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Executives

Ed Makin - CEO and President

Dan Lafrance - CFO

Analysts

Michael Van Aelst - TD Securities

Stephen MacLeod - BMO Capital Markets

Trevor Johnson - National Bank

Rogers Sugar, Inc. (OTC:RSGUF) F2Q 2013 Earnings Conference Call May 1, 2013 4:30 PM ET

Operator

Ladies and gentleman, thank you for standing by and welcome to the Rogers Sugar Second Quarter Results Conference call.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a Question-and-Answer Session. (Operator Instructions). As a reminder, this conference is being recorded Wednesday, May 1, 2013.

It's now my pleasure to introduce Ed Makin, Chief Executive Officer and President. You may begin sir.

Ed Makin

Thank you operator. And good afternoon ladies and gentleman. Joining me today for this conference call is Dan Lafrance, our CFO. In keeping with our usual format, I’ll start by commenting on some of the highlights of the quarter. Thereafter, I will turn the call over to Dan who will review the financials in more detail and talk briefly about the outlook of the remainder of the fiscal year. We’ll then open up the phone lines and answer any questions you might have.

Turning first to our volume, we sold approximately 4400 tonnes more this past quarter when compared against last year’s comparable quarter. The increase in volume occurred in our industrial and liquid segments, but it was partially offset with lower consumer and export sales. Industrial sales increased by 8200 tonnes during the quarter, and we now expect industrial volumes to remain robust throughout the balance of 2013.

Liquid sugar sales also increased for the quarter by approximately 600 tonnes, and volumes in this category will continue to grow positively during the remainder of the year as we ramp up deliveries to one of the major bottlers in Western Canada. Consumer volumes were lower by approximately 1000 tonnes due in part to the lack of promotions by some of our retail accounts.

As no exceptional access to the United States was available during the second quarter, we were restricted to shipping to the U.S. for the most part against our traditional U.S. quota. Shipments to Mexico continued during the quarter, and we’ll deliver sugar from our existing contracts through September 2013 to this destination. Export volumes were low by 3100 tonnes overall.

For the quarter, our adjusted gross margin decreased by approximately $3.2 million; and on a metric tonne basis, our adjusted gross margin rate decreased by $25.58 per metric tonne. An unfavorable sales mix and reduced volume and export had a negative impact on margins.

Additionally, the Montreal refinery incurred an extraordinary expense of approximately $1 million related to the purchase of stand-by natural gas. When as per contract terms, our existing delivery supply contract was interrupted due to very cold weather. As a result of the above factors, our adjusted EBIT decreased by $3.7 million over the comparable quarter of 2012.

Year-to-date EBIT now stands at $35.7 million or $11.9 million lower than last year. Free cash flow for the second quarter amounted to $7.2 million, and this compares to $12.8 million for the same period last year. The decrease in free cash flow was mainly due to lower adjusted EBIT and higher current income taxes of $2.3 million.

During the quarter, the company declared a dividend of $0.09 per common share or $8.4 million. In Taber, our slicing campaign was completed early February, and we are now estimating refined sugar production for 2013 at approximately 122,000 tonnes once the thick juice run is completed later on the summer. With respect to this year’s beet crop, we expect our growers to plant approximately 24,000 acres this spring, which under normal conditions should produce approximately 80,000 tonnes of refined sugar. The reduction in acres is a consequence of a large carry forward of refined sugar from 2013.

And finally, negotiations for both Montreal and Vancouver labour contracts that expired at the end of February commenced during the quarter. Discussions are ongoing, and we expect to conclude mutually acceptable agreements over the coming weeks.

And at this point, I’ll turn the call over to Dan.

Dan Lafrance

Thank you Ed. Ed did review the volume, the ups and downs in the volume for the first quarter, and also year-to-date, we were down almost 12,000 tonnes from last year. (Inaudible) as we all know, the U.S. quota last year did contribute about 25,000 tonnes to this volume in over the first two quarters of the year, and that was offset with an increase in industrial volume as we had discussed last year at about 12,900 tonnes.

On a gross margin rate, change of mix is very important with the lower volume of export sales that were sold at very high margins last year against the special U.S. quota and also the [interruptible] (ph) gas which did cost us [$1 million] (ph). A bit unusual this year compared to other years, we're interrupted for more days, I think we had a total of 25 days this year of interruption compared to about 12 or 13 last year about the same quarter. The big difference was the price. (indiscernible) gas versus the previous year. There was a high demand in the North east states, U.S. states also for natural gas, and even when we look at switching to oil, oil was very expensive. We did switch to oil for a few days versus natural gas. But still, the amount that we paid year-over-year was far in excess of what we ever paid. Unusual for fiscal 2013, we don’t see that repeating itself for 2014 and following years. On the (indiscernible) side, basically speaking we’re about $600,000 above for the quarter and also year-to-date, mainly due to the timing of expenses, the administration and selling expenses for the business.

