Rogers Sugar Inc. (OTCPK:RSGUF) Q1 2023 Earnings Conference Call February 9, 2023 8:00 AM ET
Company Participants
Mike Walton – President and CEO
Jean-Sebastien Couillard – VP of Finance and CFO
Conference Call Participants
George Doumet – Scotiabank
Michael Van Aelst – TD Securities
Andrew Lane – National Bank
Nevan Yochim – BMO
Frederic Tremblay – Desjardin
Operator
Good day ladies and gentlemen, and welcome to the Rogers Sugar First Quarter 2023 Results Conference Call. [Operator Instructions] Please note that this call is being recorded today, February 9, 2023 at 8:00 a.m. Eastern time.
I would now like to turn the meeting 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 Finance and CFO. During today’s call, I will review the first quarter results of 2023 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.
Now turning to our first quarter results. We began fiscal 2023 with a strong quarter that saw the continuation of trends established in the second half of the last fiscal year. In the quarter, higher sales volume and improved pricing in our Sugar segment drove an overall strong performance in the business. The Sugar segment performance in the strength of the quarter showcases the continued strong demand for sugar and sugar containing products. We are very proud of the fact that our Q1 adjusted EBITDA performance was better than any previous quarter.
In the current period our Maple business began to see the evidence of some improved pricing with higher revenues. While the business continues to face high inflationary pressures and reduced global demand, we expect the impact of higher pricing to mitigate the impact of higher costs, especially as inflationary impacts received.
Now turning to the results in the quarter. In sugar, volumes reached almost 193,000 metric tonnes in sales, which is an increase of over 7% from the previous year. During the quarter, we saw growth in all three of our domestic segments, including notable growth in industrial, which more than offset the planned decline in exports.
Our industrial segments increased by almost 12,000 metric tonnes compared to the same quarter last year, driven by continued strong demand for sugar containing products in the domestic market and the United States. Our consumer business increased by 1200 metric tonnes in the quarter from strong sales in Eastern Canada.
Consumer demand appears to have largely returned to pre-COVID level on an annualized basis. Adjusted gross margin in the quarter improved as a result of higher average pricing for refined sugar products and strong demand when compared to the same period last year. This was partly offset by inflationary pressures on operating costs, which is an area our team is very focused on and has been managing well.
Turning now to our Taber beet crop, as I mentioned in last quarter, unfavorable weather conditions in the latter stage of the growing period have reduced the expected sugar content from the beets. As a result, we expect to produce approximately 105,000 metric tonnes of sugar for the 2022 campaign below last year’s production of 120,000 metric tonnes.
While this is lower beet sugar production than we anticipated, Taber sugar production is within a good range for the business. It is important to remember that the Taber crop is not yet finished and next month is a key period for our beet processing. We will have a final number in the Taber crop by the end of February, which we will provide in our Q2 results.
We have also updated our sugar sales guidance to reflect the favorable North American market dynamics. We increased fiscal 2023 volume expectations by 15,000 metric tonnes to our record volume of approximately 805,000 metric tonnes due to the continued strong demand in the Canadian domestic market. A majority of the additional volumes will be coming from our industrial segments. However, the full benefit of this growth will be partly offset by the lower contribution from beet sugar production. With anticipated beet sugar volumes down slightly, we will continue to leverage our unique operational flexibility to meet customer’s needs by moving sugar east from our western operations and prioritizing domestic sales.
In addition, over the holiday period, we upgraded operations that are Montreal plants, improving efficiency and streamlining processes which has improved performance. Our Montreal plant is operating well and is expected to continue to run smoothly.
Finally, we would like to share an update on our Montreal expansion project. We are advancing the design and planning aspects of the project and the detailed engineering study is expected to be completed during the third quarter. During this stage of the project, we are proactively engaging with major providers and stakeholders and we look forward to providing updates over the months ahead.
