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 2021 Results Conference Call. [Operator Instructions] Please note that this call is being recorded today, August 4 of 2021 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 evening, everyone. Joining me for today's call is Jean-Sebastien Couillard, our VP, Finance and CFO.During today's call, I will provide some insights on trends in our industry and an update on our outlook for the balance of fiscal 2021. 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 statements or disclaimers and non-GAAP measure definitions included in our public filings with the Securities Commission for more information on these items.As has been customary in our most recent calls, I will start with an update on the implications of COVID-19 on our operations and the work we are doing to manage through these challenges. As vaccination rates across the country have increased, we are starting to see some welcome relief from the operating challenges we faced over the last 18 months. Our focus on ensuring sites meet or exceed authority guidelines took in a collaborative effort and added significant costs and complexities to our operations. These costs include such things as investments in our sites to improve physical distancing, conversion of some workspace to segregate external contractors from plant workers, augmenting personal washing stations, cross-training employees in critical roles to ensure uninterrupted operations and in case of employee absence as well as the purchase of computing and office equipment to support normal workers. We made this commitment out of concern for our employees' well-being and our common goal of providing our customers with the essential ingredients we deliver to critical food supply chains in the markets we serve. I am very proud of how we have done at our plants and the measures we have taken to maintain a safe, reliable operating environment. Our continued track record of 0 disruptions is a great accomplishment for our facilities.In the third quarter of 2021, our overall investments in health and safety measures related to the pandemic was approximately $600,000. This is less than the prior quarter and we expect it to gradually reduce as we build more immunity in communities across Canada. Although we are seeing the easing of pandemic restrictions and gradual opening of the economy, we do continue to feel the impact of COVID-19 on our business.Let's now turn to the third quarter results. Adjusted EBITDA in the third quarter increased by 21% from the same quarter last year. That was below our internal expectations. Consolidated adjusted EBITDA was lower largely because of direct and indirect impacts of COVID-19 in the Maple business and Sugar business. Both businesses experienced uncharacteristically weak sales demand resulting from a short-term destocking event as economies began to reopen.Our Sugar volumes, which include sales to all market segments, overcame the weak consumer shipments and reached 190,000 metric tonnes in sales, an improvement of more than 18,000 metric tonnes compared to last year.As noted, the majority of our segments performed exceptionally well and our business was again very quick to respond to the significant unforecasted changes in product demand. Our industrial business with its diverse group of customers experienced growth of 10,000 metric tonnes or approximately 11%. Our liquid business also surpassed our expectations with increases of 10,000 metric tonnes or approximately 28%. These positive volumes were partially offset by declines in our more profitable consumer business, which experienced a loss of 9,000 metric tonnes or 34% compared to the same period last year.We know that 2020 was an anomaly as a result of pantry loading and surge in home baking. Major retailers are also beginning to report on how the transition to a more open economy post-COVID-19 is affecting their business and how are they -- how they are working through this change.Reflecting on our consumer business and broader grocery related trends, we expect consumer retail demand in Sugar to return to normal in the coming quarters. We noticed the softness in the consumer segment early in the quarter and we quickly pivoted our production plans to capture opportunistic export sales, which grew by 7,000 tonnes or 54% year-over-year. Our outlook for the year remains unchanged at 776,000 metric tonnes as overall demand continues to be firm.In the fourth quarter, we expect to return to more traditional retail demand and forecast higher export volumes, driven largely by the resumption of shipments to Mexico and the new export quotas under CUSMA, which took effect at the beginning of the fourth