Rogers Sugar's (RSGUF) CEO Edward Makin on Q3 2014 Results - Earnings Call Transcript

| About: Rogers Sugar (RSGUF)

Rogers Sugar Inc. (OTC:RSGUF) Q3 2014 Earnings Conference Call July 30, 2014 5:00 PM ET

Executives

Edward Makin – President and CEO

Manon Lacroix – Vice-President, Finance

Analysts

Christine Healy – Scotia Capital Markets

Michael Van Aelst – TD Securities

Stephen MacLeod – BMO Capital Markets

Operator

Good afternoon, ladies and gentlemen, and welcome to the Rogers Sugar Third Quarter 2014 Results Conference Call. After the presentation, we will conduct a question-and-answer session, which will be open only to financial analyst. Instructions will be given at that time. Please note that this call is being recorded today, Wednesday, July 30, 2014 at 5:00 PM Eastern Time.

I would now like to turn the meeting over to Mr. Ed Makin, Chief Executive Officer. Please go ahead, Mr. Makin.

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

Turning first to our volume, we sold approximately 6,800 tonnes less this past quarter when compared against last year's comparable quarter. The decrease in volume occurred in our liquid and consumer categories, that was partially offset by increased volumes in industrial and export sales.

Industrial sales increased by 1,300 tonnes during the quarter due to additional volume with new and existing customers. Liquid sugar sales as expected decreased for the quarter by approximately 6,600 tonnes as our contract with the HFCS substitutable liquid sugar in Western Canada was completed at the end of March 2014. We expect liquid volumes for the balance of the year to return to more traditional levels.

Consumer volumes were lower by 3,300 tonnes as we did not resigned an important Eastern account and a new multi-year contract with another client has not yet reached full distribution. Year-over-year, we expect the loss and gain to be positive overall. General weakness in the Consumer segment also contributed to the decline in volumes. Export volume is higher by 1,800 tonnes due to timing of deliveries under the Canada-specific quota to the United States.

For the quarter, our adjusted gross margin increased by approximately $1.2 million. On a per metric tonne basis, our adjusted gross margin rate increased by approximately $12 per metric tonne. The prior year's adjusted gross margin included $1.9 million cost for future pension plan updates. Excluding this charge, the adjusted – the gross margin for the current quarter decreased by $700,000.

On a per tonne basis, excluding pension cost, the margin rate was comparable to last year. For the quarter, adjusted EBIT amounted to $9.9 million, an increase of $1.2 million over the comparable quarter's 2013. During the quarter, the company recorded a non-cash expense of $1 million, representing the termination costs associated with the only remaining salary defined benefit pension plan.

Additionally, consulting fees increases the consequence of the process improvement analysis currently underway at the Montreal refinery. These items were offset somewhat by a reduction in employee benefit provisions. Year-to-date, adjusted EBIT now stands at $36.2 million, or approximately $7.7 million lower than last year.

Free cash flow for the third quarter amounted to $5.5 million and this compares to $7.2 million for the same period last year. The decrease in free cash flow was mainly due to higher capital spending due to timing of projects. During the quarter, the company declared a dividend of $0.09 per common share, or $8.5 million.

Also during the quarter, the company entered into a new $10 million five-year interest rate swap agreement at a rate of 2.09%. In the second quarter of 2014, we exercised our right to extend our revolving credit facility through June of 2019. In the third quarter of 2013, we have entered into a five-year interest rate swap agreement at a rate also of 2.09% for an additional amount of $50 million declining to $30 million by the end of the agreement.

In Taber, our thick juice campaign was completed in early July, and we're now estimating refined sugar production for 2014 at approximately 97,000 tonnes. With respect to this year's beet crop our growth climbed to 22,000 acres this past spring, which under normal condition should produce approximately 80,000 tonnes of refined sugar. The reduction in acres is a consequence of an expected carry-forward of refined sugar from 2013 crop due to a reduction in export opportunities.

And finally, labor negotiations for the last remaining smaller bargaining unit at the Montreal refinery continued and we expect satisfactory agreements for both parties in the near future.

And at this point that concludes my remarks. And I will now turn it over to Manon, who will give an update in more detail.

Manon Lacroix

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

Adjusted gross margin for the quarter was $16.8 million compared to $15.5 million last year. As Ed just mentioned, adjusted gross margin of last year included a $1.9 million cost for future pension plan updates. Excluding this expense, adjusted gross margin decreased by $700,000.

