Rogers Sugar's CEO Discusses F1Q 2014 Results - Earnings Call Transcript

|
 |  About: Rogers Sugar Inc. (RSGUF)
by: SA Transcripts

Rogers Sugar Inc. (OTC:RSGUF) F1Q 2014 Earnings Conference Call January 30, 2013 5:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Rogers Sugar Inc. First Quarter Results 2014. [French language spoken]

[Operator Instructions]

It is now my pleasure to turn the conference over to Mr. Ed Makin, Chief Executive Officer [French language spoken] and Mr. Manon Lacroix, VP Finance, Rogers Sugar, Inc. Please go ahead.

Edward Makin

Thank you, operator, and good afternoon, ladies and gentlemen. Joining me today for this conference call is Manon Lacroix, our Vice President of Finance.

In keeping with our usual format, I'll start by commenting briefly on some of the highlights for the quarter. Thereafter I will then turn the call over to Manon who will review the financials in more detail, and talk about the outlook for the remainder of the fiscal year. We'll then open up the phone lines for any questions you might have.

Turning first to our volume, we sold approximately 5,800 tonnes more this past quarter when compared against last year's comparable quarter. The increase in volume occurred in all our domestic segments of our business, but was partially offset by lower export sales. Industrial sales increased by 4,700 tonnes, and our consumer volumes were also higher by 1,300 tonnes due to timing of features by some of our retail accounts. Liquid volume was also up by approximately 3,600 tonnes as we continued to enjoy sales to high-fructose corn syrup substitutable customers.

Exports decreased by approximately 3,800 tonnes, mostly due to lower sales to Mexico. We do not anticipate any extraordinary access to the U.S. this year, although our normal candidate-specific quota of approximately 12,000 tonnes will be augmented by additional sales through the U.S. global quota of approximately 5,600 tonnes.

For the quarter, our adjusted gross margin decreased by $4.6 million when compared to last year. Our adjusted EBIT decreased to $17.9 million, which was $4.5 million lower than the comparable quarter of 2013. On a per metric tonne basis, our adjusted gross margin rate decreased by approximately $35 per metric tonne.

The decrease in the margin rate was due to an unfavorable sales mix that included higher industrial liquid sales, combined with lower high-margin export volumes. Additionally, maintenance costs in Vancouver were higher by approximately $1 million due to an unusual mechanical breakdown that occurred at the end of fiscal 2013 but continued to impact the refinery through October 2014.

For the quarter, free cash flow amounted to $13.6 million as compared to $18.1 million in fiscal 2013. The decrease in free cash flow was mostly due to lower operating results.

During the quarter the company declared a dividend of $0.09 per common share for a total amount of $8.5 million.

Taber beet harvest and subsequent slicing campaign was completed by late January. In total we expect to produce approximately 95,000 tonnes of refined sugar from this year's crop once our thick juice one is completed later on in the spring. This amount will be lower than last year's volume due to a reduction in planted acres.

And finally, labor negotiations continue for the last remaining smaller bargaining unit at the Montreal refinery. We expect to conclude an agreement for this year in the very near future.

And at this point I'll turn the call over to Manon.

Manon Lacroix

Thank you, Ed. I will now go over the first quarter results in more detail.

Adjusted gross margin for the quarter was $24.8 million compared to $29.4 million last year. On a per tonne basis, adjusted gross margin was approximately $163 per metric tonne compared to approximately $188 per metric tonne in the same quarter last year, a decrease of approximately $35 a tonne.

As Ed mentioned, the unfavorable sales mix continued to negatively impact gross margin rate and is the main reason for the decrease compared to the first quarter of 2013. In addition, operating expenses were higher than last year for both the Vancouver and Montreal refinery. At yearend we talked about an unusual breakdown in Vancouver of one of its boilers. Unfortunately, the breakdown added $1 million in maintenance costs in the first quarter of the year as further issues were encountered. The good news is that the problem is now resolved and we do not expect to have any additional costs in the second quarter.

Related to this issue, Vancouver also incurred additional refining costs in order to catch up on lost production. At the end of December, Vancouver's inventories were back to our normal level.

