Rogers Sugar's (RSGUF) CEO John Holliday on Q3 2016 Results - Earnings Call Transcript

| About: Rogers Sugar (RSGUF)

Rogers Sugar Incorporated (OTC:RSGUF) Q3 2016 Earnings Conference Call July 27, 2016 5:00 PM ET

Executives

John Holliday - CEO

Manon Lacroix - VP, Finance

Analysts

George Doumet - Scotiabank

Michael Van Aelst - TD Securities

Stephen MacLeod - BMO Capital Markets

Operator

Good afternoon, ladies and gentlemen, and welcome to the Rogers Sugar Third Quarter 2016 Results Conference Call. After the presentation, we will conduct a question-and-answer session, which will be open only to financial analysts. Instructions will be given at that time. Please note that this call is being recorded, Wednesday, July 27, 2016, at 5 PM Eastern Time.

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

John Holliday

Thank you, operator, and good afternoon ladies and gentlemen. Joining me for today’s conference call is our Vice President of Finance, Manon Lacroix. In keeping with our usual format, I will start by commenting on some of the highlights for the quarter and provide some updates on our key strategies. Thereafter, I will turn the conference call over to Manon, who will review the financials in more detail and talk briefly about the outlook for balance of the fiscal year. We will then open up the phone lines up for questions-and-answers.

I’m pleased to share that in the third quarter volume increased by approximately 8,800 metric tons versus last year’s comparable quarter, strong sales demand across the industrial and export segments accounted for the majority of the growth. On a year-to-date basis, the company sold approximately 22,100 tons more than in fiscal 2015 or the same period. Consistent with second quarter industrial sales represented the largest portion of the increase, but all segments experienced growth when compared to fiscal 2015.

We continue to hold the view that the business is benefiting from several trends, first, a combination of a generally weaker dollar, positive spreads between the number 11, and number 16 commodity markets, making it attractive for Canadian value-added exporters of sugar containing products to expand production at their Canadian plants. Given that sugar usage of Canadian value-added exporters represents a significant portion of the total market demand changes in trends in this segment have an important impact on the industry.

Secondly, we are observing changes in a trend of food and beverage companies to reformulate to simpler more natural ingredients. We have and continue to see this trend manifest itself as a substitution of high fructose corn syrup for natural refined sugars. Traditionally, this substitution has been driven strictly by economics. Today we are seeing consumer preferences influence the conversion decision and thus raising the economic threshold where companies will convert. All these factors are providing moderate growth to the overall market.

As we reported last quarter, we confirmed the signing of two, three year contracts totaling 45,000 tons per metric ton for liquid and the export segments. The annualized volume lift from this business will be 35,000 metric tons starting in the first quarter of 2017. As a result, we contracted and planted 28,000 acres of beets. Our agricultural planning in Taber plant have been focused on readying for this step change in production. Planting and growing conditions have been good and the plant is on target to begin production two weeks earlier than normal in late September.

The company continues to look for incremental business opportunities that allow us to create new sales opportunities when favorable arbitrage conditions develop between the price certainty of established lower contracts for the 2017 and 2018 crop years versus pricing of comparable sugar in export markets. These market conditions coupled with our long-term and proven relationship with existing customers have created an environment where we can act quickly to expand our business when favorable market conditions exist.

During the quarter, we experienced six day work stoppage in Montreal. A well considered contingency plan kept customers well-informed and ensured that the Montreal plant back-office staff continued to work efficiently without any disruptions to services supplier to other Lantic locations. Before handing the call over to Manon to provide more detail on the financials, I wanted to provide a brief update on Taber and our key operating strategies specifically operational excellence, market access and acquisitions.

Taber's juice campaign was completed in early June, the beet juice quality and plant reliability were excellent, resulting in total production cost per ton lower than last year. We continue to project production of approximately 90,000 tons. Our operational excellence initiatives continue to be a priority for the business. We continue to benefit from increased score carding and standardizing of our business around best practices, capital spending for fiscal 2016 as previously communicated will increase versus prior years consistent with our plan. We will continue to invest to increase plant reliability and continue to update buildings and operations and to reduce our operating costs.

