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 Third Quarter 2018 Results Conference Call. [Operator Instructions] Please note that this call is being recorded today August 1, 2018, at 5:30 p.m. Eastern time.I would now like to turn the meeting over to John Holliday, Chief Executive Officer. Please go ahead, Mr. Holliday.
Thank you, operator, and good afternoon, ladies and gentlemen. Joining me for today's conference call is our CFO, Manon Lacroix. In keeping with our usual format, I will start by commenting on some of the highlights for the quarter for both our Sugar and Maple segments and then provide some brief updates on our key strategies. At the conclusion of my comments, I will turn the conference call over to Manon who will review the financials in more detail and talk briefly about the outlook for the balance of the fiscal year. We will then open the phone lines to answer any questions you might have.Commenting on our sugar volume. We saw strong overall volumes in the third quarter. Our results exceeded prior year shipments by approximately 8,400 metric tonnes and 8,700 metric tonnes for the quarter and year-to-date, respectively.Looking at each segment, we saw our industrial business expand by approximately 2,400 metric tonnes for the third quarter. Year-to-date, volume was down by approximately 4,600 metric tonnes. On a very large base, these swings represent less than 1% move in either way, which in our view is reflective of the relatively flat market demand in this segment. Consumer shipments for the quarter were lower by approximately 1,200 tonnes and up approximately 2,100 metric tonnes year-to-date. Less promotional activity by our retail partners underpinned the slight decrease.Liquid volumes continue to be strong. New customer demand and the recovery of some temporary customer losses helped us deliver approximately 3,100 metric tonnes and 8,600 metric tonnes more for the quarter and year-to-date, respectively. We believe the low #11 sugar prices and strong demand from our existing customers continues to lend near-term tailwinds to this segment. Export sales enjoyed a strong quarter and year-to-date performance with shipments of approximately 4,200 metric tonnes and 6,800 metric tonnes, respectively. The strong quarter resulted from accelerated shipments against our contracted Mexican volume and additional high tier opportunities. High tier sales continue to benefit from the weak Canadian dollar and low #11 values.Before providing an update on our Maple segment, I want to take a moment to update you on our Taber facility. We completed our thick juice campaign and we were able to confirm last year's crop delivered a record sugar output for the facility. We continue to monitor the 2018 crop conditions and so far the growing season has been good.Lastly, I wanted to report that we expect to install the air emission solution for the south [ heli ] dryer in the fall. The north dryer will be completed by September 2019 in advance of our fiscal 2020 processing campaign.Now turning to the Maple segment. I wanted to provide an update on our integration progress and some comments and observations on our outlook for this newly acquired business. During the quarter, we made significant progress on a number of initiatives. As you may recall, we have developed our integration gains around 3 areas: procurement, operational excellence and sales. Integration gains in the packaging procurement have met our initial targets where we have adopted lowest-cost supply contracts and have leveraged our scale whenever and wherever possible. In the third quarter, we began to see some benefit from this work. More material savings will come in the fourth quarter and next year as we work through inventories and complete more complex supplier negotiations.Targets for cost reductions for maple syrup were successful for the 2017 crop year but as we mentioned last quarter, the 2018 crop was disappointing and will impact some of our initial fiscal 2019 targets as we work through the challenges of this crop. These have been considered in our current outlook.More importantly, with the experience that we have gained and acquired with seasoned operational personnel, we have begun to develop a procurement model that will bring structural cost savings for our maple syrup procurement. I will comment more on this when I discuss our operational excellence initiatives.Integration gains related to business IT platforms and organizational design were largely implemented late in the second quarter, and transition to a common IT platform for [ Granada ] and Granby has improved our business analysis and allowed us to centralize certain back-office functions. In addition, the revision system has provided us better visibility on freight. Unlike the Sugar segment, the Maple business is largely sold on a delivered basis and therefore, cost control in this area of the business is very important.Innovation system will help us tackle supply chain integration as well as help us manage like chain integration as well as gives us visibility to our overall distribution cost increases since the acquisition. With the adoption of a central freight management process and improved variance reporting, we expect better control over freight cost, which should lead to cost reductions.The unfavorable currency impact noted