Now turning to our Maple segments. In Maple, adjusted EBITDA lowered in the first quarter largely due to lower sales volumes from existing customers and increased operating costs. It is worth noting that the revenue increased in the quarter as the impact of an improvement in pricing more than offset lower volumes. Sales volume lowered in the first quarter driven by lower demand from existing retail customers, competitiveness in the market as well as the timing of shipments.
We remain committed to the Maple business and are encouraged by the recovery and pricing we have begun to see. Our order book is healthy and we continue to focus on maintaining our share of the global market.
Adjusted gross margin was slightly lower than the comparable period as we continue to be negatively impacted by lower volumes, less favorable customer mix and higher costs partially offset by improved average selling price.
Before leaving Maple, I would like to briefly discuss Maple pricing and the 2023 Maple crop. This year, PPAQ set a price increase for the upcoming crop which comes into effect on March 1 of this year. While it is a fairly large increase, we are confident in our ability to recover the higher commodity price through customer pricing. All participants in the Maple business are faced with similar cost pressures, and we expect most Maple sellers to pass this increase through to their customers.
In regards to the size of the Maple crop itself, we don’t have much visibility into the crop as it finishes in the end of April. We expect to be able to provide an update with our next quarter results.
Additionally, we are undertaking automation projects with two of our Maple plants. Both will come online during the second quarter and will help the streamline operations and reduce variable costs. We will continue to monitor our operations and pursue automation projects where we see opportunities for further improvement.
Finally, I want to say thank you to our employees who have helped start the year off strongly. Their hard work and dedication are key to our success. We still have three quarters to go but we are off to a great start to the year. Over to you J.S.
Jean-Sebastien Couillard
Thank you, Mike. And good morning everyone.
In the first quarter of 2023, our adjusted EBITDA was $33.5 million, an increase of $7.4 million from the same quarter last year. As Mike mentioned, we saw a continuation of the trends experience in fiscal 2022 and our higher adjusted EBITDA in the quarter was again driven by the strong performance of our Sugar segment, which was partially offset by softer result in our Maple segment. We anticipate the Sugar segment will continue to perform well in 2023 as demand remains strong for sugar containing products.
Overall, we expect to continue to deliver strong and stable financial results in 2023, despite inflationary pressures across both of our business segments, challenging market dynamics in our Maple segments, and lower expected beet sugar volumes produced at our Taber facility.
Let’s start by remarks with a review of the Sugar segment. Adjusted EBITDA in the Sugar segment was $30.7 million in the first quarter up 36% from the same quarter last year. A combination of increased volumes largely from our industrial segment, and improved average pricing drove higher adjusted gross margin. Sugar pricing increases were largely driven by continued strong demand in the Canadian domestic sugar market in particular from industrial customers producing sugar containing products.
On average, the pricing increases more than offset the market based inflationary pressures on costs seen over the last few months. Adjusted gross margin increased in the quarter by $6.3 million or 17% from the same quarter last year. On a per unit basis, adjusted gross margin increased by $21 to $195 per metric tonne.
Distribution costs increased slightly in the first quarter due to higher freight costs and additional logistical costs incurred to support our supply chain as we continue to move sugar produced in the West to Eastern Canada to meet customer demand. We anticipate this trend is likely to continue throughout 2023 and 2024. We hope to address permanently the challenges of moving sugar from the West to the East with our proposed expansion project.
Administration and selling expenditures decreased by $2.5 million from the prior year quarter, mainly because of lower share-based compensation expenditure. Our outlook for the Sugar segment remains positive as we move through fiscal 2023.
Underlying North American demand remains strong across all our customer segments, and we expect our increased pricing to continue to support our financial results and largely mitigate the ongoing inflationary pressures. As Mike mentioned, sales volume in 2023 are now expected to reach 805,000 metric tonnes, an increase of 10,000 metric tonnes over our fiscal 2022 volume. This is an improvement from our original forecast for 2023, driven mainly by the strength of our key industrial segment.