Now looking at Montreal, you may recall that the refinery had an interruptible gas supply contract. Due to an unusual cold December, the Montreal refinery was interrupted for multiple days during the month, which is exceptional. More expensive auxiliary gas was purchased and an additional $400,000 was spent in energy costs. In fiscal 2013, the Montreal refinery was only interrupted during the second quarter.

Finally, byproduct revenues were approximately $800,000 lower than last year. Taber beet factory is the most significant contributor of revenues from byproducts in the form of beet pulp and beet molasses. The acreage was reduced by 6,000 acres in fiscal 2014 to 24,000 acres and therefore reduced byproduct revenues for the quarter. From a processing point of view, the Taber factory operated well.

Administration costs as well as distribution costs were comparable to last year. When we exclude the mark-to-market gain or loss on the interest rate swap, finance costs were $0.2 million below the first quarter of fiscal 2013 due to lower interest rates on the new negotiated credit agreement and related new interest swap. The company is aggressively pursuing return on investment projects in order to reduce costs. As mentioned in the last quarter of fiscal 2013, the company committed to spend $2.2 million on a new product sizing [ph] station at the Vancouver refinery, of which $1.6 million will be spent in 2014. Labor savings are expected to start in the last quarter of the current year. The company is also looking at other investment projects that will reduce energy or labor costs.

I will now turn to the outlook for the year. As Ed mentioned, the company was able to enter [ph] 5,600 metric tonnes under the U.S. global quota that opened and closed on October 1st. However, even when considering this additional volume, total export volume will be lower than last year as export sales to Mexico will be negligible. A new multiyear national agreement with one major retail account started as of the beginning of January and will increase overall consumer volume in fiscal 2014. Total company sales volume in fiscal 2014 is expected to be comparable to fiscal 2013 as higher consumer industrial volume will be offset by lower export volume.

Adjusted gross margin rate per metric tonne in fiscal 2014 is expected to be lower than fiscal 2013 due to an increasingly competitive environment in the domestic consumer and industrial segment. In addition, large crops in the U.S. and Mexico are putting downward pressure on selling prices in the U.S. The company has had approximately 75% of its gas requirements and related foreign currency for 2014 and the remaining requirements will be purchased on the spot market.

With the increase in discount rate at the end of fiscal 2013, pension expense is expected to be approximately $1.1 million lower than last year's reported pension expense. As we mentioned at yearend, contributions to defined benefit plans will increase in fiscal 2014 due to two one-time payments. In the second quarter the company will fund the withdrawal of a senior executive following his retirement. Later in the year the company will fund the future benefit plan update committed to in fiscal 2013.

In total, the defined benefit plan contributions are expected to be approximately $13 million in fiscal 2014. Actuarial evaluations for three of the company's four defined benefit plans are required as of December 31st, 2013. Results from the new actuarial evaluation will be known later this year and may impact contributions for the current year.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions].

And our first question is from the line of Michael Van Aelst with TD Securities. Please go ahead.

Michael Van Aelst – TD Securities

Hi. Good afternoon guys.

Edward Makin

Hi, Michael.

Michael Van Aelst – TD Securities

First question for you, you talked, in your guidance, you talked about gross margin pressure coming from the competitive pressures both domestic and from imports. Can you give us an idea of to what extent that was reflected in Q1 and how much or it more so [ph] to be felt in future quarters?

Edward Makin

Michael, the, you know, we've talked about competitive pressures in the past and it is always an ongoing feature in the business, so it is something that is perhaps a little stronger than we've experienced in the past. I think what we're looking at in the first quarter is likely to continue through whatever we've experienced. We do not see it getting any worse than it currently is, and it will be reflected throughout the year.

Michael Van Aelst – TD Securities

Okay. All right. Secondly, the higher refining cost that you had in Vancouver that was required to catch up on the lost production, can you give us an idea how much that was?

Manon Lacroix

Well, it was not significant, but it was still higher than it was last year.

Michael Van Aelst – TD Securities

Okay. And then the liquid volumes the increase this quarter was only about half of what it's been in the last two quarters. So is that contract starting to wind down or is it just a timing?