in the last quarter that resulted in margin losses on unhedged sales has had a negative impact on results in the first 9 months. The decidedly weaker Canadian dollar and the adoption of enterprise-wide hedging policy will help reduce future currency exposure.Operational excellence goals for the first 9 months of the year were not realized, largely due to the initially unplanned acquisition of Decacer, which delayed the start of the integration efforts and added new complexity into the analysis. After looking at our operations in more detail, we have satisfied ourselves that we have the right geographic footprint and that we can extract the most value from the business by investing in modernization, automization and specialization, which together will lower our costs and increase our capacity to handle future growth. Today, we are pleased to share we have decided to build for purpose, to purpose or for purpose a new 100,000-square-foot manufacturing and distribution center in Granby. This property will replace the existing leased property at the expiry of the lease in November of 2019.Lantic will invest approximately $4.5 million to install a best-in-class, plastic bottling line and upgrade our syrup handling systems. The building will offer improved bulk storage for maple syrup and provide the business with a warehouse mixing center for the consolidation of our broad product portfolio.During the quarter, we also reached an agreement to enter into a leased owned warehouse in Dégelis. The warehouse is located adjacent to our existing plant and will provide additional bulk storage -- self storage and will lower our procurement costs.The second phase of our asset optimization plans continue to be refined and we will share these plans within the next few months.On the sales and marketing front, we continue to see overall healthy market growth. Our sales leadership team has been reorganized to cover regions and market segments. These changes were important and are starting to bear results. The traditional retail private label space continues to be the most challenging but our new sales structure has improved our ability to compete by allowing us to create more strategic partnerships. We have experienced new account growth and some competitive losses.On balance, this segment continues to benefit from the overall marketplace growth of mid- to high single digits. Our strategy in the traditional retail maple space is to grow with the right partners and not pursue aggressive share scale.In the retail baking aisle, we were able to confirm the intention of a Canadian retailer to list our maple sugar and flakes nationally. We will create a new -- this will create a new Lantic/Rogers branded alternative, natural sugar line extension in the traditional baking aisle. We are excited to see how this new product will perform.In the ingredient segment, off on initially small base, we have grown the business 35% year-to-date. In the quarter, we finalized a national brokerage agreement with a leading U.S. ingredients supplier. We have placed our product portfolio in a broad range of food processing companies, recognizing that some end-users have long product development cycles. We don't expect instantaneous results. Nonetheless, we are seeing strong interest and positive growth from new customers in this largely untapped market.In summary, we have made good progress on many fronts. Following a new division update, we have improved visibility on certain areas such as supply chain and as a consequence, we established plans and implemented a process to address the risks. As we have previously commented, the timing of some of our integration gains were impacted by the acquisition of Decacer. With the Decacer acquisition behind us, we are now transforming the business from 4 individual standalone businesses to an integrated business strategic footprint of specialized manufacturing sites supported by a market focused sales team and centralized functional teams.We see FY '19 continuing to be a transition year. The full impact of the commercial, operational and business process changes will be realized in FY 2020 and beyond.Commenting briefly on our key overarching business strategies, I would like to share, we are on target for our Sugar segment operational excellence initiatives in FY 2018. We continue to build a very good portfolio, return on investment projects, which we will prioritize and fund into future years.Our market outset outlooks strategy is positive with a positive market conditions brought on by low #11 values and a weak Canadian dollar, we are actively nurturing existing agreements to build new export sales. NAFTA negotiations on the agricultural issues were quiet during the quarter. We continue to monitor the developments and continue to view the situation as generally positive.On the acquisition front, our efforts are largely focused on integration.Finally, I am pleased to confirm the corporation declared a dividend of $0.09 per share to shareholders of record on June 29, which will be paid on or about July 19. The total payout is estimated at $9.5 million.In conclusion, I would like to thank all our employees for their efforts and contributions to our third quarter results and ongoing integration efforts.I will now hand the call over to Manon to provide more detail on the financials.