Distribution expense for the quarter and year-to-date were about the same level, so no changes there. The finance costs basically [removed] (ph) the mark-to-market adjustment that we do for the interest swaps that we have. For the quarter, we were on par with last year. On a year-to-date basis, we are about $900,000 lower than fiscal 2012 for the first six months. The main reason is that last year we had $600,000 write-off for the refinancing of the third series debentures. As we redeemed the debenture in December 2011, we had to write-off the remaining deferred costs of about $600,000, so that's the main difference from year-over-year.

On the outlook, as we had discussed last year, we did recover some industrial volume. And as you can see, year-to-date we’re about 13,000 tonnes over year-over-year. Liquid sugar, as we also discussed in previous quarters, we will start really in the second or third quarter this year until next April, March or next year. We have a one-year contract with a major bottler in Western Canada, and although there was a few of those shipped before the end of quarter, the major impact will be over the next four quarters.

Ed did discuss about the beet crop this year at 24,000 acres. We have a large carry over from this years’ crop. We had a record crop, record yield from this year. We will be producing about 122,000 tonnes of sugar, and that's the reason why we have less acres next year. The last item is natural gas. We haven’t done much in terms of additional hedging over the last number of quarters. But right now what we are looking at is a flat curve really for the next four, five years. We haven’t seen the price as flat as it has been right now in the last couple of weeks, and therefore, we’ll investigating to see if we can do more in the further years like 2016, 2017, and 2018 depending on the current liquidity in the market. We may add, or we may start hedging some of that natural gas for these years.

So, that concludes our presentation. And I will ask the operator to see if there will be any questions from the people on the line. Thank you.

Question-and-Answer Session

Operator

Thanks you Mr. Makin. (Operator Instructions). Our first question from the line of Michael Van Aelst with TD Securities. You may begin sir.

Michael Van Aelst - TD Securities

A few questions for you, I guess, I'm assuming that on the energy costs, $1 million of extra energy costs, that's not something that you can recapture from your suppliers?

Dan Lafrance

No, it’s not something we can recapture from our customers or our suppliers. We have an interruptible contract with (indiscernible), which is a standard for large users in the (indiscernible). And let’s not forget with the integral contract, normally speaking, we pay less for transportation. This year, like I said before, a bit of unusual where we had so many days interruption and also beside the auxiliary gas and oil was so much more expensive than it has been in the past.

So, we had a meeting with our supplier. We do believe that there will be some changes made in the distribution center and distribution pipeline next year. And we should not see, depending on the weather again, we should not see that number of days of interruption and also we are looking at alternatives to see what we can do to mitigate the price of these, high price that we paid when we were interrupted.

Michael Van Aelst - TD Securities

As for Taber, what would be an optimal production level?

Ed Makin

This year, Michael, we are going for 24,000 acres. I mean it really depends on the year. Obviously, given the carry over that we are facing, lack of export opportunities going into the United States, 24,000 acres for us is optimal this year with the carry over.

Michael Van Aelst - TD Securities

As you had some carry over, right, so if I look at the average of the past year plus what you are looking for next year, so it’s about a 100,000 metric tonnes. Is that excluding any additional exports? Is that something, is that the level that you would want to be at then?

Dan Lafrance

You know, I wouldn’t want to say that number right now going forward without knowing all the parameters that we are dealing with. The market is obviously dynamic. We reserve the right to adjust the acres with the growers on an annual basis. And I think, when we look at the spring planting, we would typically talk to the growers; base is the forecast of sales and that could be obviously domestic sales and export sales taken into account. So, rather than say what the optimal is, I think I would say that, we typically try to pick a number that fits the sales profile of the year coming.

Michael Van Aelst - TD Securities

And then when I look at this liquid sugar customer, can you give us an idea of the size?

Ed Makin

We got asked that question last time, I think I declined to comment on that. The best I would say is it was more than a 1000 tonnes as I recall was my answer. And I think I'm going to have to stick to that because it's specific to one account, and we typically do not get into naming accounts or volumes of anybody in particular. That would be unfair.

Michael Van Aelst - TD Securities

A thousand metric tonnes wouldn’t sound substantial?

Ed Makin

No, it will be more than that, quite a bit more than that.

Michael Van Aelst - TD Securities

And then I guess finally on the export volumes, can you give us an idea of the timing of your normal quarter shipments this year? How they are going to split up between the quarters?

Ed Makin

I think, as I recall we are probably mostly through the existing typical contract. I’d say there is probably several thousand tonnes yet to go, but the lion’s share is certainly already shipped.

Dan Lafrance

If you look at our export sales to-date, basically speaking we are probably slightly more than half way through thinking about what we have with Mexico and our quota to the US from Taber would be about half way through our volume. We try to do as much as possible to have them evenly throughout the quarters, but we can never do that. we also prefer to ship earlier in the year because of warehousing capacity. But right now looking at the numbers here today, we are slightly more than half way through on average it is [of course] (ph) to just the US.

Michael Van Aelst - TD Securities

You mentioned you have got Mexico at least until September 2013, I think you made the same comment last year. So this is six years in a row. Is there any reason to believe that you won’t be shipping sugar to Mexico for a seventh year?