Edward Makin

No, there is -- the contract that I think you're referring to, Michael, was one of the major beverage users out West, and that's still in effect. What I think we've seen is a bit of a softening of some other users, more East in Canada [ph] to be more precise. And that could be just a timing issue, the two or three customers that seem to be a little slower. But at this stage of the game, we have no indications whether that's an ongoing trend or not.

Michael Van Aelst – TD Securities

Okay. And so based on your comments, it sounds like there shouldn't be any more usual expenses in the next couple of quarters unless -- other than possibly on the energy side.

Edward Makin

Well, we certainly hope not. I mean these unusual things, as you'll appreciate, just kind of come out of the blue, and certainly the boiler incident that Manon referred to was totally unexpected, and fairly significant given the costs involved. But these things do happen from time to time, as Manon said. What expenses we've already incurred, we don't anticipate that at all going forward. We're just hopeful that we don't see anything else like that.

Manon Lacroix

Yeah. And as Ed said, I think we'll see on the gas the interruption days, depending on the weather how it continues, we'll see it has an impact on the Montreal refinery.

Michael Van Aelst – TD Securities

Okay. So the first quarter tends to be your strongest given the seasonality in the business and the competitive pressure it seems will still be there. So it looks like you could be short of funding your dividend this year. I guess the question I have would be, how do you look at this from I guess the board perspective or from a company perspective in terms of funding the dividend, how comfortable or how long would you hold -- would you kind of continue the same dividend before having to revisit that dividend policy? You know, how long can you wait to see how the industry is going to turn around and how quickly you might be able to recapture some loss, export volumes, things like that?

Edward Makin

Michael, we've, from a dividend point of view, we are comfortable where we are today. As we mentioned many times in the past, we give no assurances about future payout. But where we sit today, we feel comfortable with what we've got on dividend policy.

Manon Lacroix

And it is reviewed on a quarterly basis.

Michael Van Aelst – TD Securities

Okay. Thank you.

Edward Makin

Thanks, Michael.

Manon Lacroix

Thank you.

Michael Van Aelst – TD Securities

Thank you.

Operator

And our next question is from the line of Stephen MacLeod with BMO Capital Markets. Please go ahead.

Stephen MacLeod – BMO Capital Markets

Thank you. Good afternoon.

Edward Makin

Hi, Stephen.

Manon Lacroix

Hi.

Stephen MacLeod – BMO Capital Markets

Hi. Just on the consumer side, so you had already started shipping to the new customer in January, so that number reflects about a month, is that right?

Edward Makin

No. In the first quarter, Stephen, there wouldn't be any shipped at all on that. It's a January 1st start.

Stephen MacLeod – BMO Capital Markets

Right. Okay. And are you able to discuss what the magnitude of that will be?

Edward Makin

Absolutely not. I mean that would be something -- we don't disclose names or volumes with anybody, Stephen.

Stephen MacLeod – BMO Capital Markets

Okay.

Edward Makin

We'll give you as much guidance as we could by saying a major account and that's about the extent it'll be.

Stephen MacLeod – BMO Capital Markets

Yeah. No, that's fair.

And then on the export side, in the outlook you mentioned that you're looking elsewhere for exports. Are you -- where else are you looking at, what markets are available and economical to export to right now?

Edward Makin

Well, typically in the past we've been fairly successful in the Caribbean. North Africa is usually a place that we're able to get into. And even countries like India who are the world's second largest producer, we will ship sugar over there on pharmaceutical-grade sugar we do quite frequently. So I think what we're looking to do is trying to expand into those areas, as well as Southeast Asia and try and use the Vancouver refinery from that point of view.

Stephen MacLeod – BMO Capital Markets

Okay. And then with respect to the Taber expectations, so you have 95,000 -- so you expect 95,000 metric tonnes of refined sugar. How does that compare to the current demand outlook for Western Canada? And do you expect to incur any incremental warehousing costs?

Edward Makin

There might be a small incremental cost on what we have. We came into the season with relatively low inventories. So we're comfortable with 95,000 at this point in time.

Stephen MacLeod – BMO Capital Markets

Okay. Okay. And then finally, just to follow up from the previous set of questions, it sounds as though for liquid volumes, I mean as you cycle the new account that you captured in Q2 of last year, are you seeing some movement away from liquid volumes or do you think, based on the corn price differential, you might see some volumes going back in?