On a per tonne basis without this $1.9 million cost, the adjusted gross margin was comparable to the third quarter of fiscal 2013 at $105.61 per metric tonne versus $105.91 per metric tonne this quarter. The slight increase is due to the sales mix with a reduction in lower high-margin liquid sales slightly offset by a decrease in higher margin consumer sales. In the previous quarters we mentioned an unusual breakdown of a boiler at the Vancouver refinery in September 2013, which increased maintenance cost in the last quarter of fiscal 2013, as well as the $1000 [ph] was recorded in the quarter as a reduction of maintenance cost for the settlement of the claim.

Year-to-date, adjusted gross margin was $57.9 million compared to $64.9 million for the same period last year or approximately $122 per metric tonne compared to $137 per metric tonne last year or $151 per metric tonne if we exclude the additional pension cost for 2013.

The largest negative impact on gross margin year-to-date was the unfavorable sales mix as well as $1.5 million reduction in byproduct revenue as the acreage in Taber was reduced by 6,000 acres to 24,000 acres for the 2013 crop. Taber beet factory is the most significant contributor of revenue from byproducts in the form beet pulp and beet molasses.

As discussed in the second quarter, the interruptible gas contract in Montreal increased energy cost by $1.4 million compared to the first-half of 2013 with a total of 49 days interruption compared to 27 days in the winter of 2013.

Finally, the unusual breakdown in Vancouver added $500,000 in maintenance cost after taking into consideration the insurance claim. In addition, higher refining costs and some additional labor costs were incurred in catching up lost production in the first quarter of the year.

For the quarter, administration and selling costs were relatively flat compared to last year and $300,000 higher year-to-date due to timing of expenses. Even though the administration and selling costs for the quarter were stable within the numbers we had higher pension expense and consulting fee offset by a reduction in provision in employee benefits.

As Ed mentioned, the company took the decision to terminate the last remaining salaried defined benefit pension plan. Service costs for this plan had been frozen since 2008. Due to a large deficit the defined benefit plan was never terminated at the time. After the December 31, 2013 actuarial evaluation was completed for this plan the deficit was found to be essentially new, hence the decision to terminate at this time. As such, $1 million was recorded this quarter in administration cost.

As a result of this decision, pension plan contributions are expected to be reduced in fiscal 2014 and further reduced in fiscal 2016. An amount of $3.4 million was contributed in fiscal 2013 for this plan alone and $800,000 was paid this year. The company will have three [ph] defined benefit plans after the termination of the salaried plan.

Distribution cost for the quarter were comparable to last year's third quarter but $700,000 higher year-to-date due to timing in export deliveries under the Canadian and global quotas, one time demurrage cost incurred in second quarter and additional storage cost due to the large carryover of beet sugar inventory at the end of last fiscal year.

When we exclude the mark-to-market gain or loss on the interest rate swaps finance costs were $0.4 million below the third quarter fiscal 2013 due to lower interest rate on the credit agreement and the related interest rate swap negotiated in June 2013. Year-to-date, finance costs were $0.8 million lower than last year.

I will now turn to the outlook for the year.

As previously reported, a multi-year contract with a major consumer account started in January of this year. However, the company did not re-sign an important Eastern consumer account in April 2014. On an annualized basis we anticipate that the volume gain with the multi-year agreement will more than offset the volume loss.

For fiscal 2014 we expect a slight increase in consumer volume compared to fiscal 2013. Looking at exports, the company expects to sell approximately 18,000 metric tonne under the Canada specific quota and the global quota. However, total export volume will be lower than last year, as export sales to Mexico will be negligible.

As Ed mentioned, liquids volume is expected to be low (inaudible) 2014 is expected to be lower than fiscal 2013. Adjusted gross margin rate per metric tonne in fiscal 2014 is expected to be lower than (inaudible) 2013 due to an unfavorable sales mix as well as additional operating cost incurred in the current year as mentioned previously. The company is always looking at ways to reduce its cost through continuous improvement processes and spending on return on investment capital project.

(inaudible) We anticipate to incur more (inaudible). In addition, the (inaudible) progressing well and is expected to be completed by the end of the fiscal year and will start (inaudible) $3 million in investment capital this year.

(inaudible) of which approximately half will be spent (inaudible) considered an investment capital because of its longer payback (inaudible) saving and improved packaging efficiencies. With the approval of this project the company expects capital expenditures for the year to be between $8.5 million and $9.5 million excluding any investment capital projects.

The company has had approximately 75% of its cash requirement for 2015 at prices comparable to those of fiscal 2014. The company completed the actuarial evaluation of all of its pension plans, favorable returns on pension assets combined with an increase in the discount rate contributed to the deficit of all pension plans to be significantly reduced or eliminated.

