Rogers Sugar Inc. (OTCPK:RSGUF) Q3 2022 Earnings Conference Call August 11, 2022 8:00 AM ET
Company Participants
Mike Walton – President & Chief Executive Officer
Jean-Sebastien Couillard – Vice President of Finance, Chief Financial Officer & Corporate Secretary
Conference Call Participants
George Doumet – Scotiabank
Operator
Good morning and welcome to the Rogers Sugar Third Quarter 2022 Results Conference Call. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to turn the call over to Mike Walton, President and CEO. Please go ahead, Mr. Walton.
Mike Walton
Thank you, operator and good morning, everyone. Joining me for today’s call is Jean-Sebastien Couillard, VP of Finance and CFO. During today’s call, I will review the third quarter results of 2022 and trends in our industry.
Please be reminded that today’s call may include forward-looking statements regarding our future operations and expectations. Such statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied today. Please also note that we may refer to some non-GAAP measures in our call. Please refer to the forward-looking disclaimers and non-GAAP measure definitions included in our public filings with the Securities Commission for more information on these items. A replay of this call will be available later today. The replay numbers and passcodes have been provided in our press release and an archived recording of this call will also be available on our website. Before I discuss the third quarter results, I want to bring your attention to the outcome of the operational review.
Today, we’re announcing our intention to expand our Montreal Refining Facility. This expansion will add approximately 100,000 metric tons of new capacity through the refinery and align our operations with the growing demand we see in Eastern Canada. It will also eliminate the need for transporting bulk sugar from our Vancouver facility, thus reducing costs and making that capacity available for other sales opportunities. The project is expected to cost approximately $160 million and take 24 months to complete. It will be built utilizing existing buildings adjacent to our existing refinery and can be constructed without disturbing our current operations.
As part of the project, we will also be significantly upgrading our rail loading, railcar management operations in Montreal and at our distribution center in Toronto. Majority of this additional capacity will be shipped by rail to our Toronto distribution center for further to customers in the Greater Toronto area. So upgrading both of these areas is key to the project’s success. This project is an exciting growth opportunity for Rogers Sugar that will help ensure the viability of the growing domestic processing industry while also improving efficiency with our operations.
Now turning to our third quarter results. The third quarter was another strong quarter for Rogers and our second consecutive quarter of record sales volume and record EBITDA, again driven by the strength of our sugar business. Sugar demand remains firm, in particular, in our industrial and liquid segments where we’re seeing increased demand for sugar-containing products across North America.
In Maple, we continue to experience delays between inflationary increases in our operating costs and recovery through higher pricing. While we expect these financial pressures to continue for the remainder of the fiscal year, we are beginning to see improvements in the supply chain. With COVID-19 volatility and supply chain-driven pressures abating, freight availability and rates are starting to improve. As logistics continue to improve, we expect timing delays will lessen volatility on volumes. As we finish up the last quarter of the fiscal year, underlying demand for sugar remained strong.
As a result, we have increased our volume forecast for 2022 by 10,000 metric tons to 785,000 metric tons. This increase is in addition to the 5,000 metric ton increase from last quarter. Given that over 85% of our adjusted EBITDA is driven from sugar, we continue to expect that the strong demand and improved margin in our Sugar segment will more than offset lower demand and higher costs in the Maple segment and result in improved financial performance over the last fiscal year.
Now let’s turn to our third quarter results. As I mentioned, it was a record third quarter for Rogers driven by higher sugar adjusted gross margin and partly offset by higher costs in Maple. Our sugar volumes reached over 203,000 metric tons in sales and improved of nearly 13,000 metric tons or 6.7% over last year. During the quarter, we saw growth across all segments with Industrial contributing the largest increase.
Our Industrial segment increased by over 10,000 metric tons compared to the same quarter last year. This was due to increased orders — bulk orders in the segment as a result of higher demand from existing customers. We attribute some of this to a temporary supply disruption at one of our competitors and therefore, we expect part of this growth to be more of a timing issue as some volume was pulled forward from Q4.
