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Executives

Ed Makin - CEO & President

Dan Lafrance - CFO

Analysts

Michael Van Aelst - TD Securities

Stephen MacLeod - BMO Capital Markets

Rogers Sugar's (OTC:RSGUF) F3Q 2013 Earnings Conference Call July 31, 2013 5:00 PM ET

Operator

Welcome to the Roger’s Sugar Inc. Third Quarter Results Conference Call. (Operator Instructions). As a reminder, this conference is being recorded Wednesday, July 31, 2013.

I would now like to turn the conference over to Ed Makin, CEO and President of Rogers Sugar. You may begin Mr. Makin.

Ed Makin

Thank you operator and good afternoon ladies and gentleman. Joining me today for this conference call is Dan Lafrance; our CFO who as many of you know will be taking early retirement at the end of July. So this will be his last conference call for the company. Before beginning the formal part of the call I just like to publically thank and acknowledge Dan’s many contributions for Rogers and I wish him a long and healthy retirement.

And now back to the formal part of the call, I will start by commenting on some of the highlights for the quarter, there after I’ll turn the call over to Dan who will review the financials in more detail and talk briefly about the outlook for the remainder of the fiscal year. We will then open up the phone lines for any questions you might have.

Turning first to our volume, we sold approximately 7500 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 more than 7000 tonnes during the quarter, and we expect volumes to remain firm for the balance of the year.

Liquid sugar sales also positive by 7900 tonne for the quarter when compared to last year’s deliveries and we also will continue to be strong in this segment particularly in the Western Canada. Our consumer volumes were slightly lower due to impart the lack of promotion by some of our retail accounts.

As no exceptional access to the U.S. was available during the third 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 continue to deliver sugar from existing contracts through September 2013 to this destination. Overall export volumes were lower by 6600 tonnes against last year.

For the quarter, our adjusted gross margin decreased by approximately $3.9 million; and on a metric tonne basis, our adjusted gross margin rate decreased by approximately $29 per metric tonne. The decrease in the margin break was due to an expense of $1.9 million for a future pension plan update as now required under IFRS.

In addition sales mix that included higher industrial and liquid volumes combined with lower consumer and export sales negatively impacted margins. As a consequence our adjusted EBIT decreased by $3.7 million over the comparable quarter of 2012.

Year-to-date adjusted EBIT now stands at $44.7 million which is $15.6 million lower than last year. Free cash flow for the third quarter amounted to $7.2 million, and this compares to $8.8 million for the same period last year.

During the quarter, the company declared a dividend of $0.09 per common share. In Taber, our success run was completed by the middle of July and we’re now expecting refined sugar production for 2013 to be approximately 122,000 tonnes. With respect to this year’s beet crop, our growers planted approximately 24,000 acres this spring, which under normal growing and harvesting conditions should produce approximately 85,000 tonnes of refined sugar for sales during fiscal 2014.

On the labor front we signed a new three year agreement with our main bargaining unit in Montreal and we also recently reached an agreement with our unionized employees at the Vancouver refinery. Both agreements were secured at competitive rates. Negotiations for the remaining four bargaining units in Montreal continue and we expect to conclude agreements over the course of the coming weeks. And finally during the quarter we entered into a new five year credit agreement of a $150 million effective June 28, 2013. A total available credit was reduced by some $50 million from the current expiring agreement to better reflect financial needs of the company.

In addition we also negotiated a five year interest swap agreement at a rate of 2.09% for initial amount of $50 million declining to 30 million at the end of the agreement. The new interest swap contract will allow the company to benefit from a lot of financing charges as compared to the former swap agreement and that concludes my remarks at the moment and I’ll turn the call over to Dan.

Dan Lafrance

Thank you Ed. Ed did review the sales profile, we were 7500 tonne over for the quarter and slightly below last year year-to-date. On the adjusted gross margin the largest in fact was by far the $1.9 million pension expense that we did this quarter. That relates to the latest negotiated contract in Montreal, it's not a new clause it's something we always had and it's a negotiated clause and it's really the pensionable earnings are based on the last the most recent three years of the employee before retires and that was negotiated again this time around.

Even though this clause will not take effect until 2014 on our new IFRS guideline and you need to expect the pension, the higher pension cost immediately. And this is a reason why we had to book as soon as the contract was signed $1.9 million this quarter. The funding of this will not happen before 2014 when the actual clause takes effect basically speaking.

So that was one of good reason, that was over $11 a tonne on year adjusted gross margin rate. The additional negative margin also was on the mix, the sales mix. Higher liquid sales and as we said it's (inaudible) business that we did, more volume of that and much lower margin and also last year we had the higher export sales value. So the combination of both events also had a negative impact on our overall gross margin rate.

Year-to-date it's over $30 lower than last year year-to-date numbers, same as we discussed before to pension impact also the sales mix. Last year let’s not forget we did 27000 tonne in the first quarter mainly against a U.S. special quota at a very high margin and which we had no benefit of that this year and also the gas energy cost for the second quarter where we had (inaudible) gas and it costed about a $1 million. So that’s the reason the year-to-date margins are about $30 lower than last year.