Thank you, John. I will now go over the third quarter results in more detail. I will start with the results of our Sugar business. Adjusted gross margin for the third quarter amounted to $20.7 million, a decrease of $2.2 million when compared to the third quarter last year. The decrease is partly explained by lower #11 world raw sugar prices, which affects Taber's domestic sales given that Lantic has negotiated a fixed Canadian dollar price with the Alberta beet sugar growers while the price of refined sugar deliveries is directly linked to the #11 world raw sugar price.In addition, by-product revenues are also had a negative impact on adjusted gross margin for the quarter as it was down compared to last year due to timing. On a per metric tonne basis, adjusted gross margin stood at approximately $113 per metric tonne, a reduction of approximately $18 per metric tonne. The reduction in adjusted gross margin rate is due to 3 factors. First of all, the decrease in #11 world raw sugar price contributed to the decrease in adjusted gross margin rates. In addition, the unfavorable sales mix with an increase in all lower margin segments volume, combined with a decrease in consumer volume also contributed negatively to the decrease versus the third quarter of fiscal 2017.Finally, lower by-product revenues also reduced the adjusted gross margin rate when compared to the same period last year.Excluding $0.6 million in acquisition costs incurred during the third quarter of last year, administration and selling expenses for the quarter were $0.7 million higher due to additional employee benefits and due to timing. Distribution costs were $0.3 million higher than the comparable quarter last year due to additional storage capacity in Taber as a result of a larger crop and due to an increase in freight rate. Overall, adjusted EBITDA was $15.6 million, a decrease of $2.8 million versus the third quarter of the fiscal 2017.Year-to-date, adjusted gross margin of $73.9 million includes a noncash pension plan income of $1.5 million, recorded in the first quarter with regards to planned amendments. Excluding this noncash income, adjusted gross margin was $72.4 million, a decrease of $2.8 million when compared to last year. On a per metric tonne basis, and excluding the noncash pension plan impact, the current year stood at approximately $139 per metric tonne compared to approximately $147 per metric tonne for the first 9 months of fiscal 2017.The decrease in adjusted gross margin and adjusted gross margin per metric tonne year-to-date is mainly explained by the impact from the third quarter results as I just explained, namely the #11 world raw sugar price decrease, the lower by-product revenues and on a per metric tonne basis, the unfavorable sales mix.Adjusted EBITDA of $59.8 million decreased by $2.1 million when compared to the same period last year.I will now turn to the Maple products segment. Revenues for the quarter amounted to $50.3 million and adjusted gross margin was $7.0 million, representing 13.9% of revenues, an increase of more than 1% versus the previous 2 quarters. Year-to-date, revenues and adjusted gross margin amounted to $152.5 million and $19.7 million respectively, which include the results of Decacer since its acquisition on November 18, 2017. Also included in the 9 months results is an expense of $0.3 million for the fair value adjustment of the inventory whereby finished goods acquired on the acquisition date are fair valued, which effectively represents the selling value minus a small distribution profit. Excluding this accounting entry, adjusted gross margin was $20 million, representing 13.1% of revenue.As we mentioned last quarter, the company's transition 2 of its 4 bottling plants to Lantic's ERP system, which allowed us to implement some organizational changes with the centralization of certain back-office functions within the Lantic structure. Year-to-date, nonrecurring costs amounted to $0.9 million, which mainly represents severance costs, relating to the organizational changes, which are included in administration and selling expenses.For the quarter and year-to-date, administration and selling expenses amounted to $2.5 million and $7.2 million respectively when excluding nonrecurring costs and $0.7 million in acquisition costs incurred in the first quarter relating to the Decacer acquisition. Distribution costs were $1.1 million for the third quarter and $2.8 million for the first 9 months of the current year.Adjusted EBITDA amounted to $4.7 million and $13.9 million for the quarter and year-to-date, respectively when excluding the nonrecurring costs I just mentioned. On a consolidated basis, adjusted EBITDA increased by $2 million and $11.7 million compared to the third quarter last year and year-to-date respectively.Finance cost increased by $2.1 million for the third quarter of this year and by $5.7 million year-to-date when excluding the impact of the mark-to-market adjustments on interest rate swaps. As for the previous quarters, the increase is explained by a higher level of bulk ordering due to the Maple products segment acquisition, an increase in interest rates and interest paid to Fédération des Producteurs Acéricoles du Québec, or the FPAQ, on purchases of maple syrup.During the quarter, the