In liquid, the business grew by 1,200 metric tons from the same period last year, mainly due to higher demand from existing customers. Our consumer business was largely in line with the same quarter last year as demand normalizes to pre-COVID levels. Trends experienced in the second quarter continued into the third quarter with adjusted gross margin improving as a result of strong sugar demand and improved pricing. This was partly offset by the inflationary environment which affected our operating costs.
For the most part, we’ve been successful in passing higher costs on to our customers and margins have improved alongside growing volumes. Improved production volumes and higher quality beats from our Taber bead crop this year also helped drive improved results in the third quarter. As you may have seen in our press release, we are pleased to announce a multiyear supply partnership with Ryzen to source certified non-GMO raw sugar for our Eastern Canada operations.
Ryzen is the largest individual sugar exporter on the international market based in Brazil. To ensure quality and traceability, the company has created a segregated fully traceable raw sugar supply chain from planting to processing and transportation. This non-GMO raw sugar will be refined Atlantic’s Montreal facility and offered to both Canadian and export markets as part of our commitment to sustainability.
Now turning to our Maple segment. In our Maple segment, adjusted EBITDA increased by $200,000 in the third quarter. This was largely due to higher consumer demand and improved pricing, partially offset by higher costs. Sales volumes increased in the third quarter, driven mainly by timing of retail demand.
As I mentioned, we are seeing global shipping issues and export carrier shortages slowly beginning to improve, leading to increased availability of freight and improvements in rates. As we are able to secure transportation for our product, we anticipate timing issues will begin to abate, leading to less volatility in volumes. In the quarter, adjusted gross margin was impacted by a delay between the increase in operating costs and the price increases from our updated pricing strategy.
The expected improvement in pricing to recover these unanticipated cost increases is not occurring as fast as initially anticipated. Price increases were delayed largely a result of greater competition in the [indiscernible] market due to a slowing of global demand and a bumble maple crop for 2022, adding extra serve to the market. Additionally, the timing of pricing negotiations on large contracts as they come up for renewal has also contributed to the delay in price increase. Over the next few quarters, we will focus on volume and securing all opportunities available to sell our syrup and maintain our share of the global market.
Over the past few months, a strong crop made possible by favorable weather conditions and the addition of Man’s and new Pass has begun to replenish the strategic Maple reserve. Although previously heavily depleted from poor weather conditions and 2 years of higher-than-expected demand, the excellent yields we have seen this season will start rebuilding reserve inventories and supply global demand.
Turning to the tight labor market in Quebec. The wage increases that we previously implemented has stabilized and we are seeing a positive impact in terms of employee intention. Additionally, last quarter, I mentioned an immigrant labor plan to support production in maple. Integration plans are underway for these recruits and we will welcome new employees from Tunisia in the new fiscal year. The additional labor will help support the great work our employees are doing in Maple. So, those who work for us across all of our operations, I want to say thank you for your care, your dedication throughout the volatility in the past years. It has been greatly appreciated.
Now I will turn the call over to JS, who will provide additional information on the quarterly results.
Jean-Sebastien Couillard
Thank you, Mike and good morning, everyone. In the third quarter of 2022, our adjusted EBITDA was $23.1 million, an increase of $5.9 million from the same quarter last year. Higher adjusted EBITDA in the quarter was largely driven by higher adjusted gross margin in the sugar segment, partially offset by weaker results in our Maple segment.
For the first 9 months of 2022, adjusted EBITDA was $73.2 million, up $7 million from the same period last year, largely as a result of the strong performance of our Sugar segment in the second and third quarters. As Mike mentioned, this is a record EBITDA result for our third quarter for our overall business. We expect our strong results to continue for the remainder of 2022, driven by the strength of our Sugar business segment which represents over 85% of our activity. This will more than offset the current challenges we are experiencing in our maple business which are more exposed to the current volatility in the global economy.