quarter. With these additional sales, we are expecting to increase our exports to 20,000 tonnes for the fourth quarter. Altogether, sales in the fourth quarter of 2021 will be lower than last year due to 1 less shipping week.As we have shown to be the case during the pandemic, we maintain a flexible manufacturing platform and respond quickly to any COVID-19 related changes to our sales outlook. Overall, for the Sugar segment, we expect stronger volumes, sales margin improvements, and reduced non-standard supply chain costs in the fourth quarter will align performance with prior year levels when adjusted for 52 weeks.Before commenting on the Maple business, I will give an update on Taber. As we reported last quarter, we continue to critically assess our Taber operations and assess actions we can take to mitigate the potential of weather and related risks. The first step we are taking in this action plan is to undertake a more aggressive early harvest program. The financial terms of this plan were modified this spring with the ASPG to encourage early harvest, which will both lower the risk of producer field losses experienced in 2019 and reduce the risk of processing and storage condition losses seen in 2020.Our 2021 beet crop has developed well this summer and will be ready to start harvesting and processing in early September when weather conditions are a much lower risk factor. Getting the sugar beets out of the ground early, processed quickly and stored and good condition will reduce losses in both yield and quality that can occur with extended harvest or late processing campaigns. We will provide an update on our progress in the coming quarters.In our Maple segment, we had a weaker third quarter. Sales volumes decreased by 20% in the third quarter as demand volatility impacts from the pandemic led to high retail inventory and lower customer orders. Despite the lower sales volume this quarter, we expect to see ongoing improved performance in our Maple segment in fiscal 2021. Price increases that we implemented in fiscal 2020 and at early fiscal 2021 are being captured in revenues as a new contract pricing takes effect. In addition, manufacturing costs continue to drive lower operating costs in 2021.We believe the impact of the broader retail trend of higher inventory levels related to the reopening of the economy is a non-recurring event and we are seeing a return to a stronger order book in the beginning of the fourth quarter. There is no analog year to compare to, which makes sales and production planning difficult. However, in terms of our outlook, continue to hold the view that retail Maple sales volume has benefited from higher consumption during the pandemic and will return to more traditional middle -- mid-single-digit growth levels post the pandemic.As we reported last quarter, the production of this year's Canadian and U.S. Maple syrup was below average and well below the last 2 years of record output. The PPAQ strategic reserve has provided the necessary supply to offset this shortfall. With a direct producer supply and authorized buyer access to the strategic reserve, we will not face any supply risks or non-recoverable costs in this area. The PPAQ also announced this quarter that they will add another $7 million tax to the production quota that should yield approximately 20 million pounds of additional supply this coming spring.Now I would like to provide an update on our work with Doux-Matok. We are monitoring their product development pipeline in the U.S. and are encouraged by the interest we are seeing. We're also realizing that, for the most part, product development efforts are focused on new-to-market products versus the reformulation of existing products. This fact translates into longer product development timelines and the smaller and less predictable demand. We remain committed to offering the unique based -- sugar-based, sugar reduction solution, and will provide periodic updates as development engagements translate into commercial sales.Knowing that you are following the news that might impact our business, I wanted to make you aware that we completed our fifth Canadian trade tribunal review on the issue of maintaining anti-dumping tariffs against the EU, U.K. and U.S. sugar imports into Canada. We expect to receive a decision from the tribunal in the fourth quarter and we will provide a further update then.And finally, I want to thank our employees for their continued efforts and collaboration, especially throughout the COVID-19 pandemic where they have proudly demonstrated their commitment to each other and to our customers.Now I will turn the call over to JS, who will provide an -- the additional information on the quarterly results.