In the third quarter of fiscal 2016 our market access strategy was focused on SEDAR. We have been reviewing and analyzing the final quarter rules and we are working on how best to commercialize this opportunity. Despite some of the progress in these areas it is safe to say that the Brexit vote has created some uncertainty around the timing of the SEDAR ratification, which had been expected to be in place to commercialize in 2017.

During the quarter, the company continued to look at acquisitions, the business is financially well positioned to pursue strategic business opportunities that offer the right fit, the growth profile and risk adjusted earnings potential. Finally, before handing the call over the Manon I'm pleased to confirm the corporation declared a dividend of $0.09 per share for a total payout of $8.4 million.

I will now turn the call over to Manon.

Manon Lacroix

Thank you, John. I will now go over the third quarter results in more detail. First I'd like to briefly address the work stoppage at the Montreal refinery during the quarter. As John mentioned, a contingency plan had been put in place which included increasing inventory levels, transferring products from other Lantic locations, rerouting other order pickups and purchasing sugar from third-parties. Overall the total financial impact of the work stoppage for the quarter included in gross margin, administration and selling expenses and distribution costs amounted to 1.3 million.

Now looking at the third quarter in more detail, adjusted gross margin was 20.4 million which represents an increase of 0.9 million versus the comparable quarter last year. However, a pension upgrade was granted to the hourly employees as part of the negotiation process, which resulted in a onetime pension charge of 2.4 million. Excluding this non-cash pension charge, adjusted gross margin for the quarter was 3.3 million above last year.

As John just mentioned volume for the third quarter increased by 8,800 metric tons and was a significant contributor to the improved adjusted gross margin. In addition, byproduct revenues were also higher than the third quarter of fiscal 2015. A third positive element is that the Taber factory had good harvest of beet quality, operated well during and throughout the slicing campaign and subsequent juice campaign, which helped reduce overall beet costs. Incremental costs related to the work stoppage amounted to 0.8 million to purchase third-party refined sugar, which did offset some of the positive variation.

On a per ton basis, adjusted gross margin for the quarter was $120.11 per metric ton compared to $120.91 per metric ton for the third quarter last year. For the quarter, the pension charge and the incremental costs related to the work stoppage had a negative impact of $14.21 per metric ton and $4.782 per metric ton respectively. Excluding these two elements once again, the additional volume was beneficial to generate efficiency gains with higher throughputs at the Montreal and Vancouver refineries thus reducing fixed costs per metric ton.

In addition, as I just mentioned, the overall performance of the beet campaign contributed to the reduction in beet costs, therefore increased the adjusted margin rate per metric ton. Administration and selling expenses for the quarter were 0.6 million higher than the same period last year, 0.2 million of which represented additional costs as a result of work stoppage. The remainder of the increase in administration and selling expenses is mainly explained by higher legal costs and employee benefits due to timing.

Distribution costs for the third quarter were 0.4 million higher than last year, most of which is explained by additional costs due to the work stoppage. Adjusted EBIT for the quarter was comparable to the third quarter last year at 12.3 million, but included 1.3 million in incremental work stoppage costs as I just explained.

Now turning to the year-to-date results, adjusted gross margin was 66.5 million, compared to 61.8 million last year. The adjusted gross margin rate amounted to $136.37 per metric ton versus $132.71 per metric ton in fiscal 2015. The improvement in the year-to-date results for both the adjusted gross margin and adjusted gross margin rate is explained primarily by the solid performance for the second and third quarter offset somewhat by the negative adjustment I just mentioned with regards to pension and incremental work stoppage cost.

Administration and selling expenses at 14 million are 1.5 million lower than the comparable period last year. As we discussed previously, the company reverse a 1.2 million non-cash accrual for the termination and settlement of the Western salaried defined benefit pension plan. Excluding the impact of this pension plan settlement the administration and selling expenses were $0.3 million lower than last year. The decrease is mostly explained by a reduction in consulting fees, which were incurred in the first quarter of fiscal 2015 to complete the process improvement review at the Montreal refinery, slightly offset by the incremental costs incurred in the third quarter relating to the work stoppage.

