some with the early harvest that we are expecting out of Taber in late in the year. But the positive impact versus last year is pretty much all realized.
Okay. That's helpful. And shifting gears to the Maple syrup business. When we first part that business, I think our expectations were kind of mid- to high single-digit volume growth, that slowed down, as you went through the pandemic that reaccelerated. So maybe a 2-part question there as well. Can you maybe talk a little bit about what you think the medium-term outlook is for that business in terms of growth and would you -- second part is, I mean, would you expect at all -- or to what magnitude would you expect a demand, maybe a volume response from the higher pricing at all over the next a little bit?
George, thanks for that question. Medium-term growth, you're right. And we've been saying that the last couple of quarters. We expect to return to pre-COVID norms. And when we acquired this business, it was running at about 5%, 5.5% CAGR, and then we saw 2 years with COVID at near 20% or 21%. We are drifting back now to the -- what we'd see traditional growth around 5%, and that's in our plans. We expected that. So it is resetting like everything else that's coming out of COVID, and we're seeing those things results now. And your second question, George, was?
I'm just worried about I mean, we were obviously pushing a lot of price in that business. I'm wondering if you're seeing it all or expect to see a negative volume response from the end user?
Yes, that's -- we looked at that before as well and when we looked at inflation in the first year when we bought the business, what would happen. We did not experience that when prices went up in Maple syrup. The ultimately, we would think there's more sticky, so to speak, in the segment because over the last 2 years ago, there's been more consumption in trial and some of that will stick more with consumers. They're looking for the healthy alternate sweeteners, and we think we'll have more sticky that will insulate us from high price erosion in the [indiscernible]
Okay. And just one last one maybe for JS. On working capital. Obviously, there's a lot of supply chain be up to manage is an inflationary backdrop. Can you talk a little bit about how you would expect working capital this year to kind of trend compared to maybe what we've seen in the past?
Yes. There's a bit of pressure on working capital, and it comes a little bit from the sugar side, for example, where you have a higher price of sugar than we had in prior year. I'm not expecting this to make a significant impact from -- I mean, our current facilities are fairly well aligned. I don't see us -- if I look at the level of our covenants, we're still pretty much at the same level than we were in the past. So it is putting a bit of pressure. But on the other hand, we're also managing the situation fairly closely on the other side, the ability to collect from our customers.
The next question is from Michael Van Aelst with TD Securities.
I want to follow up on a few things. So stock-based comp was a big number again. Can you give us an idea of what it was actually? how much it increased year-over-year? And is that just due to the share price? Or is there other -- or are you also awarding more?
Well, the increase from last year is about $2 million on a quarter-to-quarter basis, Michael. The -- it's really related to the share price. So there hasn't been any change in the plan versus what we've disclosed in the past in our management circular. The difference is the stock price is rallying. I would say, if you look at -- when I talked about 18 months ago, the stock price around [ CAD 4.75 ]. It's now been going about [ CAD 6 ] for a while. And as you probably know, when you evaluate those things from an accounting standpoint, it's based on models -- [ algorithmic ] models or we use the Monte Carlo model to do that. And the more you do simulation on those, the more and with the higher stock price, it just gets higher results in the future. So that was -- that accounts for some of it. The other portion of it that impacts in the first 2 quarters of the year is with the retirement of our CEO from an accounting standpoint, we have to take those future charges immediately as John Holiday has left the organization.
And how much was that?
It's -- I would say it accounts for about half of the variance.
So we -- that's on the admin and gen in general?
Yes.
So half being the 3-point or is it up 3.6?
Half of the $2 million versus last year.
Half of the $2 million. Okay.
Yes.
All right. So when you look at -- you guided towards a 25% to 30% increase in admin and selling for the year, how much of that is because of stock-based comp? And then what are you assuming for a stock base for a share price when you make that calculation?
Well, we're assuming it's a simulation that using historical information. So I'd say if you look at our accrual base right now, we're probably somewhere close to where the stock price is right now. That's our current expectation going forward. And most of it, if you look at our admin cost almost all of it is based on the impact of share-based compensation. And there's another portion that is based on overall compensation with more market adjustment mainly for management employees.
Okay. All right. And then just to get the distribution out of the way, I think you said a 10% to 15% increase. So if I understood you correctly earlier, it's not so much on exports. It's more on shipping product from west to east.
On the freight costs, yes, that's exactly right, Michael.
Okay. Sorry, and that's because the demand is stronger than the East and that's what you're looking to try and offset by increasing capacity in your Montreal facility?
That would be a fair assumption. Yes. If you look at the variance in our freight and distribution costs, I would say that half of it is related to the demand that we have to move from out West to bring to out East to serve our customer. And the other half is the market. I think no need to [indiscernible] freight market has been quite difficult.
Right. But most of your product is sold FOB except for your exports, correct? So just -- it's increased volumes going from West to East and then the increased pricing on that plus the exports?
Yes. So we've always kind of move a little bit of sugar from West to the East, and we're moving more this year and the cost to move it is actually...
Right. Okay. So the Sugar business was strong, but so -- but I want to ask about the Maple side because I read a lot of articles saying how strong the demand is for Maple and some of your competitors have been bought up or tied up with others based on that outlook for strong growth, yes, we're kind of seeing that weakness the last couple of quarters in your volumes year-over-year. So when you're talking about resetting to a 5% CAGR on growth, are you -- are you saying that we're going to give back -- you're giving back some of the Maple volume that you got the last few years? And you're going to -- so that you get like a 3-year CAGR of 5% historically?
No, Michael, the consumption itself is going to reduce. We're not we're not giving up any share. We're still keeping our share and our same customers. It's just the consumption of people going back to work and returning back to normal life, they're at home for 2 years. And we're not going to see it be impossible to see continued growth we saw during COVID, 20%.