Thank you, John, and good evening, everyone. In the third quarter of fiscal 2021, we continue to experience a strong demand and improved profitability in our Sugar segment, which more than offset lower results in our Maple segment. This led to improved financial performance as compared to last year.Consolidated adjusted EBITDA in the third quarter of 2021 amounted to $17.2 million, up 21% from the same quarter last year. We expect our overall volume for 2021 to exceed 2020 for both business segments. This is a positive outcome considering the recent volatility in consumer retail demand resulting in high levels of inventory impacting both Sugar and Maple consumer retail volumes.I will begin my financial commentaries by an overview of our Sugar segment. In the third quarter, sales volumes increased to 190,000 metric tonnes, an increase of 11% over the same quarter last year. As John described, this was driven by strong industrial, liquid and export volume, partially offset by a reduction in consumer retail volume. We noted an increase in industrial bulk and liquid products volume for the domestic market as consumer demand increased and the easing of COVID-19 restructuring resulted in a gradual resumption of pre-pandemic activities, which drove higher customer demand in the foodservice industry. Another underlying factor driving demand is an increase in beet sugar exports under CUSMA as well as through additional opportunistic sales to the U.S. and Mexico.Higher volumes are driven by increased customer orders and improved availability of sugar from our Taber facility to fill those orders. As discussed previously, these favorable variances were partially offset by lower consumer retail demand during the quarter. The reduction was due to timing difference associated with the volatility in consumer retail demand and the prior year pantry loading of sugar that occurred in the early stage of the pandemic. As John mentioned, we expect the reduction in retail consumer demand to be temporary and anticipate demand to return to a more traditional pre-COVID pattern in the coming quarters.Adjusted gross margin increased by $1 million in the third quarter mainly due to higher sugar sales margin of $3.6 million and increased byproduct net contribution of $1.9 million. This was partially offset by higher processing costs of $4.7 million at our Taber facility due to higher production volume in the quarter as well as higher warehousing and energy costs. Overall, our adjusted gross margin per metric tonne decreased by $6.50 to $113.95 during the quarter. This decrease reflects the variance in sales mix to the lower margin category.Adjusted EBITDA for the Sugar segment increased by $3.3 million compared to the same period last year. This increase was mainly due to a higher adjusted gross margin, along with lower administration and selling expenses as the easing of COVID-19 restriction has led to lower costs associated with the pandemic and lower distribution costs as costs associated with reconfiguring our supply chain in the current quarter were lower due to improved production volume from our Taber facility.Now I would like to discuss our Maple segment. In Maple, our third quarter revenue were $12.3 million lower than the same period last year, driven by lower sales volumes of 2.8 million pounds. This reduction in sales volume was mainly attributable to a higher volume purchase in 2020 related to inventory lowing experienced in the early stage of the COVID-19 pandemic and timing of purchases from large retailers who appear to have high inventory of Maple syrup due to the volatility of the demand experienced throughout the pandemic. This led to year-over-year reduction in adjusted gross margin of $1 million. Despite our lower volume during the third quarter, adjusted gross margin percentage improved by 10 basis points compared to the same quarter last year.Adjusted EBITDA decreased by $0.4 million compared to the same period last year, largely due to lower adjusted gross margin driven by lower sales volume. This was partially offset by lower administration and selling expenses and reduced distribution costs. We believe that the reduction in volume in the third quarter to be mainly related to the volatility in demand related to the pandemic. We are expecting volume to return to prior quarter levels over the next few quarters.We also believe that the sustained growth in Maple syrup demand over the past 3 years, coupled with the operational investment we made in our bottling facility in recent years, as well as the impact of our pricing and marketing strategy that began in the later part of 2020 will allow us to continue to grow our business and our profitability for the Maple business segment.Finally, I would like to close with some comments on our financials. Free cash flow for the last 12 months decreased by $2 million compared to the same period last year. The decrease was mainly attributable to higher amounts paid for taxes and interest on debt facilities as well as higher capital-related expenditures incurred during the period to maintain our plant. This was partially offset by higher EBITDA. We continue to return capital to our shareholders through the payment of our quarterly dividend.In the third quarter of 2021, we distributed $0.09 per share to our shareholder for a total payout of $9.3 million. The payment of our quarterly dividend continues to be a descender of our financial strategy. On that note, the Board of Directors declared a dividend of $0.09 per share on August 4, 2021. I would also like to point out that on April 30 this year, we took advantage of favorable low long-term interest rates available on the financial market. We issued $100 million in secured guaranteed notes through a private placement debt instrument with institutional investors at a rate of 3.49%. The proceeds of the issuance were used to repay existing debt.In conclusion, I would like to say that despite the variation in product mix impacting overall margin, the absence of the U.S. global TRQs in 2021 and 1 less shipping week, we anticipate 2021 sugar volume to exceed 2020 levels. The quick pivot of our production plan to increase opportunistic sugar exports with the change in demand will help mitigate the reduction in consumer volumes. For Maple, despite the lower-than-anticipated performance of this segment in the third quarter, we continue to expect improved financial performance in comparison to 2020, driven by strong underlying demand, improved margins and lower cost structure.And with that, I would like to turn the call back over to the operator for questions.
