Rogers Sugar Inc.

Good day, ladies and gentlemen, and welcome to the Roger Schubert First Quarter 2023 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 today, February 9th, 2023, at 8 a.m. Eastern Time. I will now like to turn the meeting over to Mike Walton, President and CEO. Please go ahead, Mr. Walton.

Thank you, Operator, and good morning, everyone. Joining me for today's call is Jean-Sebastien Couillard, BP 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 filing 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 and 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 recede. Now turning to the results in the quarter. In sugar, volumes reached almost 193,000 metric tons 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 segment increased by almost 12,000 metric tons 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 1,200 metric tons in the quarter from strong sales in eastern Canada. Consumer demand appears to have largely returned to pre-COVID levels 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 Tabor beet crop, as I mentioned 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 tons of sugar for the 2022 campaign, below last year's production of 120,000 metric tons. While this is lower beet sugar production than we anticipated, Tabor sugar production is within a good range for the business. It is important to remember that the Tabor crop is not yet finished, and next month is a key period for our beet processings. We will have a final number in the Tabor 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 tons to a record volume of approximately 805,000 metric tons due to the continued strong demand in the Canadian domestic markets. The majority of the additional volumes will be coming from our industrial segment. 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 customers' needs by moving sugar east from our western operations and prioritizing domestic sales. In addition, over the holiday period, we upgraded operations at our Montreal plant, 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 segment. 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 shipment. We remain committed to the maple business and are encouraged by the recovery in 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, PPAC set a price increase for the upcoming crop, which comes into effect on March 1st 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 of yet 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 at two of our maple plants. Both will come online during the second quarter and will help to 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're off to a great start to the year. Over to you, J.S.

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 trend 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 results 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 segment, and lower expected beet sugar volumes produced at our Tabor facility. Let's start my 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 growth margins. 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 expenditures. 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 tons and increase of 10,000 metric tons over our fiscal 2022 volume. This is an improvement from our original forecast for 2023, driven mainly by the strength of our key industrial segments. 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 volumes should decrease by approximately 15% as we continue to focus our sales effort 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 contracts and higher pricing began to flow to our results. leading to an increase in revenue of 1.3 million, despite volume decreasing by half a million pounds. 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 figures 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 receding 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 non-cash impact. Our capital expenditures for fiscal 2023 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 to $2 million in maple. This estimate does not include our Montreal capacity extension 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 dividends 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 prevailing high inflationary pressure. We are committed to our maple segment, and we will continue to manage this business closely, including its current challenging market dynamics. As inflationary pressures begin to recede, 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.