As a result we expect pension plan contribution for fiscal 2014 to be slightly lower than last year. In the second quarter of this year, the company funded the withdrawal of a senior executive retirement plan. This additional contribution was a one-time event and when combined with the termination of the salaried defined benefit pension plan will further reduce the contribution for fiscal 2015. With that I would like to turn the call back over to the operator for the question-and-answer session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Christine Healy with Scotia Bank. Please go ahead.

Christine Healy – Scotia Capital Markets

Hi, guys.

Manon Lacroix

Hi, Christine.

Edward Makin

Hi, Christine.

Christine Healy – Scotia Capital Markets

Hi, this is my first question. You guys mentioned in your release that your new multi-year consumer contract, could you talk about why it's taking a while to ramp up and when you expect it to reach the full distribution?

Edward Makin

Yes, Christine, we did get the contract going early in the year but it has taken time to wind through the process. I would say even at this stage it is not fully ramped up and that's probably going to take at least another month or so before it does.

Christine Healy – Scotia Capital Markets

Okay. So if we look at fiscal 2015, that's when it will be running in its full run rate?

Edward Makin

Yes, and in fact, within the next month or so I would expect that it'd be running full out at that stage.

Christine Healy – Scotia Capital Markets

Okay. And is it like running right now the half-rate to slightly less than full; is there any kind of color that you can give us there?

Edward Makin

I would say it's running probably at 90% at the moment.

Christine Healy – Scotia Capital Markets

All right, okay. Okay. And then the two investment projects that you have going on in Vancouver, the palletizer and then the specialty packaging equipment. Can you talk about what you expect your payback periods to be for both?

Edward Makin

Manon, do you want to go ahead?

Manon Lacroix

Well, we usually don't give that kind of information but for the palletizer normally investment project will look at return on investment between less than a year to five years so the palletizer is definitely within that timeframe. However, the other one is higher than the five years so that's why we don't consider it investment capital but still it will generate modest savings.

Christine Healy – Scotia Capital Markets

Okay. And then just lastly Manon, you're going through all the pensions and there's so many moving pieces there, can you just, I guess confirm what you expect the cash flow impact of the pension changes to be for next year. It sounds like it was $3 million less cash outflow, is that right?

Manon Lacroix

Approximately yes.

Christine Healy – Scotia Capital Markets

Okay, great. Thanks so much guys.

Edward Makin

Thank you.

Manon Lacroix

Thanks.

Operator

Your next question comes from Michael Van Aelst with TD Securities. Please go ahead.

Michael Van Aelst – TD Securities

Hi, good afternoon.

Edward Makin

Hi, Michael.

Manon Lacroix

Hi.

Michael Van Aelst – TD Securities

So a number of question for you, I guess, as far as the exports are concerned, what's left to ship this year?

Edward Makin

At this stage Michael, I think the balance of our U.S. quota and other shipments down into the Caribbean and some I would call them peripheral shipments to elsewhere in the world.

Michael Van Aelst – TD Securities

Okay. So are those – are you starting to see some traction in getting meaningful exports to other markets?

Edward Makin

I would say that it’s been very difficult. We have had our traditional exports into other parts of the world and they have been maintained. We have been successful in moving other products, higher value added products into – even into the United States this year as well. So it’s been a tough slog as you can imagine, but we've found little bits and pieces here and there that'd be quite meaningful.

Michael Van Aelst – TD Securities

Okay. You talked about a drop in the byproduct revenue and an increase in the energy cost, was all that in the first half or some of that – any of that in Q3?

Manon Lacroix

On the byproduct revenue there is a bit in Q3, but it’s not significant, it was more significant in the prior quarters and that’s why we've discussed this in the quarter specifically. For the energy, it was all in the second quarter as we discussed in the past.

Michael Van Aelst – TD Securities

Okay. And you talked about the gross margin being down year-over-year in fiscal 2014, but for the fourth quarter, shouldn’t that increase given the mix improvement?

Manon Lacroix

Well, yes. There is going to be less liquids for sure. I would say that they will not – it’s not going to be a decline, but it will be around the same as last quarter – last quarter last year, sorry.

Michael Van Aelst – TD Securities

Okay. And then you talked about CETA in your outlook statement and that you've been talking to – some European customers already. Should that deal get ratified at some point, what's your blending capacity at this point, your unused blending capacity at this point?

Edward Makin

I would not want to give it out in detail, Michael, but let’s just say that we got more than adequate capacity to handle anything that comes under CETA and then a little bit more. So we would not be constrained by anything that is currently envisioned under CETA.

Michael Van Aelst – TD Securities

Okay, great. And what's your CapEx outlook for fiscal 2015 and how much of that is maintenance?

Manon Lacroix

Well, at this point it will be around this year – the same level of this year.

Michael Van Aelst – TD Securities

Around $9 million maintenance.