Let’s start with a review of the strong results of our Sugar business segment. Adjusted EBITDA in the Sugar segment was $20 million in the third quarter, up 40% over the same quarter last year. Our strong improvement was driven by continued firm demand for sugar and our ability to pass through market-driven cost increases to our customers.
Adjusted gross margin increased in the quarter, up $6.5 million from the same quarter last year. This improvement was driven by higher sales volume, improved customer pricing and increased byproduct net contribution, partially offset by higher production costs due to inflationary pressures. As Mike mentioned, the bulk of the volume increase came from our Industrial segment and price improvement reflected price increases put through over the past few quarters. Production costs increased in the quarter, mainly attributable to higher volumes produced along with market-based labor and energy cost increases.
On a per unit basis, adjusted gross margin increased by almost $25 per metric ton to $139 per metric ton in the third quarter of 2022. Adjusted gross margin per unit improved due to favorable customer pricing, higher volume and strong operational performance delivered out of our 3 plants, including improved production delivered from our beach sugar plant in Taber, Alberta.
To this latest point, I’d like to state that the [indiscernible] quality this year was good and it was not impacted by the unfavorable weather conditions that affected the last 2 weeks. And as such, we were able to deliver just over 120,000 metric tons of sugar which is aligned with our initial expectation. Distribution costs increased by $1.3 million in the third quarter due to higher freight costs and additional logistical costs incurred to support our supply chain as we transported sugar from west to east to meet higher-than-expected customer demand in Eastern Canada.
As Mike mentioned previously, a portion of the third quarter demand was attributable to issues encountered by one of our competitors and is therefore not recurring in nature. Administration and selling expenditures remained largely unchanged from the prior year as the reduction in COVID-19 costs was offset by an increase in share-based compensation, consistent with the last 2 quarters. Our outlook for the Sugar segment remained strong for 2022.
For the second quarter in a row, given the strong customer demand we are anticipating, we are increasing our sales volume forecast for 2022. We are increasing our expectations by an additional 10,000 metric tons to 785,000 metric tons. The combination of higher volumes and margin increases from recent customer negotiations, along with the stability of our operations, are expected to drive improved profitability and stronger financial performance over the prior year.
Let’s now move to our Maple segment. Our Maple results were largely unchanged in the quarter from the same quarter last year. Adjusted EBITDA in the third quarter was up $200,000 as the benefit of increased revenue was largely offset by higher costs. Revenue increased by $4.7 million as a result of higher volume and increased prices. Inflationary pressures continue to affect operating costs, particularly in higher packaging, freight and energy costs and resulted in adjusted gross margin of 8.2%, a reduction of 30 basis points from the same quarter last year.
As Mike mentioned, some delays in passing through increased cost to customers are waiting on our margins and the expected improvement in pricing and margin is not occurring as fast as initially anticipated due to the current volatile market conditions and the competitive dynamics of the Maple business. We expect inflationary pressures and market volatility to continue to unfavorably impact our Maple business segment for the remainder of 2022 or until the impact of higher interest cost begins to put a damper on the economy.
We are closely monitoring the impact of the current inflation pressures on the purchasing habits of customers as they relate to maple syrup. We believe this could negatively impact demand in the short term. In the meantime, we continue to manage our cost closely and focus on securing volumes.
At this time, I’d like to add to the comments made by Mike earlier regarding the announcement we made today about our intention to proceed with an extension of our Montreal sugar refining facility and our related distribution network in Eastern Canada. Over the past few months, we have performed a detailed review of the project and analyze the expected financial return associated with our business assumptions which are supported by the strong demand of the Canadian refined sugar market.
Our conclusion is that expanding our Montreal facility by up to 100,000 metric tons and our related Eastern logistics network will allow us to continue to yield a strong financial return for our shareholders while supporting the growing Canadian food industry. We are considering different options to finance this exciting project. We are currently estimating the project will take about 2 years to complete at a total cost of approximately $160 million.