company extended its revolving credit facility to mature on June 28, 2023, under the same terms and conditions as the amendment and revolving credit facility dated December 20, 2017. In addition, Lantic canceled a borrowing availability of $50 million taken in the third quarter of last year to repeat fourth series debentures, which was set to expire on December 31, 2018. Therefore, after the cancellation, $265 million is now available under Lantic's revolving credit facility.Also during the quarter, Rogers entered into a normal course issuer bid, or NCIB, and that the schematic share purchase plan whereby the company may purchase up to 1,500,000 common shares and is set to expire at the end of May 2019. To date, the company purchased and canceled 336,900 common shares at an average price of $5.38 per common share for a total cash consideration of $1.8 million. For the quarter, free cash flow at $7.1 million represented a slight increase of $0.2 million. Year-to-date, free cash flow was $37.5 million or $3.4 million higher than last year.The increase in adjusted EBITDA and the lower income taxes paid were positive contributing factors for both periods. While the payments under the NCIB gain increase in interest paid and the higher capital spending all contributed negatively to the free cash flow.I will now turn to the outlook for fiscal 2018. Once again, I will start with the Sugar segments. Our expectations bottom-wise have remained unchanged for the last quarter with an increase in approximately 10,000 metric tonne versus fiscal 2017. Both the liquid and export segments are expected to increase by 10,000 metric tonne each while the industrial and consumer markets are expected to be down slightly. As usual, we will continue to aggressively pursue export opportunities and additional high fructose corn syrup conversion to sucrose volume since the decrease in #11 raw sugar prices could create opportunities.Now looking at the Maple products segment. Our forecast for fiscal 2018 remains unchanged at $19.9 million as opposed to last quarter. John has discussed many of the elements affecting the Maple products segment and the progress we have accomplished thus far. With the announcement of the first phase of the operational excellence review, we forecast that adjusted EBITDA for fiscal 2019 should amount to $21.1 million, which include $1.1 million in nonrecurring costs, mainly attributable to additional leasing costs for the new facility until the old lease expires in November 2019, as well as moving costs and some miscellaneous costs.Capital spending will increase in fiscal 2018. Spending in the Sugar segment is expected to amount to approximately $20 million of which approximately $6 million should be spent on return-on-investment capital. In addition to this, the company should spend approximately $2 million towards the realization of the air emission reduction capital project in Taber. Total capital spending for the air emission project is estimated at $8 million to $10 million, to be spent over 2 fiscal years.Finally, the Maple products segment capital spending on the first phase of the operational excellence project should approximately -- approximate $4.5 million of which $1 million should be spent in fiscal 2018. In addition, in the current fiscal year, the Maple products segment is expected to spend approximately $1.5 million in [indiscernible] business capital expenditures for a total of approximately $2.5 million. Therefore, in total, Rogers' capital spending for fiscal 2018 should amount to approximately $24.5 million of which $7 million should be returned on investment projects.With that, I would like to turn the call back to the operator for the question session.
[Operator Instructions] Your first question comes from the line of George Doumet from Scotiabank.
John, I just wanted to clarify, you might have answered this in your prepared remarks but as it relates to maple syrup business, the guidance is -- remains unchanged at $22.2 million for fiscal '19, right?
That is correct.
Okay, and does that number bake in the higher crop costs that you've pointed to, I think, in last conference call?
That is correct. Yes, it does.
Okay. Great, and would that also include kind of the stoppage time? I think you mentioned some relocation of the bottling facility. Was that also included in there?
Yes, it does. But we actually won't be quite frankly stopping it. We are acquiring it a brand new line, it will be installed whilst we are continuing to operate the other facility. So it will run in parallel and that's why, as Manon said, it has a bit of a crossover in the leasing expenses during the period.
Yes, we'll have $1.1 million in our nonrecurring costs.
Okay. So you don't really expect anytime we go through a Phase 1 and Phase 2, you guys don't really see any kind of disruptions to revenues at all?
Yes, that is -- no, we don't.
Okay, great. In your prepared remarks, you had mentioned also the tough private label market. I know we lost some larger customers, I think, it was about $1 million to $1.5 million of revenues. I'm just wondering, looking forward, can you talk a little bit about that kind of the tough private label market. Any potential sense of the community recapture some of that extra volume in the next 12 months?
