Rogers Sugar's CEO Discusses F4Q 2013 Results - Earnings Call Transcript

Nov.14.13 | About: Rogers Sugar (RSGUF)

Rogers Sugar Inc (OTC:RSGUF) F4Q 2013 (Qtr End 09/28/2013) Earnings Call November 14, 2013 4:30 PM ET

Executives

Edward Makin - President and Chief Executive Officer

Manon Lacroix - Vice President, Finance and Secretary

Analysts

Stephen MacLeod - BMO

Michael Van Aelst - TD Securities

Operator

Welcome to the fourth quarter results conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Ed Makin, CEO and President of Rogers Sugar Inc. Please go ahead, sir.

Edward Makin

Thank you, operator, and good afternoon, ladies and gentleman. Joining me today for our conference call is our new Vice President of Finance, Manon Lacroix. And keeping with our usual format, I'll start by commenting on some of the highlights for the quarter and then the full year. Thereafter, I'll turn the conference call over to Manon, who will review the financials in more detail and tell briefly about the outlook for the new fiscal year. We'll then open up the phone lines to answer any questions you might have.

For the fourth quarter 2013, we sold approximately 12,100 tons more this past quarter as compared to the fourth quarter of 2012. The increase in volume was mostly due to higher industry and liquid sales. However, high volumes in these categories were partially offset with lower volumes in consumer and export sales.

I'd also like to note that during the quarter, we were able to find a multi-year agreement with a major retail account, and as a consequence we expect volumes in this category to be positive moving forward. For the full year, volume increased in 2013 by 7,700 tons. Industrial sales rebounded strongly from 2012 levels and were higher by 30,600 tons due to volume change with new and existing customers.

Liquid sales were also up by approximately 14,500 tons, as we recovered a large HFCS substitutable account in western Canada. These increases were partially offset by lower consumer and export sales. Consumer volumes were lower by approximately 2,000 tons due to timing of retail promotions. And exports decline by 35,400 as the company had limited access to the Untied States, as that occurred in 2012 when a special refined sugar quota opened up in October of 2011.

For the quarter, our adjusted gross margin decreased by approximately $3.9 million and on an adjusted EBIT decreased to $12.2 million or $2.5 million less than the comparable quarter of 2012. On a per metric ton basis, our adjusted gross margin decreased by approximately $31.33 per metric ton.

The decrease in the margin rate was due to higher than expected cost of raw material in Taber, high maintenance cost in Vancouver and an unfavorable sales mix that feature higher industrial and liquid volumes to typically have lower margins combined with lower consumer and export sales that usually enjoy a higher margin.

Free cash flow for the fourth quarter amounted to $4.2 million and this compares to $8.5 million for the same period of last year. The decrease of $4.3 million was mainly due to higher cash pension contributions, higher income taxes and lower adjusted operating results. This was partially offset by a reduction in capital expenditures of $1 million due to the timing of projects.

During the quarter, corporation declared a quarterly dividend of $0.09 per share for a total payout of $8.5 million. For the full year 2013, adjusted earnings before interest and income taxes were $56.9 million, which represented a decrease of $18.1 million when compared to the financial results of fiscal 2012.

Our adjusted gross margin rate decreased by $31.48 per ton. This decrease occurred as a result of an unfavorable sales mix with low margin industrial and liquid sales, and the special export orders to the U.S. In addition, we incurred a $1.9 million charge for committed future benefit update and additional cost of $1 million related to auxiliary natural gas, approximately $600,000 unplanned maintenance at the Vancouver refinery and some packaging inefficiencies also occurred.

This past spring a total of approximately 24,000 acres were planted by the Alberta beet sugar growers. This year's harvest is being completed under mostly favorable conditions, with average sugar content and lower acres we expect total refined sugar to be lower than last year, for any unforeseen events and the completion of the thick juice campaign, an amount of approximately 85,000 tons of refined sugar is now anticipated. As a consequence of the lower production related by-product volumes will also be marginally lower than the previous year.

And finally, although it will not impact the company in 2014, the recently completed trade agreement between Canada and the EU bodes well for the future of the Canadian sugar industry.

No direct access to Canadian sugar is granted, but the agreement does secure an initial 30,000 ton quota for sugar containing product access. This initial access is expected to grow over a 15 year timeframe to approximately 52,000 tons. We view this as a very positive development for the Canadian sugar industry.

In the wing we're also supportive of the objectives being pursued by Canada with respect to the trends specific partnership negotiation. The interest of the sugar industry could be enhanced further, should an agreement be reached for this extremely important trading block.

And that concludes my comments and at this point, I'll turn in the call over to Manon.

Manon Lacroix

Thank you, Ed. It is my pleasure to be joining this conference call for the first time in my new role as VP, Finance. I will now go over the fourth quarter results in more detail.