Overall, we anticipate that the domestic market demand will increase by more than 3% in 2023 as compared to 2022. Conversely, and as expected, export volume should decrease by approximately 15% as we continue to focus our sales efforts on meeting the growing domestic demand and capturing the strong economics available in the Canadian market.
I will now move to our Maple segment. Similar to the conditions we saw in fiscal 2022, our overall Maple results were weaker than the same quarter last year as inflationary pressures continue to negatively impact our business. As a result, adjusted EBITDA in the first quarter was down $0.6 million as lower sales volume and higher costs more than offset the benefit of recent pricing increases.
In the first quarter, the benefit of recently negotiated contract and higher pricing began to flow through our results, leading to an increase in revenue of $1.3 million despite volume decreasing by GBP 0.5 million. However, inflationary pressures continue to affect our operating costs, particularly as it relates to packaging, energy and labor. As a result, adjusted gross margin was 7.7% in the quarter, slightly lower than last year’s figure of 8.2%.
Moving forward, we continue to expect our Maple segment to show improvement as we progress through fiscal 2023. Building on the increases in revenue and average selling price this quarter, we believe the unfavorable financial and operating pressures will begin to improve likely in the second half of the year. As the year progresses, we expect Maple to recover and to deliver slightly improved financial performance over 2022, driven by the receiving inflationary pressures and price increases on recently negotiated agreements.
Before closing, I would like to highlight a few other related financial items. Our adjusted net earnings for the fourth quarter were $15.3 million or $0.15 per share compared to $11 million or $0.11 per share for the comparable period last year. Free cash flow for the last 12 months was $58 million, an increase of $16.9 million compared to the same period last year. The increase was mainly due to higher adjusted EBITDA, excluding noncash impact.
Our capital expenditures for fiscal 2022 are expected to be similar to last year, with spending mainly related to improvement of our current facilities and development of improved business processes to increase efficiency.
For 2023, we expect our capital expenditures to be approximately $25 million on various capital projects in sugar and $1 million to $2 million in Maple. This estimate does not include our Montreal capacity expansion project. As Mike mentioned, this exciting growth opportunity is progressing as expected, and we will provide future updates when it is appropriate.
Today, we are also announcing that the Board of Directors approved a payment of a $0.09 per share dividend in relation to the results of the first quarter and consistent with the dividend paid in previous quarters for the last several years.
Overall, the first quarter of 2023 has continued with the same trends we saw in 2022. Ongoing strength in our sugar business is continuing to drive a strong and stable financial performance. A firm need for sugar-containing products across North America is providing strong demand for our sugar products and providing us with resilience to manage the preventing high inflationary pressure.
We are committed to our Maple segment, and we will continue to manage this business closely, including experiencing challenging market dynamics. As inflationary pressures begin to receive, hopefully, in the second half of the year, we expect to see some improvement in our results.
With that, I would like to turn the call back over to the operator for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from George Doumet from Scotiabank. Please go ahead, Mr. Doumet.
George Doumet
Thanks. Good morning, everybody. Congrats on the results. I just want to talk a little bit about the sustainability of the strong gross margins at Sugar kind of as we go through the year. Any comment there maybe any one-timers that we should maybe comment this quarter?
Jean-Sebastien Couillard
Sorry. It’s J.S. here. Well, the margin was strong. I think over recent quarters, as contracts are being negotiated. I think we have seen some improvement in pricing. I think we don’t see this as changing anytime soon as we move forward, though, there’s always a bit of seasonality, the first quarter is usually a quarter where we have some of the product mix is favorizing a bit of a greater margin.
George Doumet
Okay. Thanks. And I just wanted to — I know we’re fully hedged, but I just want to talk about maybe any implications we’re seeing at all to our business maybe from the higher global sugar prices. Do you want to call out?