Yes, I think as I kind of commented on previously on the Sugar business. We do have kind of puts and takes in our business on a day-to-day basis. We have now a good team in place to kind of manage and respond to that with opportunities if we are faced with any potential losses. We've had gains in the quarter as well. So again, I think it's a normal competitive environment for us. I would say if you segment, which we tried to do, the maple syrup into the kind of buckets we did where you got your private label business and you have your ingredients space, the traditional private-label business is a more competitive marketplace than some of the other places that we are participating. But we win and we lose, we're comfortable with our approach in that market. It's not a share steel. It's virtually accounts we've got, have the right accounts and benefit from the organic growth that those accounts are realizing.
Okay, that's great. And one last one if I may, on the legacy business, this means I'm strong export tonnage in the quarter. I think you called out Mexico and high tiered sales as well. Any sense of maybe, any new visibility you can give us on that momentum continuing maybe into '19? Anything that can maybe be positive out of NAFTA negotiations. Trying to get a sense of that momentum going into next year.
It's -- the market conditions right now are beneficial for us for sure. I mean as you might kind of heard us in some other aspects of our business, we're definitely beneficial on that space. We have as we've been doing over a course of time, building strong business relationships and we are -- and we have a portfolio of opportunities that we are continuing to manage and pursue. So I'd say it view it as we've got tailwinds. But I'm not about to report anything specifically other than that's the trading environment.
And the Mexico business is booked for next year. It was a 2-year contract.
Your next question comes from the line of Stephen MacLeod from BMO Capital Markets.
Just with respect to Granby, the new facility you announced. Can you just talk a little bit about, excuse me, what exactly that -- what benefits Granby provides as a new bottling plant? You sound like you have some distribution there as well. Can you give us an idea of how many existing plants or distribution facilities you're consolidating into Granby?
We have a facility in Granby today. We are operating and quite frankly, roughly the same size. And we will move to a brand-new facility built for purpose. Approximately 2.5 kilometers from the facility we're at. In that facility, we will install what is a primary operating line for us, a plastic line, which will be much more efficient and lower cost and expand our capacity for growth. We will have in that facility, better -- 100,000 square feet of space, which is the same but the configuration of that space is such that it provides a lot more efficiencies for us to store maple syrup, required maple syrup at harvest, which will lower some of our procurement costs by we are able to take it directly and it has the capability of being a small, not large, mixing center for [ LTL ] shipping activity that we have from each one of the facilities. So we don't need to do that separately across the 3 Canadian facilities. We'll be able to consolidate there. So those are the kind of the 3 components, syrup, help us on the syrup side, creates some efficiency in our distribution capabilities and it lowers our manufacturing cost.
Well, okay. Okay, that's great. And you would expect like when you head into 2020, I mean, is kind of $25 million to $26 million -- I'm not going to pin you into a corner, but I'm just curious, does that...
But you're going to try.
Does the new Granby facility kind of provide a visibility into that getting back to that previously communicated EBITDA levels?
It definitely moves us in that direction and all the different things we're doing, and that's just one of the things we're doing. Under normal course of business, we'll get us to the target number that we had forecast or presented in our prospectus.
Yes, okay, okay. And then I just wanted to confirm, just to follow on with -- from George's question. With respect to the 2019 EBITDA, so it looks like the number you're looking for now is $22.2 million, excluding Granby, and I thought that was $21.1 million before. So I'm just curious, did the Granby cost, like as you had accounted for that and the $21.1 million but then hadn't backed it out?
Yes, we did segregate it as the last quarter so...
It's kind of difficult to explain.
Yes, I'm sure, yes. So there's effectively no change from last quarter?
Yes, effectively no change except for -- if you divulge what we're doing a little more with more clarity.
Right, okay. And then just finally, you mentioned some liquid substitution opportunities. Was that specific to export opportunities? Or are you talking about liquid domestic?
It's all domestic.
It's all domestic, yes.
All domestic, yes.
Okay, and you would expect that, that could potentially provide some upside to your 2018 because that...
It has.