Edward Makin

Yeah, I think, Stephen, the value of corn obviously per bushel has dropped pretty significantly since we last put that contract on the book. I think corn is probably trading about 4-1/4 a bushel right now. Admittedly, sugar prices have come off as well, but I think the differential has expanded to the point where we would expect HFCS to recover at some point the volume that we had managed to snap off 12 months, 18 months ago.

Stephen MacLeod – BMO Capital Markets

So you expect that to go back to HFCS?

Edward Makin

Yeah, unfortunately, from our point of view, yes.

Stephen MacLeod – BMO Capital Markets

Right. Okay. Okay, that's great. Thank you very much.

Edward Makin

Thanks, Stephen.

Manon Lacroix

Thank you.

Operator

Thank you. And our next question is from the line of Fred Veep [ph], private investor. Please go ahead.

Unidentified Participant

Could you clarify the special dividends?

Manon Lacroix

Well, last year we declared an additional dividend based on the earned cash flow that we've received in the past five years. So between 2008 and 2012 we had additional cash flow of 65 -- close to $65 million, and we issued a special dividend of $0.36 to give back to the shareholders.

Unidentified Participant

Is there a special dividend for '14?

Manon Lacroix

At the moment, no.

Unidentified Participant

No?

Manon Lacroix

No.

Unidentified Participant

Okay. Thank you.

Edward Makin

Thank you.

Operator

Thank you. And our next question is from the line of Christine Healy with Scotia Bank. Please go ahead.

Christine Healy – Scotia Bank

Great. Hi guys.

Edward Makin

Hi, Christine.

Manon Lacroix

Hi.

Christine Healy – Scotia Bank

Just have a question on the large U.S. sugar crop they have. I know the Canadian Sugar Institute issued a complaint late last year that the U.S. has found a loophole that allowed sugar in the can. I think it was under some sort of re-export program. So they were just concerned that they found a way to get volumes illegally dumped here. Just wondering if you guys have seen any impacts on that. I haven't seen an update from the Canadian Sugar Institute in a while on that.

Edward Makin

I mean at this stage, Christine, StatsCan [ph] is usually two to three months behind the reporting of any imports. And we haven't seen anything through, I think it's October, of significance that would put any of the additional radar screens going on. But it's still a little early in the game. I think we're still very concerned about it. The re-export program is absolutely, this newer portion, was absolutely in our mind a subsidized venture that the USDA and U.S. government has entered into.

But the reality is at this point we haven't seen or haven't felt anything. And I think even from our sales and marketing perspective, we've not run into anything that would indicate that volumes of substance are coming across the border.

Christine Healy – Scotia Bank

Okay. Great. And then I guess a second, on the sugar price, so it's fallen quite significantly here since October. I know that it's just Taber volumes are typically exposed to movements in the commodity price. But just curious if there's some way that you can quantify what margin impact did that have in the quarter, was that material or is it a smaller impact?

Edward Makin

Relatively small, Christine. Without getting into the details of our contract with the growers, right now I would say it's negligible. Customs already covered some product ahead. If it continues to drop, obviously, then that experience starts to get a little worse. But where we are right now is not -- is manageable, let's put it that way.

Christine Healy – Scotia Bank

Okay. Okay, great. That's it for me. Thanks.

Edward Makin

Thank you, Christine.

Manon Lacroix

Thank you.

Operator

Thank you. [Operator Instructions]

Our next question is a follow-up question from the line of Michael Van Aelst with TD Securities. Please go ahead.

Michael Van Aelst – TD Securities

Thank you. The U.S. export, the global quota that opened up for a day, what was the reason for that given the oversupply in the U.S.? Why did that open up?

Edward Makin

There is a global quota every year, Michael, and that's on October 1st, the U.S. government put in, in addition, if you remember, we have Canada-specific, the other portion is the WTO commitment that United States has is called a global quota. And so we always, every year, we've always applied sugar against that. And in most instances we only get a little bit. This year we were rather fortunate in that everything we had down there which was a full 56,000 tonnes cleared and was accepted.

Michael Van Aelst – TD Securities

Okay. So when should we see that recorded through the volumes, the revenues?