Jean-Sebastien Couillard
Yes. I mean we — our hedging program is fairly cumbersome. So we haven’t — for us, we don’t believe it’s going to have an impact on our financial results. Price have been difficult to predict at times. And if you look through a long, long period of time, they’ve been going up and down. We haven’t seen any impact on customer demand right now. It’s been — it’s actually been the opposite — demand for sugar in Canada is actually very healthy. And so we don’t expect having any impact of significance because of the high price of sugar right now.
Mike Walton
And Doumet, if I can add to that, as you know, most of our pricing is a flow-through agreement, and that’s what makes Canada so attractive is the ability to use the number 11. So the volatility and number 11s have virtually no impact to our EBITDA.
George Doumet
Okay. Thanks for that. And just one last one on Maple. Can you quantify the price increases that you expect for this year?
Mike Walton
Yes, that would be hard to put a number to that, George. The PPAQ price is out and some of those pricing changes will come over time as contracts come up for renewal, but the PPAQ price is to all buyers, all bottlers of Maple segment and so everybody’s got the same price increase to deal with, and I don’t think there’s any choice but for it to be passed through to the customers.
George Doumet
Okay. Thanks guys.
Mike Walton
Thanks George.
Operator
Thank you. Your next question comes from Michael Van Aelst from TD Securities. Please go ahead.
Michael Van Aelst
Thanks. And congrats on the solid results. I just want to start on the — continue on the Maple and then we’ll go back to the Sugar, but can you just remind me the size of the PPAQ increase and the timing and when it kicks in?
Mike Walton
The PPAQ increase was announced publicly, it’s $0.20 a pound, and it takes place in April, I believe, April 1.
Michael Van Aelst
Okay. So, what’s the, I guess, the process for you to get that passed on. And when does it start, I know that growth is usually require three months on a lot of their increases. Is it different in your case, if it’s a commodity-based pass-through?
Mike Walton
That’s a great observation, Michael. It is a commodity-based pass-through in most of the agreements. And it starts with the new crop. So most packers and especially ourselves, as we said, we bought a lot of syrup off the field last year. So we’re holding syrup from last year’s crop. So we’ll have that time to be able to transition to new cost of PPAQ as contracts come up for renewal with our customers.
Michael Van Aelst
Okay, so we shouldn’t really – it sounds like you have some inventory to get you through a quarter or so before you can pass through the price is at a good summer?
Mike Walton
Yes, Michael, we held the inventory for the contracts we have in place until they come up for renewal. And mostly, it’s never a perfect matchup, of course, but that is our strategy always has been to get us through when we commit pricing that has syrup on hand to manage those costs.
Michael Van Aelst
Okay and when do those contracts, most of those contracts come up for renewal?
Mike Walton
Just like any other business staggered based on customer needs and timings to the market, but a lot of them will come up after the crop is finished, which most retailers like to wait until the crops done and see what the size of the crop is because it influences availability of syrup. So through April to September, we’ll see – we’ll manage most of those new agreements.
Michael Van Aelst
Okay. And then once you get through passing on the cost and catching up to some of these inflationary pressures? Do you still see an environment where you can get back to double-digit gross margins maybe by the second half of the year?
Jean-Sebastien Couillard
Hi Michael, it’s J.S. here? I think double-digit gross margin is obviously our long-term goal. I think there’s a lot of things right now, including inflation and pressure on cost that will dictate that. I think, that would be probably a bit of a stretch in the short-term this year. But I think, when we look more into, a two to five years extended period, that’s definitely where we believe this business is going to go.
Michael Van Aelst
Okay. And then just finally on maple, I can’t recall if I saw volume guidance for the year, but I think you were expecting volumes to increase for the year. Is that still the case and yes you talk about protecting your global market share. But the volumes are, are down year-over-year? So are you losing share, because you’re being more, strict on passing through your cost increases then maybe some of your peers or is that or is just low weak demand in general?