The project is used in proven sugar refining technology and will be built in parallel to the current refining capacity of the Montreal plant. We are working with different stakeholders, including financial institutions, business partners and government authorities to finalize our financing. We intend to provide regular update on the overall progress of our project periodically.
In closing, I would like to highlight a few other related financial items. Our adjusted net earnings for the third quarter were $8.4 million or $0.08 per share compared to $4.2 million or $0.04 per share for the comparable period last year. For the first 9 months of 2022, adjusted net earnings were $28.5 million or $0.27 per share, up from $24.2 million or $0.23 per share last year. Free cash flow for the last 12 months was $49.5 million, an increase of $7.4 million compared to the same period last year.
The increase was mainly due to higher adjusted EBITDA, excluding noncash items, lower interest and capital expenditures, excluding value-added projects and partially offset by higher income tax paid. Our capital expenditures for the first 9 months amounted to $9.7 million and were lower than prior year equivalent balance of $7.8 million. The barring is due to timing and execution delays caused by events outside of our control. We are targeting to spend up to $20 million in 2022 on various capital projects.
Today, we are also announcing that the Board of Directors approved a payment of a $0.09 per share dividend in relation with the result of the third quarter, consistent with the dividend paid in previous quarters for the last several years. In summary, we are reporting today’s strong third quarter results driven by our sugar business, our largest business segment.
We are closely monitoring the challenges of our Maple segment and our focus on maintaining market share and improving margin over the next few quarters. We believe the overall strong financial results achieved thus far in 2022 will continue, allowing us to deliver stronger financial performance for 2022 as compared to 2021. We are committed to maintain the historical return provided to our shareholders and to support the Canadian food industry by providing high-quality products to our customers.
With that, I would like to turn the call back over to the operator for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from George Doumet from Scotiabank.
George Doumet
Maybe just getting started on the Montreal project. I know it’s capacity related but can you maybe talk to the payback either an Investor Relations or EBITDA perspective that you expect from the project? And maybe the extent of any potential disruptions you may see while transition production?
Jean-Sebastien Couillard
Good question. We look at the project. We are expecting this is going to yield a return on asset that is similar to our current business. The new production is aimed at increasing capacity for industrial customers, mainly in Ontario and also in Quebec. From a project standpoint, it’s going to be run in parallel. So there it’s almost like building another plant within our facility in Montreal, George. And so we’re not expecting any potential big disruption. I mean, what we will do is some items are interconnected but we will be doing those in our normal shutdown period that we have throughout the year. So we do not expect that this will disrupt our current capacity in Montreal.
George Doumet
Okay. And I look at the project is going to increase our leverage well into the fore. So will this be internally funded? And maybe how should we think of the dividend going forward?
Jean-Sebastien Couillard
So first thing good question. First thing, just on the dividend side right now, we don’t expect this will impact our ability to continue to pay a $0.09 per quarter dividend. From a financing perspective, there are several options for us on the table. And we’re looking at options that are not going to overly stress our leverage in the long term from a balance sheet standpoint. We’re going to take advantage of some of our existing tools but we also have discussions that are well advanced with other different stakeholders in order to finalize the package that we’ll achieve the objective, as I mentioned earlier, does not overly stress our balance sheet in the long term and move forward.
George Doumet
Okay. And maybe one last one on the Maple. I’m just wondering in general why it’s taking longer than expected for pricing, presumably, the extra costs are being felt by payer competitors as well because south of the border. So can you maybe talk to that a little bit, please?
Mike Walton
Yes. Sure, George. It’s Mike. The Maple business, the cost pressures were pretty immediate, as you can appreciate with the inflation and freight and the things everybody in the food processing industry is facing. Some of the contracts that we have with our Maple supply, largely private label, largely export-based business are more longer-term contracts. And so in renewals, we bring in pricing where we can. And then the bottom line is, it’s still a very competitive space and you can get the pricing that the market will allow and we continue to work at getting all the pricing we can.