So our assumption is we'll continue to drift back towards what was traditional pre-COVID of 5.5%. It might be slightly higher, but that's kind of how we're setting our expectations.
Okay. So basically a reset to a lower -- to what would have been the trend line, so lower volumes this year and then continue to grow from there?
That's correct.
Okay. So for the full year, you've guided to higher profits overall sugar strength offset by the weakness in Maple, when you gave guidance at the start of the year, you also talked -- when you're talking about that improvement, you had pointed out over $10 million of kind of excess or unusual costs that wouldn't recur in fiscal '22? So when you talk about improvement in earnings, is it -- is it also -- would you also be improving earnings if we back out those unusual costs from last year?
We actually really don't give guidance on earnings that precise. But I would say we don't try to walk away to discuss it. I would say that we had this $10 million last year, there's also some onetime this year. We talked earlier, Michael, about the share-based compensation we didn't have last year. So if you combine the 2 together, I think you get to a number fairly close to where we're expecting earnings to land in this year. Okay. I'm not sure if it's clear the way I explained it, but...
Yes. No, I think that's fair. Okay.
The next question is from Stephen Kwai with National Bank.
Just calling in for Andrew here. So we've looked at some data and we've seen kind of the dynamics with higher ethanol fuel and lower conversion to high- fructose corn syrup. Just wondering what you guys are seeing on your end and if that's driving anything on the sugar side?
No. I don't see any correlation but it in our business at all. I mean, it's -- we're actually in New York this week at Sugar Week and been meeting with the trade side, there's abundant supply overall in the market. We see raw sugar supplies continuing to be well serviced well and strong enough for what's going on in the market and there's no very little left correlation in our business to the high-fructose corn syrup because most of those conversions took place in the last year or a couple of years.
Okay. Great. And just moving to the Maple segment here. I think you mentioned in your press release, the lower volumes were partially attributable to timing issues related to shipping. And just wondering, like, has that subsided in this quarter? And are you going to be able to make up those volumes? Is it just a timing-related issue?
Yes, a lot of it is timing, Stephen. And as everybody knows the global freight market is very difficult, very volatile, very hard to predict. As we said, we spent more money on freight. We've absorbed costs. There's a cost for assured supply -- and even though customers may have their own freight arrangements, we had a lot of good sitting that our customers couldn't get freight in. So we arrange more freight than we would have planned and spent more costs on that to do that, to get goods to the customers, so that the shelves will be stocked, so to speak.
So -- the global freight market, Maple is largely an export product. The global freight market continues to be volatile. We're taking as many measures, and we continue to battle it on a daily basis with the team. We have a sophisticated freight team that comes from right in the Maple side, working together to find solutions and advance to the problems as they come so. We've got the right team on the task, and I'm confident that things will get stronger and better for the maple supply side on freight going forward and supplying our customers.
Okay. And sticking with Maple, I guess on the pricing, is there anything else that when you say new pricing strategies, is there anything else than just higher prices that can be implemented? Or is there any other approach?
Yes. It's -- we've got very robust modern facilities. Our production costs are world-class competitive. It's a freight issue and cost of goods of components and packaging, and those are the costs that we need to pass through to customers, and that's what we are going to be focused on.
Okay. Perfect. And just a couple more here. You mentioned in your opening remarks targeting immigration labor. Just to clarify, is that new immigrants coming in? Or is that the temporary international recruitment? And I think just to clarify one more time, I think you just relating that to the Maple side of the business, is that also being seen on sugar side?
Yes. Thank you. No, the immigrant strategy is for our Maple business to Quebec based plants. And we started this well over a year ago as a way of shoring up the labor force. And so that's been a project that's been under for a while. These will be more permanent, not a temporary immigrant employee base. So we expect him to be here in the fall and help support the teams in the production of Maple products.
Perfect. And yes, just one last one here. Just on the -- just wondering what you guys are seeing on the competition side of things from Maple. I think there was a transaction recently in the industry. And yes, I just wanted to get your thoughts.
Yes. As I said in previous quarter, the Maple business remains very competitive. I don't see that changing overnight in any way, shape or form, and we're here for the long haul. It's just like -- we've been in the business in the Sugar business for 135 years. So we expect to be in the Maple business for a while as well.
The next question is from Stephen MacLeod with BMO Capital Markets.
I apologize, I jumped on a little bit late. But I just wanted to ask about the adjusted gross margin per metric tonne in the Sugar business. It was quite robust. And I'm just curious when you think about how that factors into your outlook? Is it fair to say that your expectation would be for a stronger -- for the strength to continue, which would offset some of the pressures you're seeing on the distribution and admin and selling side?
I think it'd be fair to say that we had some significant improvement in margins, especially in terms of our sales margin that is driving a lot of the better performance on our adjusted EBITDA per metric tonne. The one thing -- the only caveat I would put on that, Stephen, is that there's also seasonality. So I would look at -- I wouldn't take that number and say, well, we'll replicate that for the next 2 quarters. I think we need to also consider the seasonality in our business. And so if you were to look at this number and then adjust it for in Q3 and Q4 for the seasonality factor as we've had historically, I think we'd be fairly aligned.
Right. Okay. Okay. Great. And then just secondly, on the industrial side, you've seen in the past, some sugar-containing product manufacturing coming back into Canada. Are you still seeing that sort of tailwind positively impacting that specific segment going forward?
Yes, Stephen, we've reported on that, and that was in my comments as well. That segment continues to grow and Canada continues to benefit from those assets expanding and growing in Canada and bringing more food manufacturing jobs to Canada and production.
Okay. That's great.
We have no further questions. At this time, I'll turn it back to the presenters for any closing remarks.
Thank you, operator, and we'll see everybody again next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.