Mike Walton
Yes, Michael, we’re seeing a weakening in demand because of food inflation globally maple’s tends to be seen as a luxury product. So we’ve mentioned that in previous discussions that we expected some erosion in global demand. We’ve seen that in some large markets, United States and Europe early in the year. And that – those realities were looked at in our when we put our business plans together for 2023 and they were envisioned and reflected in how we’re running the business.
Michael Van Aelst
Okay. So is that so back to the volume growth expectations, should we expect it should be to be down then for the year?
Jean-Sebastien Couillard
Yes, I think – the reasonable expectation when we looked at it, it’s not because we’re losing market share. It’s really more because of global demand that is a bit softer than what we could had – that’s what we had last year for the reason Mike just explained. I think it’s a fair assumption, Michael.
Michael Van Aelst
Okay. And then on to the sugar side, it was a very impressive gross margin number. How did mix come into play there because exports can be both high and low margin. I just assume that the product that you’re – the volume reduction in export is likely due to the lower volume business being pulled back or whatever, but the liquid and industrial were also stronger than consumer. So how do you – how much was mix a factor and where else – and is the rest simply just passing on cost inflation?
Jean-Sebastien Couillard
Well, I think there’s, a few things here and you hit on a few. There are obviously inflation that were passed through in some of our costs. But I think the main driver of our gross margin is demand. Demand is strong, and it’s been for, I think, for three or four quarters in a row. I think starting in the second quarter last year. We saw a significant increase in demand. And I think we’ve been navigating this in a very positive way.
If you look at the economics of sugar are still favoring Canada. And if you look at the sugar-containing products is coming from our industrial and our industrial sector, the demand has been very, very strong. And so it puts us in a position where the demand is strong in the market, then obviously, there’s impact on pricing. So I think that’s where I think that we would attribute this – the increase in gross margin.
Michael Van Aelst
Okay. And other than yourselves, have you seen anybody else trying to add capacity, whether it’s domestically or through imports?
Mike Walton
We’ve seen – Canada, Michael, as you know, has always been a competitive market, and we’re not new to this. We’ve been in the business for more than 135 years, and we have a great track record of service. We’ve seen the sugar industry, evolve with innovation, making new competitors, changes in consumer preferences, expert opportunities. And we see new entrants in both large and small and to the market over time.
And as we’ve reported, and I spoke in my comments, we’re addressing the continued growing demand for sugar with our capacity expansion in Montreal, we feel confident in our ability to respond to the evolving market. Rogers is – given the breadth in the 135 years in business, we’re positioned to continue to successfully grow in the Canadian market, and we’re committed to it.
Michael Van Aelst
Excellent, thank you.
Mike Walton
Thanks Michael.
Operator
Thank you. Your next question comes from Andrew Lane from National Bank. Please go ahead.
Andrew Lane
Yes, good morning. Thanks taking my questions and congrats on a good quarter. I’ll continue to my first one – on the sugar, I’ll continue with that. And in terms of the question is more kind of how much visibility do you have into the special industrial market being strong in Canada and for how long, right? Like how do you see this demand evolving, but especially when it comes to the end consumer? I mean there’s, reports out there that saying that demand will drop at the end consumer for sugar containing product just because the prices are so high?
Mike Walton
Yes, Andrew thanks for your question. And that’s always an interesting question for us as we look at the business. And as you know, I’ve been with Atlantic for over 40 years, I’ve seen some of these trends come and go. The difference is it’s not consumption the sugar – the market we’re servicing isn’t all the sugar being consumed in Canada only about 50% of it is consumed in Canada.
The rest of it goes in the sugar containing products to a market that is 10 times the size of ours in the United States. So it’s very durable and the sugar economics favor the production of goods in Canada for shipment export markets. And that’s why you’re seeing other news releases that we’ve all seen publicly about manufacturers, global manufacturers, adding capacity and in fact, building new plants in Canada to take advantage of these number 11 sugar values.