Distribution costs were 7.7 million versus 6.5 million last year. A year-to-date negative variance is also explained by additional transfer costs between our various facilities, due to strong demand and due to the contingency plan put in place for the work stoppage. Adjusted EBIT year-to-date was 44.9 million compared to 39.9 million last year, an increase of 5 million or 12% mainly due to higher adjusted gross margin and lower administration and selling expenses.

Excluding the mark-to-market adjustment on the interest rate swaps, finance costs were 0.3 million and 0.6 million lower than the third quarter last year and year-to-date respectively. Since the overall amount drawn under the revolving credit facility was lower in fiscal 2016. During the third quarter, the company extended its revolving credit facility for an additional year and it will now mature in June 2021. The company repurchased and cancelled 178,600 common shares through the normal course issuer bid so far this fiscal year. No shares were repurchased during the current quarter.

For the quarter free cash flow amounted to 9.8 million versus 8.9 million in fiscal 2015. Year-To-Date free cash flow amounted to 30.4 million compared to 28.8 million in fiscal 2015. The increase for the quarter and year-to-date is mainly explained by higher adjusted growth margin, slightly offset by a higher capital expenditures, interest paid, pension contributions and income tax paid.

I'll now discuss the outlook for the last quarter of 2016. As a reminder, the last quarter of fiscal 2015 included 14 shipping weeks, being one additional week when compared to the fourth quarter this year. Industrial sales volume was strong during the second and third quarter of the current year. For the last quarter, we expect volume to be comparable to last year, once adjusted to convert to a 13 shipping week basis. With regards to the liquid and consumer segments, we are also expecting them to be comparable to last year once adjusted to reflect a period of 13 shipping weeks.

We anticipate export volume to finish slightly below the fourth quarter of fiscal 2015, due mostly to the additional shipping week. Overall sales volume for fiscal 2016 is expected to exceed fiscal 2015 even without adjusting for the additional week last year. We expect administration and selling expenses to be lower than last year, this is a positive variation year-to-date. In addition, the fourth quarter of fiscal 2015 included cost that are not expected to reoccur such as an accrual for the Western salaried pension plan termination, consulting fees for the Western salaried pension plan termination and CITT proceeding, recruiting fees and bad debt expense.

With regards to distribution cost, we expect the last quarter of the year to be lower than last year, but we anticipate overall distribution cost to be higher for the full year. Finally, two of the four bargaining agreements for the Montreal refinery were settled during the quarter. The remaining two smaller units are expected to conclude before the end of the year.

With that I'd like to turn the call back over to the operator for the question session.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line George Doumet of Scotiabank. Your line is open.

George Doumet

Just diving into the export opportunities and I think FX is comparable to last quarter, but we've seen a deterioration in the spread between the 11.60 sugar prices. Maybe give us some color there in terms of additional volumes expected or wins expected on a go forward basis?

John Holliday

So the export opportunities come to us through two means the one that I tried to describe I'm not sure if we're providing enough clarity is the value-added sugar containing product industry. They look at the Canadian currency and recognized it is obviously favorable and they see that number 11 sugar values is preferable versus number 16 and they incur no duty penalties for moving product from Canada into the U.S. so I would say for them it's still pretty much a green light situation in terms of interest to explore opportunities of that nature. And for our business those opportunities are -- I mean less attractive but market do change pretty quickly and there are periods during the past quarter and that where there may be of interest for somebody to consider purchasing product from Canada on a full duty basis. Especially if it's a specialty product as opposed to say a base sugar.

George Doumet

Yes it's really helpful and I guess on note on dynamic markets I think we've seen obviously pretty dramatic move in sugar prices lately. Just wondering if that's impacted orders maybe some folks deferring shipments there?

John Holliday

No it's not impacted us at all.

George Doumet

Okay, great, just I guess looking back a couple of quarters you guys had mentioned that you passed up on some M&A opportunities just following up there anything you can provide in terms of verticals you are interested in, I am wondering if valuations have ticked up in the last couple of months?