[Operator Instructions] And your first question comes from George Doumet with Scotiabank.
Can you guys maybe provide some color on those higher processing costs at Taber. What happened there? Was that only -- was that contained through a quarter only? And I believe last quarter, you guys expected fiscal '21 Sugar EBITDA to be up year-over-year? I just wanted to confirm that that's still the case.
We had higher processing cost in Taber in comparison to last year as we had very little production last year in Taber 30 compared to last the quarter, that was the case. We've also had a bit of, I would say, some leftover cost from the poor beet quality that we've had. So that increased our cost a little bit in this quarter, but it was mainly related to the increased volume we had in Taber this year.
And you guys still expect -- I guess you guys still expect to be up in terms of EBITDA for the fiscal '21 versus '20 in that segment?
Well, we haven't -- we're not providing earnings guidance. I think we saw some change in the mix in the fourth quarter in relation to the pandemic. There's been a bit of a retreat of the consumer retail market, which we believe is temporary. I think it will depend on the time it would take for this market to come back to us as it is one of our most profitable area.
Okay. And JS, obviously a lot of stuff has happened on the gross margin this year from the Sugar segment. Can you maybe just tell us -- from the looks of 2022, can you just maybe remind us of the puts and takes this year that may not necessarily recur next year?
Yes, absolutely, George. This year, we had an issue a crop in Taber, as I mentioned earlier. So that was -- the quality of the beets was not what we were expecting because we had some costs. So we continue to process those. So there is some cost there that will not repeat themselves. We've also had -- that also had an impact as we had to pay some minimum payment to our -- to the growers in Alberta. So that had an impact. And I think we've actually met -- put number on this one, which was about $4 million.In Q1, we also had significant logistic issue. We had a short -- we were short in sugar on the East, so we had to bring sugar from out West. And that increased our supply chain costs. We are not -- believe this is a recurring situation. I think it was due partially to -- if you recall, last year Q4 was very, very strong in volumes, and it was mainly due to volatility in -- caused by COVID-19. So we had a very strong Q4 and we started the year with very low inventory, which kind of forced us in order to serve our customers to bring sugar from out West without expecting this to reoccur significantly next year.
And just one last one for me. John, there was a vision a while ago to diversify away from sugar. I think you guys even threw like a 50-50 long term kind of plan obviously over a lot of years. It seems like the Maple business is stable and maybe back to growth more next year. So just wondering how active you guys plan on being in terms of M&A over the medium to longer term?
On that particular question I apologize as I was on mute. Yes, our -- we're getting back to a more stable and predictable Maple business. It's growing slowly and on the margin front, but we do need to manage the total business. And I think we need to benefit from a good Taber crop, and that will make a big difference, and if we can deliver on Sugar and deliver on Maple and -- not in the near term, but in the midterm, we will continue to look at those opportunities for diversification, but it's not a short-term action plan.
And your next question comes from Stephen MacLeod with BMO.
I just had a couple of questions. I was wondering if you could, for the fiscal -- your fiscal 2021, the outlook. Last quarter, you gave some specific numbers around your volumes, but they don't seem to be here for this quarter. So I'm just wondering if you can clarify kind of how you expect volumes by segment to evolve or how you expect them to move to get to about 776,000 metric tonnes?
Directionally, without giving any specifics, we're going to see the export business grow and we're going to continue to see, as we have seen, strong growth in the liquid business. I think in total -- JS can correct me if I'm wrong here, we're probably -- you do the math, we're probably about 215,000 tonnes in the quarter total-total. That's obviously 1 less shipping week than the prior year. But the growth drivers in the quarter are liquid and export.
I think if I might just add. So we haven't provided the specifics. And the main reason was because the mix is still a little bit volatile. I think we have opportunities. We are fairly confident on delivering the number -- we are confident in delivering a number in the outlook. I think it's just about what type of mix. It's still a bit volatile at this point. So for example, if consumer doesn't come back as we like it to come back, then we know we can compensate with better sales and at least hit our numbers from a volume standpoint.