Edward Makin

I think it's, you know, in concert with Canada-specific, it will be allocated over the next nine months. There's no rush. It's in there. Some are sold, some are still sitting in warehouses. And we'll try and extract the best amount of dollar value out as we can. So we're not in any pressure to make sure that it's sold. It's all in, as long as it's in before September 30th, you're fine. And we're already in that situation. So it should just be marketed accordingly over the next nine months.

Michael Van Aelst – TD Securities

Okay. Ed, that -- the smaller Montreal unit that -- are they holding out or is it just taking time to get to that contract?

Edward Makin

I think what we just said is taking time, Michael, without going into all the details, that would probably be sufficient. It is a very, very small unit and it's had a lot of complications attached to it. I really don't think it's worth going into much more detail than that. We're not particularly worried about it. We think we will come to terms of agreement in the near future. It's just taken a long time to get it squared away.

Michael Van Aelst – TD Securities

Okay. Fair enough. And can you give us some more color on the import competition that you alluded to?

Edward Makin

The imports, as you know, over the years, have always been in the order of 5% or less of the market. There is great talk about more import competition. And where we sit here today, we have not run into anything abnormal. That's not to say our competitor has not. But we, Rogers Sugar, have not -- we don't believe we've lost any sales to any extraordinary import asset at this stage. That might change tomorrow. But as we sit here today, that's where we see it.

Michael Van Aelst – TD Securities

Then I'm confused a bit. Why did you mention it as one of the reasons for lower gross margins?

Edward Makin

I think what we're referring to is imports in general. We weren't referring to any additional imports that you're referring to. Imports have always been a feature. It can be aggressive on the retail side and on the industrial side. And that's what I think we've seen a little in the last six months or so.

But nothing exceptional over and above. I know there's a lot of rumors out in the marketplace about additional import competition. We haven't really run into anything on that nature. What we're seeing is what we would classify as traditional competition, which is always there.

Michael Van Aelst – TD Securities

Okay. Thank you very much.

Edward Makin

Thanks, Michael.

Manon Lacroix

Thank you.

Operator

And our next question is from the line of Neil Peinwit [ph] who's a private investor. Please go ahead.

Unidentified Participant

Yeah. Just listening to the call, it seems that the company is really under pressure from quotas into the U.S., from imports, from price squeezing, probably look to get higher natural gas cost. It looks like you're getting boxed into a corner. How do you get out and really expand the growth?

Edward Makin

I think it's one of the cyclical items that every period of time there seems to be an issue in the Canadian refined market where things do get pretty tight. And I think you put your finger on several of the items at the moment that there's no denying there's a lot of competition going on. Ultimately though, I won't call it peace because there's no any such thing, but I think that sometime logic starts to rein in that the margins that are out there are a little soft and they can be improved upon. And I think when the cycle turns around, that's when everything starts to come a little better.

But I think it's more of a patience game right now than anything else. The Canadian market is not going to grow. Per capita consumption is pretty static, with the exception of population growth, that's the boxed-in number that you referred to. And as far as exports are concerned, what we have enjoyed over the last number of years going into the U.S. probably is not there, with the exception of the global quota that we talked about.

Undoubtedly there are items that come up that we try to exploit whenever we see it. We've still got nine months to go over this year, and so we haven't given up all hope on improving our lot where we sit right now.

Manon Lacroix

On a cost basis, we're, as I said, we're actively pursuing investment project where we can -- we could reduce our operating costs. So that's a focus that we're putting this year in particular.

Unidentified Participant

Okay. It sounds like you have a real job on your hands.

Edward Makin

All the help we can get if you feel like it.

Unidentified Participant

Oh God. Yeah, okay. Thanks very much.

Edward Makin

Thank you.

Operator

Thank you. And there are no further questions to make, and I'll turn the call over to you.

Edward Makin

Operator, if there are no further questions, I would just like to thank everybody for joining us today, and we look forward to talking and updating you in three months' period. Thank you again.

Manon Lacroix

Thank you.

Operator

[French language spoken]

Ladies and gentlemen, this concludes the conference call for today, we thank you for your participation and ask that you please disconnect your line.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!