Andrew Lane
That’s great and thanks for the color, Mike. The other question is a bit more administrative. But on the – well, on the admin cost, especially sugar I mean they were down quite a bit from last year on stock on share comp. And you mentioned that you expect them stable. I just wanted for 2022, I just wanted to clarify stable versus what we saw in Q1 or stable as an overall cost in ’23 versus ’22?
Jean-Sebastien Couillard
That’s a good observation. It’s JS here, Andrew. We expect the overall admin costs to be stable in comparison to last year with the exception of share-based compensation, which is — which could be a bit volatile in the sense that there’s a cycle right now that going to end at this year. And it’s – the financial markets are difficult to predict, and this cycle is directly based – is directly calculated with the stock price.
So as stock price moves and – with the market, then it hasn’t – it could have an impact on share-based compensation and hence on our administrative costs, but the other part of our administrative costs are expected to be stable.
Andrew Lane
Okay, thank you. And another question and I’m not sure if you want to touch for this – at this point, but for the expansion that you plan in Montreal and in Toronto. I think again, there are some reports in the media that you’re looking for a loan from Quebec institutions around $65 million in debt. Can you talk about – that process, number one, how is it going and number two, if you can give us any color on the rest of that – of the cost for that expansion?
Jean-Sebastien Couillard
Good question. We are in the midst of doing the detail engineering process, on finalizing all the plan for the expansion and that will drive the final amount of capital that we’re going to need to invest. And we’re looking at different options for financing this project, but the main objective is not to overstretch our balance sheet. One of the items that has been discussed and has been discussed in the media is the discussion we’ve had with [Investia Quebec] for support in regards to the project.
The discussions have been very positive. We’re quite happy with the way the discussion and the reception we have been given. I think everybody acknowledged that Atlantic, the Montreal plant is a significant – it’s part of the tissue of the East Montreal manufacturing factor – and also people understand that sugar is at the center of the global food chain. So there’s sugar in a lot of products and for our customers to continue to grow, I think they need access to sugar.
So this was all considered in some of those discussions. We will come out with a formal financing plan when we are – when we’re ready to launch the project. But I think from those discussions that we’re in the media, they are true. We have been working with IQ in order to get support from the government for this important project.
Andrew Lane
Thank you very much, that’s it from me, congrats again on the quarter.
Mike Walton
Thanks Andrew.
Jean-Sebastien Couillard
Thanks Andrew.
Operator
Thank you. [Operator Instructions] Your next question comes from Nevan Yochim from BMO. Please go ahead.
Nevan Yochim
Good morning, thanks guys. You have Nevan sitting in for Steve today. On the Sugar segment, I wanted to confirm, was there any lingering positive impact this quarter from the competitor challenges that you guys called out in Q4?
Mike Walton
Yes, no, there was no hangover from that at all. This is a clean quarter, and – that’s the result of our own business activities.
Nevan Yochim
Okay, great. And then on the Maple segment, it sounds like all of the improvement you’re expecting this year is going to be margin driven, just wondering if you can quantify that. Are you guys expecting to get back to 2021 EBITDA margins this year and then longer term, when could we expect to see margins returning to 8% to 9% range?
Jean-Sebastien Couillard
Well, I think a lot of it is based on global economics and especially pressure on cost. I think – we are expecting those to recede in the second part of the year. So I think if you look at our third and fourth quarter, we would expect them to be more aligned with what we’ve seen in previous year in 2021. But overall, I think considering the pressure on cost and what Mike was talking about earlier about pressure on demand for a good like maple syrup.
I think the outlook might take a couple more quarters to go back to the type of run rate or margin that we had in 2021. But in the longer term, as I mentioned earlier, from two to five years, this is definitely a goal that we expect is achievable.
Nevan Yochim
Okay, great that’s it from me and thanks.
Mike Walton
Thanks Nevan.
Operator
Thank you. Your next question comes from Michael Van Aelst from TD Securities. Please go ahead.