On the administration expenses just timing, we are lower by $300,000 for the quarter we’re high by $300,000 for year-to-date, a very consistent really know what change in there. Distribution cost I know last quarter I said that we were expected to be at this higher than last year this time of the year. Actually we’re even with last year’s quarter reason being we did very well in terms of leasing space to store the add sugar that we had in Taber, Alberta. The people farmed nearby locations where we could store our goods and at a very cheap rate to get them there and to store them for few months. So I think our people did an excellent there and hence the reason why we are on par with last year’s comparable quarter and also in par with last year’s year-to-date numbers.

The finance cost when you remove the mark-to-market impact on the quarter and year-to-date we’re about $200,000 higher for the quarter due to higher borrowings that we have so far this year. Year-to-date we have $800,000 to the benefit main reason is that last year in 2012 we had to write-off about $600,000 of deferred financing cost when we repaid the third dues debentures in December 2011, that’s the major reason we are $800,000 positive this year on a year-to-date basis.

Ed didn’t mention we did negotiate new trade agreement, $150 million we were paying stand-by fees on a $200 million before we didn’t need all that credit, we never got close to borrow $150 million so that’s the reason why we had lowered our total line of credit to $250 million and as I mentioned also the we enter into new swap at $50 million for the first couple of years going down to $30 million by year five at the rate of 2.09% versus our previous slot was 4%, so as you will see starting next quarter we will have some savings short term interest at least for the next number of years.

On the outlook our sales volume as we indicated last year we would be doing better this year in total sales volume than we did in 2012. Year-to-date we are only 4400 tonne lower than last year right now but as you saw in the previous quarters initial sales has always been higher by 5000 to 8000 tonne per quarter as we had committed last year to recoup some of that volume we had loss and also we had the additional liquid sale that restarted in the third quarter of this year against an HFCS as for sugar count (ph) in Western Canada. So year-to-date after the next quarter our total volume will be higher than last year’s. Ed did speak about Taber crop and where we will get about 122,000 tonne this year and the natural gas we did put a few more hedges there for 2016, 2017 for the current spring flat on natural gas prices right now. So we took an opportunity to take a smaller position for these two years and we will continue to watch the natural gas market to at least take a position when the price is right.

On that I would like to thank everyone for their support. I know that the Manon Lacroix will be replacing me as VP of Finance and I’m sure she will get the same support as you gave me over the years. So, thank you for everyone. I do enjoy my 27 years at Rogers, it's been a pleasure. But from there on we will go to question. So Frances if you would check to see if there is any question from the people on the line. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question from the line of Michael Van Aelst from TD Securities. You may begin sir.

Michael Van Aelst - TD Securities

I would like, I guess just quickly on the liquid volumes. We hadn’t seen what that run-rate was going to be so 7900 in the quarter is that something that is a good run-rate for the life of the one year contract?

Dan Lafrance

Yes it is Mike.

Michael Van Aelst - TD Securities

And can you talk a little bit about the competitive environment, we’re seeing mix shift around a little bit here but it doesn’t seem like volumes are moving so much on a competitive basis. But what you see down on the pipeline whether it be from your domestic competitors or the import competition.

Ed Makin

Well as you know Mike I mean the marketplace is always intensely competitive, Canada is an open market and yes we only have one domestic competitive. The rest of the world can sell sugar into Canada and has done for many years I mean the exception is the EU and the U.S. which are blocked under the current anti-dumping duties. Everybody else has access into this market, so we’re always, always under a lot of competitive pressure in this business. I don’t see anything changing on that in the future. We will fight for every order that we possibly can just as we have done in the past. Segment by segment, it remains intensely competitive whether it's liquid against high fructose or imports on retail repacks or on the industrial front. So I just don’t see any change in that Michael it's all going forward, I think it's going to remain a very competitive industry.

Michael Van Aelst - TD Securities

I guess the concern I have is that there is limited amount of volume that doesn’t seem to be growing all that much on the net basis whether it's unless you’re getting some from high fructose corn syrup. So I guess the concern is that if there is any additional import competition that comes in to the market that yourself and your other domestic competition will be fighting, will be left fighting pretty hard for it and I’m just want to make sure that there is nothing coming in there that we’re not seeing at.

Ed Makin

Well I mean we have gone through many years where imports have risen a little bit typically over the last five years we have been down below 5% but several years ago if you remember we had cane sugar and then it's successor sucrose that lasted a couple of years and frankly those sort of players come and go. I mean I don’t see anything that prevents people from starting up. I mean everybody is entitled to have a crack at the marketplace, our job is to make sure that we maintain throughput in our plants and I can assure you we will attempt to do that in every way possible.