I see. Okay. So you expect to be at that number. You just don't have visibility into how specifically. Okay. And then maybe that's what leads me into my next question, is when we talk about both in the Sugar and Maple business, just the -- these retail inventory generations to be temporary. So I was just curious what your visibility is to retail volumes normalizing in Sugar and then similarly demand for maple syrup sort of steadily increasing over the next couple of quarters?
That's a difficult question because we're in this environment. There's no non to this by -- there just is not. And we saw a very significant adjustment in the third quarter. We are seeing some improvement in the pace of our sales, but I don't think we're at any point in time, as J-S just mentioned, to become -- start declaring anything because it's kind of unknown territory to us. So I don't really want to give you anything specific, although long term, over the 2 quarters period, we do expect that we will come back to a more normal growth patterns on both the Maple business and on the Sugar business.
I think if I might just add a point, Stephen, is one of the things that we're looking at is we haven't lost major accounts. That's the one thing to me that's important to notice in the sense that if we had lost -- if the volume drop and you lose account, that's one thing. But it's really more of a pullback of -- people have not pulled as much as we thought they were going to pull in the quarter.
Okay. I see. That's helpful. And then maybe just finally, you talked -- I just wanted to clarify for Taber, you had the higher processing costs. And were those isolated to Q3 or do you expect some of those to continue to leak into Q4?
Well, you have more volume in Taber in this year than last year. So in comparison to last year, you're obviously going to get higher cost. I don't think we -- if you were in a normal year, for example, if we were not comparing to a year when we lost almost half of our crop, then I think it'd be aligned with what we would be expecting from our processed half standpoint.
I see. Okay. I was just looking at the outlook section. You talked about higher processing costs related to the poor quality of the sugar beets. That was opposed…
Q3 and -- Q2 and Q3 mainly.
And your next question comes from the line of Michael Van Aelst with TD Bank.
Sorry, just to be clear on that. So the impact on Taber in Q3 was because of poor -- probably because of poor quality of the sugar beets?
Well, it's over -- the main impact in Taber portfolio was in the second quarter. We had a bit of a still as well in the third quarter, but not as significant as we had before. And then the increases versus last year is mainly related to the fact that we have more volume than we had last year as we didn't really process that much in Taber last year.
Yes. Maybe to help rectify, JS, this maybe a clarifying point. Most of our production in Taber occurred in Q1 and Q2. There's not much processing that occurs in Q3. So we carry a lot of the cost and burden that we had in terms of high processing costs or higher processing costs because of the quality of the beets and the higher chemical consumption is in our inventories. So it's -- we had some processing of what we call thick juice in the quarter, but that isn't the most significant portion of our processing, if you want to call it negative variance. It's in the very beginning when we're processing the raw beets into either liquid or crystal.
Okay. And how -- what's the timing of the by-products sale this year?
It's been very much kind of last 3 quarters of the year versus the first quarter. I think we mentioned earlier, we started the year -- we had reduced sales in the prior year because of very substantial loss of crop and we had to make our way back into reformulation. So slow start to get back into the reformulations. We're fully back into reformulations and we are selling back-end loaded byproduct sale, look.
I haven't been able to read the entire breadth -- the short window here, but they can -- I think it was -- was it on consumer or total volumes that as you said you expected Sugar to return to normal in the coming quarters?
I mentioned on the mix. Go ahead J-S.
Well, I think it's the mix that we're expecting to revert back to what it was before. So the volume in total was fairly much aligned with what we were expecting. But there was a change in the mix where we had lower consumer retail volumes and then that was compensated by higher liquid bulk and exports, but those don't come with the same type of profitability than the consumer. So we're hoping that -- we're expecting that over the next few quarters that we'll revert back to the more traditional mix.
Got it. Okay. And then the CIT decision expected in Q4 calendar or fiscal '21?
It's in our fiscal.
Fiscal, all right. Can you talk a little bit about your available capacity or capacity utilization in Eastern Canada versus Western Canada and whether there's any tightness within your network?