Operator
[Operator Instructions] Our next question comes from Michael Van Aelst from TD Securities.
Unidentified Analyst
It’s Evan [ph] in for Mike. So I guess just starting on the capacity expansion in Montreal, just following up on what George asked. How many years of growth do you expect that will take to fill up that capacity? And is there a certain level of volume or utilization that it will take before it starts to contribute to EPS?
Jean-Sebastien Couillard
Well, I can speak to the volume and when we expect it to be consumed. It would be consumed, we expect fairly soon after the capacity starts will be a quick ramp up. We’ve seen in the new some other customers of ours, the existing customers that are bringing new production and new capacity to Canada as well. So that’s been factored in. This is an analysis on volume. We started back in 2020 to look and see what our Canadian market was going and what the influencers are. So we’ve lined this 100,000 tons up that we expect to be largely utilized early in its development.
Mike Walton
Yes. Maybe just a quick comment here from my side, Mike. When we look at the demand that we have, part of it as well that we’re going to be able to use is that we are moving sugar from the west to the east to serve our customers. So that’s going to be one of the first things that’s going to go in the project. The way the project is build where the assets are being billed, the capacity will come online. There’s not a long like ramp-up periods from a capacity standpoint. So the 100,000 metric ton will be available fairly quickly. And our salespeople have had several discussions with customers and most of the volume is pretty much committed as we are right now to different customers. So we expect that it’s going to be increasing our financial rental EBITDA fairly quickly after the construction is completed.
Unidentified Analyst
Great. And for your multiyear agreement with Ryzen, are you expecting that volume to go to existing customers who want to switch or does it open up any new incremental business?
Jean-Sebastien Couillard
Yes, this will be all for existing customers because we’ll be 100% on the sugar supply in Eastern Canada on the non-GMO can basis.
Unidentified Analyst
Great. Just turning to admin and selling expenses on the sugar side, they came in a little lower than what I would have expected given the inflation and even accounting for the lower COVID costs year-over-year, was there anything else that was notable in that line item?
Mike Walton
No. I think — I mean, if you — I think it’s fairly consistent with what we were anticipating. Looking at the big impact this year is the share-based compensation that is in comparison to last year. But there is nothing from an inflation standpoint, most of the large portion of those costs are payroll costs for our support team and administration functions like sales and all the business administrative functions. So it’s mainly payroll-related. So it’s not as impacted by inflation at other costs.
Unidentified Analyst
Okay. And last question and you may have addressed this a little bit earlier but I missed part of it. Can you just talk a bit about the competitive environment in Maple and how you see that progressing over the next quarter or so?
Jean-Sebastien Couillard
Yes. Thanks, Evan. Competitive environment, Maple hasn’t changed. It’s a very competitive space. The dynamics in that market are fluid, I would say. And now we’re into inflationary period where maybe consumers are more worried about the core staples in their basket than premium items like Serv. So we’re anticipating a slight softening in the volume overall and we’ll continue a surplus crop, a lot of syrup in the market this year. So we’ll continue to support our appetite to maintain our global market share and compete as we need to in the market. It will always remain a competitive space.
Unidentified Analyst
Okay. So I guess that kind of implies like could we expect volume growth in the fourth quarter?
Jean-Sebastien Couillard
No, I would not look for volume growth in the fourth quarter. Our volumes are stable. They all got softer than last quarter but they’re stable and we don’t expect any big changes in volume at this time.
Operator
We have no further questions in queue. I’d like to turn the call back over to Mike Walton for closing remarks.
Mike Walton
Thank you, operator. We look forward to speaking to everybody in the coming months and as more updates come available. Have a good day.
Operator
This concludes today’s conference call. Thank you for your participation. You may now disconnect.
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