Adjusted gross margin for the quarter was $17.8 million compared to $21.7 million or approximately $101 per metric ton compared to approximately $132 per metric ton in the same quarter last year. A few elements explain the reduction of approximately $31 a ton.

First of all, Taber. Taber's raw material was more expensive than anticipated. Throughout the year, we estimate sugar production based on the beets delivered and sugar content in the beet.

At yearend, we are able to establish the actual sugar production when inventory levels are low. This year we had an unusual negative adjustment, reducing our estimated production volume and therefore increasing the cost per ton beet to the growers. This adjustment had a negative impact on adjusted gross margin rate per ton for the quarter, but had a much lesser impact on the fiscal year adjusted gross margin rate per ton.

In addition, Vancouver had an unusual breakdown from one of its boiler in December, which resulted in $600,000 of additional maintenance cost. Overall, [technical difficulty] performance in the two cane refineries and beet factory was below expected levels, with higher overtime and maintenance cost.

Finally, the sales mix continue to have a negative impact on gross margin rates per ton for the quarter. Industrial and liquid sales volume are strong, while export in consumer volumes were below last year's comparable quarter.

Now looking at fiscal 2013. The adjusted gross margin was $83 million compared to $102 million in 2012, or approximately $128 per metric ton, compared to approximately a $159 per metric ton, last year. By far the biggest negative impact on gross margin is the sales mix.

In fiscal 2012, the company's sold approximately 28,000 metric tons under the U.S. special quota at very good margin rate. As the United Sates was a premium market in 2012, there was no such quota in fiscal 2013.

Export volume was replaced by industrial in liquid sales, which both have lower margin rates. In addition, operating cost negatively impact the adjusted gross margin rate per ton for the year. We reported in second quarter of 2013, that the company incurred $1 million in additional energy cost. Furthermore, $1.9 million was recorded in the third quarter of 2013, for committed pension plans benefit upgrade.

The pension upgrades were negotiated as part of the Montréal bargaining agreement and are contractually driven. These upgrades basically update potential number of earnings to the latest three year reference cycle. Finally, as already mentioned the higher cost of raw material in Taber in a higher maintenance in Vancouver also had an impact on adjusted gross margin for fiscal 2013.

Administration and selling costs were $1.2 million below the comparable quarter of last year, mostly explain by reduction in the incentive provision as well as lower legal and doubtful accounts provision. Finance costs were $0.1 million below the fourth quarter of fiscal 2012, when we exclude the mark-to-market gain or loss on the interest rates swap.

As mentioned in the third quarter, it's something we entered into a new five-year revolving credit facility. The credit facility was reduced from $200 million to $150 million to better reflect the borrowing needs of the company.

In addition, the company entered into a new five-year interest rate swap at 2.09% or $50 million decreasing to $40 million and $30 million in June 2015 and June 2016 respectively. The previous $70 million interest rate swap was at approximately 4%. A new interest rate swap explains the reduction in finance cost.

For fiscal 2013, adjusted finance cost were $10.9 million compared to $11.8 million, a reduction of $0.9 million in fiscal 2013. In fiscal 2012, we erode our $600,000 as the first financing cost following the refinancing of the third series debenture, which is the main reason for the decrease.

I will now turn to the outlook for 2014. As Ed mentioned, we secured a multi-year national agreement with one major retail account. This will contribute to higher consumer volume for next year. Overall, total company volume is expected to be slightly lower than fiscal 2013 as the consumer volume gain will be offset by lower export volume for 2014.

In fiscal 2013, the company sold approximately 15,000 metric ton to Mexico, which was contracted in 2012. In 2013, Mexico experienced record crop and as a result had inventory surpluses, which have eliminated any export opportunities for fiscal 2014. Overall, adjusted gross margin rates per metric ton in fiscal 2014 is expected to be slightly lower than 2013 due to an increasingly competitive environment in the consumer and industrial segments.

With that, I'd like to turn back the call to the operator for to question-and-answer session.

Question-and-Answer Session

Operator

(Operator Instructions) And we'll proceed with our first question from the line of Stephen MacLeod with BMO.

Stephen MacLeod - BMO

I just wanted to circle back on your volume expectations. So did you say that you should shipped 1,300 domestic in '13 that won't repeat in '14? And the second part of that is the way I understand your outlook is that the higher consumer volume will be offset by lower export, is that the way you think about it for 2014?

Edward Makin

I think the way its going right now, Stephen, as Manon said the crop in Mexico, for the past couple of years been basically on record levels. And the chances of us getting anything into Mexico this year are fairly slim. So the odds on us repeating what we shipped in 2013, more than like will not be repeated in 2014. And on the consumer side, slight increase there, offset by the lesser sales going forward on the export side.

Stephen MacLeod - BMO

Sorry, I missed the last part. Did you say it's fully offset or mostly offset?

Edward Makin

Mostly offset, we still expect a bit of positive on that front.