Manon Lacroix

Approximately yes.

Michael Van Aelst – TD Securities

And what's your investment CapEx, is it around the $3 million mark again.

Manon Lacroix

We always shoot for approximately $3 a year.

Michael Van Aelst – TD Securities

All right. That’s it for now. Thank you.

Edward Makin

Thanks, Michael.

Operator

Your next question comes from Stephen MacLeod with BMO Capital Markets. Please go ahead.

Stephen MacLeod – BMO Capital Markets

Thank you. Good evening.

Edward Makin

Hi, Steve.

Manon Lacroix

Hi.

Stephen MacLeod – BMO Capital Markets

Just wondering, you mentioned you hired a process improvement firm in Montreal and this sort of how this (inaudible) cost reduction opportunities, is there any way to sort of begin to quantify what the magnitude of some of those initiatives could look like?

Edward Makin

Yes, I think, no, Stephen. At this stage we are less than halfway through the process. I think the only thing that – the word that Manon used was meaningful savings, and that’s about as far as we are prepared to go at this stage of the game.

Stephen MacLeod – BMO Capital Markets

Okay. And then on Taber, the plantings are a little bit down for this year and you have some, because of carryover sugar beets from last year. Are you incurring incremental sort of warehousing costs on the carryover from last year and do you expect that to continue, I mean?

Edward Makin

Well, I don’t think there is anything that is abnormal in that respect, and that was actually one of the reasons why the acres were (inaudible) normal this year at all.

Stephen MacLeod – BMO Capital Markets

Okay. And then can you just talk a little bit about, if your sugar buying has changed at all with the recent movements in the sugar price and I – most in the Sugar Publications would insinuate that there is a sort of a still a bearish view on the pricing, I am just wondering if that’s something that – how that impacts your sugar buying if at all?

Edward Makin

It doesn’t really. I mean we operate on a completely hedge basis. So with the obvious statement being, it's always easier to sell a cheaper product than it is more expensive. The fact that sugar is trading at $0.16 or $0.26 really doesn’t impact us at all. What we really look for is quality supply with a reliable supplier and we're in good shape on that front going forward for quite some time.

Stephen MacLeod – BMO Capital Markets

Okay. That’s great. Thank you very much.

Edward Makin

Thanks, Stephen.

Manon Lacroix

Thanks, Stephen.

Operator

(Operator Instructions) Your next question comes from Andre Leno [ph] with National Bank. Please go ahead.

Unidentified Analyst

Hi, good afternoon.

Manon Lacroix

Hi.

Unidentified Analyst

I had a quick question on the gross margin. I was wondering what do you expect for at least like early 2015, I mean, given the change in sales mix, do we expect it to increase a little bit year-over-year or closer to flat?

Manon Lacroix

Well, we – our margins are going to be like – the impact on the liquid side that next year the contract is over with, so we will have a bit of a positive upswing. But we'll give more direction at the end of the year.

Unidentified Analyst

Okay. Thank you.

Manon Lacroix

Next?

Operator

Your next question comes from Michael Van Aelst with TD Securities. Please go ahead.

Michael Van Aelst – TD Securities

All right. I just wanted to get back on to the gross margin outlook for the fourth quarter. From what I recall Q4 last year I had a number of extra costs, where there is the breakdown in Vancouver and I think you had some higher raw material cost with Taber if I'm not mistaken and things like that. So why like what are the offsets in Q4 this year that are preventing you from showing an improvement when you take into consideration that you don’t have some of those extra cost and you do have a – and you have less liquid, so your mix should be better?

Manon Lacroix

Our mix should be better, but the – we have more industrial sales and also while exports we had the Mexico in the last quarter last year, so that was helpful. I would say that it’s still the continuation of the product mix.

Michael Van Aelst – TD Securities

Okay. What's a competitive environment looking like right now, is there any – is there anything worth mentioning or is it pretty, is it seems to have calm down?

Edward Makin

It never calms down, Michael. I mean, it’s always pretty intense. I mean, they – that question gets asked a lot these days, but I honestly say it’s business as usual. The marketplace is always intensively competitive and we try to manage our business accordingly. We don’t see anything significantly different plus or minus from what we've experienced over the last a little bit.

Michael Van Aelst – TD Securities

Okay. Thank you.

Edward Makin

Okay, thanks.

Manon Lacroix

Thanks.

Operator

There are no further questions at this time. Mr. Makin, I'll turn the call back over to you.

Edward Makin

Thank you, operator. And if there are no further questions, I just like to thank everybody for dialing in today, and we look forward to updating you in the next three months. Thank you, again. Good afternoon to all.

Manon Lacroix

Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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