Michael Van Aelst
Thanks. On paper, what was the weather impact that decreased the sugar content?
Jean-Sebastien Couillard
Yes, Michael, we had the hail event, if you recall, back in the fall and the early part of or – during the start of the spring and the early planting that defoliated about 5,000 acres of beets, and so they were slow to recover in the sugar content in those particular beets as well. But overall, we’re seeing lower sugar content in beets pretty much in North America this year. It’s just the phenomena of nature in growing.
And we’re managing it well. The plant is still running it’s too early to call a final number, but we’ve taken a different approach in processing the beets to make sure we get every grand sugar out of them that we can. And the team in Taber is doing an excellent job in dealing with that this year.
Michael Van Aelst
Okay great. And then just in terms of the contract for beets going forward. I think you’ve got this last year, if I’m not mistaken of planting and then you got to come up then you have another contract that we negotiated. Is that correct?
Mike Walton
Yes it’s correct, Michael. We are in the process of negotiating with the Alberta growers right now.
Michael Van Aelst
Okay. Is there any concerns that they want to cut back, I mean I’ve seen some farmers in the U.S. cutting back on the number of acreage, the acres they allocate to sugar beets. Are the economics different in Canada than the U.S. for sugar beets?
Jean-Sebastien Couillard
That’s a good question. I’ve seen those articles as well. It’s definitely not been brought up in the discussion we’ve had with the growers in Alberta.
Michael Van Aelst
Yes, all right. Thank you.
Operator
Thank you. Your next question comes from Frederic Tremblay from Desjardin. Please go ahead.
Frederic Tremblay
Thanks good morning. Most of my questions have been answered, but maybe digging a bit deeper on the cost inflation side in maple and your outlook there. Maybe just curious on which bucket in terms of cost, you’d expect some inflation easing in Q3 and Q4? Are we talking mainly packaging or labor and sort of just what gives you confidence in that easing outlook for inflation? Is it based on signed agreements for packaging or maybe any detail there would be helpful? Thanks.
Jean-Sebastien Couillard
It’s a good question, because everybody is looking at inflation trying to figure how – it’s going to ease up first half. One of the two areas, mainly, I think, when we look at this. I think packaging is one. I mean, packaging costs for us are – in maple are obviously significant and the pressure has been there. The – and there’s two-ways attack this, there’s a way through automation.
I think it forced us that the increase in costs – but actually forced us to look at automating some of our process. We’re in the midst of doing that in our Granby and also our Dégelis facility and these things will kick in, in the second half of the year. The other area that – for us is important is on distribution, carrier fees and fuel charge and things like that.
So we have seen a bit of a relief on gas price. And obviously, I’m not going to speculate here on where fuel price is going to move. But I think we’ve seen the peak that we’ve seen in last year is starting to go down, and we’re expecting to be able to benefit from some of those in the second half of the year and going into 2024.
Mike Walton
And Fred, I can add to that. We’re seeing the global supply chain challenges ease up. So we’re getting more availability, better timing on inbound goods like packaging and freight coming in and more predictability, enable to ship finished goods out with especially overseas shipments. As you know, most of our product is in export.
And the one thing that hangs out there is I said earlier, the PPAC price increase of $0.20 a pound on new crop, that pricing that cost and that pricing will have to be passed on immediately to customers in all negotiations. And that’s the challenge that the whole industry is facing right now, and I frankly don’t believe there’s any choice, but to do that, and that’s what we’re working towards.
Frederic Tremblay
Thank you. Congrats on a good quarter.
Mike Walton
Thanks Fred.
Jean-Sebastien Couillard
Thanks Fred.
Operator
Thank you. There are no further questions at the time. You may proceed.
Mike Walton
Okay, thank you, everybody, and we’ll talk to you next quarter.
Jean-Sebastien Couillard
Thank you.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and I ask that you please disconnect your lines.
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