John Holliday

Really can't comment on valuations we continue to look we are actively investigating opportunities in that space, but I can't really comment beyond that.

George Doumet

Okay, great. Thanks.

Manon Lacroix

Thanks George.

Operator

Your next question comes from the line of Michael Van Aelst of TD Securities. Please go ahead.

Michael Van Aelst

Well, I guess you are not commenting on M&A so I won't ask you about that.

John Holliday

Okay.

Michael Van Aelst

In the last couple of years you had some extra pension charges that have held back your gross margin per ton a little bit, is there anything that you see happening in ’17 or ’18 that could do the same?

Manon Lacroix

No. Like this pension there like you are absolutely right this upgrade was similar to the last upgrade that we did in 2013 and it's really as part of the negotiation process within union so I don’t foresee anything in the short-term, short to medium-term actually yes.

John Holliday

Yes, I think management pensions have been formally addressed so we've managed all the risks in the management pension side.

Manon Lacroix

Yes.

John Holliday

And the pension adjustment relative to this bargaining agreement is a normal adjustment that we've incurred every time we complete the bargaining this bargaining agreement is for five years.

Michael Van Aelst

Okay. And you mentioned on the industrial side that it's still a favorable market for customers to repatriate more business into Canada. The business that you have now though that's already in your books is that -- have we cycled that now and is that why you are not expecting growth in industrial on a same week basis in the fourth quarter?

John Holliday

I think that’s a fair observation. We started to get some pretty good tailwinds in the fourth quarter of last year and that’s kind of the view that we’re projecting at the moment.

Michael Van Aelst

Okay. Thank you.

Manon Lacroix

Thanks Michael.

Operator

[Operator Instructions] Your next question comes from the line of Stephen MacLeod of BMO Capital Markets. Please go ahead.

Stephen MacLeod

Just on the, I just wanted to ask about the admin and selling and distribution expenses, so, and as you had an elevated distribution expense for this quarter. But is that mostly behind you or do you kind of see that continuing into Q4 potentially into 2017 or is just related to the work stoppage?

Manon Lacroix

Yes. And the expenses in the third quarter were really mostly related to the work stoppage. So I don’t foresee anything forward.

Stephen MacLeod

And then just on the volumes if I could like, when you talk about, I guess when you look at the export markets beyond Q4 and into 2017. Do you see, I know you’re talking about being opportunistic, but you see opportunities outside of potentially just the U.S. and then how are you, where you’re actively pursuing those?

John Holliday

So the three markets where we are trading, if you want to call it that would the U.S. obviously that you mentioned, Mexico and Costa Rica.

Stephen MacLeod

And what is the environment like for exports to those markets like when you look out 2017 I mean does it just depend on being opportunistic with FX and the spreads in sugar pricing?

John Holliday

It’s -- that’s an aspect of it and I think which we shared before, which I think is also very important aspect is we have very developed relationships in those markets, we’ve done business in those markets. So when opportunities present themselves, there is a large degree of trust between ourselves and the customers and the willingness to leverage those opportunities quickly rather than wait for any period of time.

Stephen MacLeod

Okay. That’s great. And then I guess just finally, the agreements that you expect to come in through fiscal 2017 through ’19. Do you see sort of other opportunistic -- is it reasonable to assume that these types of agreements will be more frequent as we fast forward over the next couple of years?

John Holliday

You’re talking about the long-term contract or the additional tonnage that we got from that?

Stephen MacLeod

That’s right, yes and one you announced last quarter.

Manon Lacroix

Yes.

John Holliday

I think I can only see, we continue to, we know what it takes to make them happen we know who the customers are and we’ll, we have our, we are paying attention to that. So those are the -- other than we have to rely on market conditions to be present but we’re well setup to leverage things, when those conditions exist.

Stephen MacLeod

Okay, that’s great. Thank you very much.

Manon Lacroix

Thanks Stephen.

Operator

There are no further questions at this time. I will turn the call back over to the presenters.

John Holliday

Okay. Thanks everybody for your time and well Manon.

Manon Lacroix

Speak to you in November.

John Holliday

Yes.

Manon Lacroix

Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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!