Stephen MacLeod - BMO

And then on the consumer volumes' that you contracted, my understanding is that it's unusual to have sort of multiyear agreement. Is that right?

Edward Makin

No. I think in years passed there have been times when contracts out a number of years. Typically over the last few years where they have tended to be more annual, but we have on the books as we are today multiyear contracts as well.

Stephen MacLeod - BMO

And is it safe to think that the margins around that consumer volume are materially lower than where it is today or where it's been in the past?

Edward Makin

I would say there is the industry is in a competitive environment and so undoubtedly they will be a little lower, yes.

Stephen MacLeod - BMO

And then are you able to quantify, how much of the adjusted gross margin rate was impacted by the raw material and Taber, I think you said it was $0.6 million of Vancouver. What was the difference from Taber?

Edward Makin

I think, Stephen, because that is part of a commercial contract, we typically don't get into disclosing any details on that aspect other than to say, we ended up with a bit of surprise out of it. But we rather not get into the specific on it, because it is a contracted agreement.

Operator

And our next question from the line of Michael Van Aelst from TD Securities.

Michael Van Aelst - TD Securities

So I just want to go back on to I guess the competitive pressures to start. And when you look at the -- you said it was, the increase in consumer volume was the result of signing one retail client. Did you have any offsets to that or is it just straightly one new customer, no customers lost?

Edward Makin

We typically don't get into that, Michael, in terms of wins and gains. This one happen to be unique. And as I said, I mean the industry is competitive. There will be strength to hang on to our existing accounts, but we will continue to try to do just that.

Michael Van Aelst - TD Securities

Have you got to the point yet, where you're negotiating new deals for the retailers that are consolidating, I guess the major gross that are consolidated and possibly?

Edward Makin

Michael, I don't think we'd want to answer that. I mean that's competitive information at this stage.

Michael Van Aelst - TD Securities

When did the lower interest rate kick-in?

Manon Lacroix

The interest rate swap, it started on the June 28 of this year.

Michael Van Aelst - TD Securities

And on the trade agreement with Europe, I believe it's mostly ratified at some point in 2015. Would that 30,000 start right away or do you have to wait a few years before that kicks-in beyond just the ratification?

Edward Makin

I mean, it's hard to say when it will go. But our understanding is once it timed off, it's ready to roll or it should be instant, there's no delays on that. We would have the access once everybody has signed off on the agreement.

Michael Van Aelst - TD Securities

And in the event that there is a deal on the TPP, are there barriers to trade now into those markets on for sugar?

Edward Makin

Pretty well all of them. I mean if you look, obviously, the United States is the closest and the biggest market for us. But you could pick on country like Japan. Their barrier on tariff basis today would be over a $1,000 a ton. That compares to the Canadian tariff of about $31 a ton. So, yes, there are significant barriers and that's why we think any negotiation with that group, we would get very positive, because right now pretty well all of them are closed market to us.

Michael Van Aelst - TD Securities

Would that mean, I guess as that opened up and then sugar could come in here as well, but given that you're at world prices, you'd be pretty protective in an open market I'd assume.

Edward Makin

Well, I mean the sugar can come in today. There is no need -- on the Canadian side, we're pretty well in open market right now with only $31 million of protection. So there is nothing stopping anybody to shift sugar in here. In short of the two anti-dumping complaints that we have, one against United States and one against Europe, but anywhere else as we've witnessed over the years is entitled to put product into Canada at minimal duty rates. So that will not change going forward. Anything that does change in our view is that there will be some reciprocal action where we might have access into markets that currently shift sugar to us.

Michael Van Aelst - TD Securities

And the last question and I guess it's kind of a general question, I don't really want to talk about the specific contracts. But when you look at your guidance for slightly lower gross margins in the year, do we expect it -- assuming similar, I guess similar mix of contract that you signed that will bring down this volume or bring down this gross margins. Do they all kick-in in January or some of them kick-in later?

Edward Makin

Most of our industrial contracts are typically January, December, but some start early as with even on the consumer side, on the retail side, equally on the liquid base. There are contracts that span years as well as the January starting date. So it's few towards January, December, but there is a fair amount that kicks-in in between before and after.

Michael Van Aelst - TD Securities

And as far as the potential for more competition to impact you this year, is all your business pretty much tied up now for fiscal '14?

Edward Makin

I would say the vast majority is already contracted. There is always some business that can be impacted, but that's no different from every year that we've had in the past. As I said, we've had an open market for many years, so I don't expect anything different on that front to be quite honest.

Operator

And Mr. Makin, we have no further questions in queue at this time. I'll turn the call back to your.

Edward Makin

As there are no further questions, operator, I'd just like to thank everybody for attending today. We look forward to updating you three months from now. Thanks again. Have a good day.

Manon Lacroix

Thank you.

Operator

Thank you very much. And ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. Please disconnect your lines and have a good day.

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