Michael Van Aelst - TD Securities

I guess final question for now is should there be a competitive increased competitive intensity whether it's this year, next year or some point in the future. To what degree do you think you have room to squeeze more cost out of your network? You’ve done a very good job of keeping SG&A and distribution costs pretty flat over the years. So I would assume if they are saving it's more on the cost of goods sold. So to what degree can you improve your manufacturing efficiencies?

Ed Makin

We’re always looking at that and the good news on that front is we see lots of opportunities in the plants to carry-on on that front. It does take time, it's not something you can snap your fingers and just make it happen overnight. But there are plenty of opportunities on that, you know I’m not saying there are a lot of low hanging fruit out there that we will be able to get out immediately but we have lots of good investment opportunities put forward by the plants right now and I see that continuing into the future. I don’t see any end in that; we’re always trying to minimize our cost in our plants.

Michael Van Aelst - TD Securities

So what’s your investment CapEx budget for the next year or so?

Dan Lafrance

Well our investment in CapEx has been about 7.5 million but as you know we also have high return project investment and I must admit in the last couple of years we’ve been pushing the plants to do a bit more of that. This year will be for the ending of the year higher than last year $40 million but we’re always at our target of about $2.5 million to $3 million in these type of projects, project that can return 0.25% it just takes time to do that and like Ed said I think our operating people have number of good ideas and that’s what we’re looking at right now to implement few of these projects. So in order that we can improve our cost structure even lower from where we are today. But we’re planning to invest at least $3 million in these projects in a couple of years.

Operator

(Operator Instructions). And our next question from the line of Stephen MacLeod with BMO Capital Markets. You may begin.

Stephen MacLeod - BMO Capital Markets

Couple of questions for you, on the volume, so on the export volumes which were down about 6600 metric tonnes in the quarter, is that kind of a run-rate that we would expect to see over the next sort of few quarters with lower sales into Mexico and the fact that you’ve already run-through most of your deliveries against the U.S. regular quarter?

Ed Makin

Mexico will continue through September, I think what we’re seeing is last year if you remember we have this special quota and we had a massive run at that to begin with and that deferred the Canada, U.S. specific quota that we’re into and that this year has been picked up a little bit. So you’re seeing an offset of one against the other really at this stage.

Dan Lafrance

At the end of the fiscal year I think most of our variance would be around 28000 – 29000 tonne which is the specific quota that we did the special quota we did last year, so we’re doing a catch-up we should catch over the next quarter a little bit from a 31000 we’re short today and that’s what we had expected to be about 28,000 tonnes, 29,000 tonne below last year because of the special quota we did last year.

Stephen MacLeod - BMO Capital Markets

Okay so you expect to pick some extra plants (ph) up in this year. And then the pension expense that you recognized this quarter is that something that we would expect to see with the other bargaining units that you’re negotiating with currently and also with Vancouver having been renegotiated recently?

Dan Lafrance

That’s all there, it's there. It's all the bargaining units even though we have not concluded on some smaller units in Montreal that reflects the expense of all the employees because these smaller units are user based the pack, the financial package is used same it's different little things between units that are negotiated. So the financial pack it will not change so that includes all the employees, including the Vancouver.

Stephen MacLeod - BMO Capital Markets

Okay and you wouldn’t expect to have to recognize something like that until you again until you’ve to renegotiate those contracts in three year time or whatever it is?

Dan Lafrance

Correct.

Stephen MacLeod - BMO Capital Markets

Great. And then I was wondering if you could comment a little bit on the macro-environment with respect to kind of the global sugar price environment and where you see prices going either further lower or beginning to stabilize and move back up?

Ed Makin

Well I think you saw in the last few days it has been a run-up of 50 points in sugar prices, it's about $0.17 right now for the month of June, most of July you saw sugar prices at 16 or low 16s and even hitting a 15 at one point in time. The greatest impact it had was the lower real value against U.S. dollar in the last month. You saw that picking up a little bit, the real got a big stronger against the U.S. dollar in the last few days that picked up. Demands also slightly higher right now, that also boded well for the sugar prices. We don’t see it; we are only much more higher than probably $0.18 and $0.185 (ph) over the next quarter. You will see probably if it has to go towards the $0.20 it should happen I would say more by the end of the calendar year in January, March of next year that’s where you probably would see the higher prices of the number of Latin raw sugar prices, $0.20, $0.21 maybe a $0.22 would be a possibility depending on how the Indian crop will be. Indian crop is always a question mark at this time of the year but right now the monsoon has been good, they are expecting a fairly good crop same with Thailand. So if that comes true and Brazil has a good end towards their crop till the end of November we wouldn’t be surprised if the products remain below the $0.20 for the balance of the year.

Operator

Mr. Makin, Mr. Lafrance there are no further questions at this time. I’ll be turning the call back to you for your closing remarks.

Ed Makin

As there are no further questions operator I just like to thank everybody for joining us this afternoon and we look forward to talking to you again in another three months’ time. Thank you very much.

Dan Lafrance

Thank you.

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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