I think just directionally if we looked at it without giving you the specifics, the western market is a smaller market and it's a market over the -- maybe the course of the last 5 or 10 years has seen a reduction in demand as processing has reduced in those markets. The eastern market is clearly larger and it has seen growth as a consequence of investments in food processing and I guess exports of some food products into the United States. So our capacity in the east is tighter than it is in the west. So when we get unexpected variations in demand, we rely on the west to help out. So -- but we're not out of capacity in the east. It's just responding to spikes. Unpredicted, unforecasted spikes is difficult to do with the west -- with the eastern operations.
Sorry. Are you like at capacity in Eastern Canada?
We're not at capacity, but we're tighter on capacity than we are in Western Canada.
Okay. And is it -- how difficult would be that capacity just in Canada if your customers continue to add capacity to their networks?
It's a good question because as many -- we've got 2 different ways we can augment capacity through small, we'll call it investments to unlock bottlenecks in the facility. So we can do that relatively quickly. If we were to do a major capacity increase, that would take more time and more capital.
Okay. But you don't see an issue of like lacking supply for your -- to meet customer demand in a…
I think maybe to state the record, we have done a fantastic job of responding to a great amount of volatility and supply. And our track record this year in terms of order fulfillment I think is at 99.5%. So we're able to look after the business. And if we see the right signals and we feel it's necessary at the right time to look at increasing and modifying our capabilities in the east, we will do so and then servicing the market.
And then on your distribution cost, we see a lot of container costs tripling or so over the last year and even some of the bulk rates have gone up, like double from what I understand. How has that been affecting your business? Have you been able to pass that along as the costs come through or is there a lag to that?
We've been largely able to pass that along as the costs come through in our business. And you've seen our margins have been improving. So we're keeping largely up to speed with that. But I wouldn't -- I agree with you, those costs are real. I think the other thing to be kind of recognized is in our business. Sugar is the biggest cost. So freight is an impact, but it is not the most material impact in our business. And similarly, in Maple, maple syrup is the base cost. So it's an impact factor, but it is not as significant as it is in many other businesses.
Okay. But the contract renewals, like your selling contract renewals, are frequent enough that you think you can pass that through without us seeing an impact on earnings?
Yes, that is correct.
[Operator Instructions] And your next question comes from the line of Endri Leno with National Bank.
Actually my first one, I'll continue on the lower -- on the distribution cost there. You said you had lower for both Sugar and Maple, but you only called Maple out in terms of an agreement for lower cost there. I was wondering if you can talk a little bit -- how long are these agreements for, right? Like how long are just the lower costs expected to last?
I'm not sure if I understand the question totally. Could you ask if -- JS, did you pick that up?
Yes, I'm trying -- no, I'm trying to.
Could you --?
No, you said you had negotiated -- you had negotiated better distribution costs in Maple, right? Like is this 1 quarter, is it going to last, is next quarter going to be at the same level, proportionally I guess to the volume, or how often do they reset?
We're expecting this to continue. We don't -- and if they don't, we will pass the increase to our customers in the future.
Okay. And what change versus last year? Was it simply a matter of volume?
Yes. It's a matter of volumes and going back to suppliers within and getting better terms.
Okay. Great. Well, most of my other questions have been answered and asked already. But if you could talk a little bit -- I mean you touched on Doux-Matok at kind of pursuing new products rather than reformulating. I mean does that change your view at all in this investment on that partnership?
No. I think it makes a difference in terms of timelines and it probably, I would say, reduces the size of the opportunities because we're talking about the entry of new products that have got to gain consumer acceptance and grow as opposed to just reformulating something that is existing, that already has known and understood demand for the product. So probably smaller in terms of total. But let's be clear, we're not -- we were interested in being in this category. We think it's very important to be there with a solution, but we don't expect this category to be a -- we expect it to be a niche market I guess at the end of the day. That is our expectation.
Okay. No, great. And so, I would expect, I mean, not much if any incremental cost for that.
To whom? To the – its…
To you.
Well, that was an absolutely not. It's a higher-margin opportunity for us. And it's not -- it doesn't come with a lot of incremental cost to us from a manufacturing perspective.
And there are no further question at this time. I will turn the call back over to the presenters for closing remarks.
Okay. I want to thank everybody for your questions and we look forward to seeing everybody at the end of the fourth quarter.
This concludes today's conference call. You may now disconnect.