Well, we're like so far, we're I think 86,000 or 87,000, sorry, 100 metric tonnes above last year so far in the liquid segment. So we had gained some additional business this year and also recaptured some business that we had lost last year. So this year, overall, like what we know, we should be more than 10,000 tonnes above last year. But given the #11 price, it could create additional opportunities for high fructose corn syrup customers to switch to sucrose. And that's what we're pursuing.
Your next question comes from the line of Michael Van Aelst from TD Securities.
It's Evan in for Mike. Sorry about my cold. So just first on the maple side, and you mentioned that in response to an earlier question but I missed it. Are you seeing any signs of competitors getting more aggressive to gain that any maple share?
We tried to comment earlier just to -- we said the private retail segment is a very competitive environment. We did communicate on a prior call that we had lost some business there. We communicated just earlier in this call that we've gained business in that segment as well. We have a -- now we've organized our sales force by region. We know who we want to kind of grow with and develop. We don't see us finding growth in that market through share steel. We find that what we want to do is work with the partners we've got and participate in the organic growth that exists within that category. And we said, probably reiterating it again, we are also in the industrial ingredient segment, seeing good growth there and good opportunities for future development in that space.
Okay, great. And then on the sugar side, are there any limitations for you in order to keep benefiting from the high tier exports assuming that the pricing differential remains favorable? Is there any, for example, is there any production limitations or any customer limitations?
No. We have enough capacity to supply additional opportunities both like at all times.
[Operator Instructions] Your next question comes from the line of Frederic Tremblay from Desjardins Capital.
First question will be on the liquid business, which you recaptured this year. Was that a 3-year contract?
No, it was business that we lost to a high fructose corn syrup during fiscal 2017.
Yes, and then you gained it back but was it just for this year or are you going to continue into next year as well?
It's an -- that is an annual contract. It's not a multiple year contract.
Okay. Switching to maple syrup procurement costs. Given the poor harvest, I would expect getting back to sort of you would be strategic reserve to stabilize to an extent the prices. You share that view? Or what's your, I guess, your outlook on procurement costs for maple for next year?
Yes, it's a complicated -- a little bit of a complicated question because when I -- and the crop is a smaller crop. So it's 85% of a normal crop. We have some facilities that are, I would say less touched than others. And so the further east you go, the more significant the impact was on the crop size. So our typical procurement kind of strategy would be and I think I'd shared that in previous calls to work with our partner growers or producers who can take direct supply in some of the markets the direct supply option is limited by kind of the lack of the size of the crop. So we need to acquire more product through the strategic reserve, which leads to a higher cost base. And that's largely what's impact areas.
Okay. And I know the U.S. is a large importer of maple syrup into Canada but any thoughts on the announced tariffs that Canada wants to implement on U.S. maple syrup. Any impact on you guys or the market?
Financially, no. None, financially.
Your next question comes from the line of Ammar Shah from National Bank.
My first question is on sugar gross margins a tonne. So it's down relative year-over-year, I was just wondering is it fair to assume improvement on this front, especially given the $7 million spend in operational excellence? Or how would you look at that?
Yes, well, I think that for the quarter, there was quite a bit of an impact because we had a triple whammy if you want to call it. The mix was unfavorable. The byproducts were also lower than last year and it's really timing because looking forward, we really see comparable numbers year-over-year. So it's just that last year, we delivered faster than this year so that will come back. And then on top of it, there was the #11 that had an impact on the quarter. But it was like the triple effect. But I would expect that the fourth quarter would be a better rate than this quarter.
Fair enough, and you'd expect the same going ahead into next year as well? I would assume.
Yes, it will be a more normalized gross margin.
Right, okay. And then just one more question. In your disclosure, you mentioned that you're looking into additional opportunities to increase export volume. I was just wondering if you could just talk a little more to that.
Well, we talked about export volume opportunities that are going to come as a consequence of having lower #11 values and a weaker Canadian dollar. So I think it's for us, we developed strong business relationships and in particular in the United States and we're continuing to leverage those relationships, look at the market kind of spread between U.S. market prices and Canadian prices using international sugar values and we're working a book.
There are no further questions at this time. I'd turn the call back to over to the presenters.
Okay. All right. Thanks, everybody, for your questions, and we'll see you at the end of the fourth quarter.
Thanks.
Thank you.
Thank you. Bye.
This concludes today's conference call. You may now disconnect.