Ed Makin

The only (inaudible) I would put on that is, it’s both Mexico and the United States have got absolute record crops. So, I think it will be a tall order for us to, at this stage, suggest that we will be able to conclude deals with Mexico. We’ll obviously try hard, but the reality is Mexico has got an absolute bump across, I mean to the point where they are putting sugar on to the world market for the first time in 20 years that I can recall. That would suggest we are going to have a very hard time looking at 2014.

Michael Van Aelst - TD Securities

How much is that volume now?

Ed Makin

This year, I believe we will do 15,000 tonnes.

Operator

(Operator Instructions) Our next question from the line of Stephen MacLeod from BMO Capital Markets.

Stephen MacLeod - BMO Capital Markets

I was just wondering if you can quantify a little bit how much higher you expect the distribution cost to be in the second half of the year.

Dan Lafrance

Well, we discussed that also I believe in the last quarter. it should be higher because we are housing a lot more beet sugar this year than we have in the previous year. We did find cheaper alternatives though. I think it would be better to what we had expected earlier. And again, depending on take away we have over the next couple of months and how early the campaign will start, we believe it shouldn’t be, it won’t be material, maybe a couple of $100,000, but it should not be material costs right now. But again, there could be a lot other items that goes in there, shipments in between, factories as an example that we do from on the semi-regular basis. So, basis of that from year-to-year we should have small increases in distribution costs, but non-material amount, we are not talking millions of dollars here.

Stephen MacLeod - BMO Capital Markets

Can you just talk a little bit about your outlook for the global sugar price generally. I mean you mentioned bumper crops in U.S. and Mexico. So do you expect the sugar prices to stay low or move low from where it is now?

Ed Makin

Well, right now, we are in the low 17, for the world raw sugar prices. Brazil is coming out strong right now. They had a soft delay and they started with their campaign this year. And that's why we are still seeing prices in the 17.30, 17.60 even yesterday or the day before. We do believe that Brazil, and everyone says so, that they will have a very good crop. We’re right into their biggest harvest right now. So between now and end of July, August everything goes well, there is a lot of pressure on the sugar prices. Internally, I would be surprised that we see 16 or low 16s. But again , we believe the sugar prices will vary between $0.16 and $0.18, and $0.19 for the next three to four months. Could it go lower? Absolutely, depending on how much sugar will be produced early and again there some time we do have pressure in terms of moving sugar quickly out of Brazil in order to make more room for the upcoming sugar. So therefore you may even see some (shifting), depending on what the demand is versus what's the offer. But to see a $0.16 to $.018, $0.19 price over the next three months would not be unusual.

So the pressure is more downward personally. That's what I think. Downwards right now, and but you may see, a price may be maintained around the $0.17 and $0.175, more unlikely we will see some $0.16 before the end of June.

Stephen MacLeod - BMO Capital Markets

I think I probably know the answer is based on, as you answered the last set of questions. But do you foresee any export opportunities with the volumes expected to come down to the table planting. Do you run the risk of maybe being out of position where you can't supply if there is a special quota?

Dan Lafrance

Not this year Stephen because obviously we've got a lot of sugar. So actually it would be very beneficial if some special quotas were announced any time between now and the end of the calendar year. We would be in fine shape to handle whatever was thrown away on that. And clearly, we still have the two cane refineries that could participate in that as well and supplement Taber beet if we ever ran short. So that would not be an issue. That would be a really nice problem to have to be quite honest.

Operator

(Operator Instructions) Our next question is from the line of Trevor Johnson from National Bank. You may begin.

Trevor Johnson - National Bank

Just (inaudible) special dividend that was paid last quarter, just looking back maybe in the rear view mirror from a capital market strategy. Are you happy with how that played out? And if you were in the same circumstance again with some more amount of cash, how would you see maybe deploying that, would it be any different?

Ed Makin

When we look at addition to that and we paid as you all know those were earnings from operations that we did between 2008 and 2012. Over the last 5-year period, we had earned additional $65 million of cash flow that was not distributed to our shareholders. We felt we had kept some of that money to see if there would be any opportunities to buy something, to make some acquisition. We could have raised a dividend back in 2008 by $0.02 a quarter, and we were rounded to $0.40. So the same principle would have applied, you distributed early or you keep the cash to see there will be any opportunities to benefit the company and the shareholders. Decision was made that mostly half of it could be returned to our shareholders cause I think that it was money earned from operations and therefore we could keep half of it and we did deploy against our debt level. We still don’t have any opportunities. We do invest in our plan about $10 million a year to investment projects, capital projects. We intend to continue that investments from year-over-year. We are always looking for good projects to reduce our costs. This additional dividend, I think our shareholders did deserve it, and let’s not forget it was from earnings within (inaudible) assets. Our assets are still the same, so therefore we didn’t deploy any capital that we didn’t have to. So it was a patience that we could have raised dividends in the past. We elected not to do so in case there will be something happening. So we still feel very good with this additional dividend payment.

Operator

Mr. Makin we have no further questions at this time. Sir I’ll turn the talk back to you.

Ed Makin

Operator, if there are no further questions, I’d just like to thank everybody for joining us today and we look forward to participating again in the next three months. Thank you very much.

Operator

Ladies and gentlemen, this does conclude the conference call for today. We thank you all for your participation. Have a great evening everyone.

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