Rogers Sugar Inc.

Good afternoon, ladies and gentlemen, and welcome to the Royal Sugar Second 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, May 10, 2023, at 5.30 p.m. Eastern Time. I will now turn the conference over to Mike Walton, President and CEO. Please go ahead, Mr. Walton.

Thank you, Operator, and good evening, everyone. Joining me for today's call is John Sebastian Couillard, VP Finance and CFO. During today's call, I will review the second 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 second quarter results. The strong industrial demand in the domestic market that has been evident for the past five quarters continued during the second quarter of fiscal 2023. Improved pricing in our sugar segment drove a modest improvement in financial performance from the same period last year. The continued strength in our sugar segment demonstrates how well positioned Roger Sugar is take advantage of Canada's favorable sugar dynamics and growing industrial and food manufacturing demand. This is also key to why we are considering expanding our sugar refining and distribution capacity. While Canada might seem like a small market in the global picture, it's important to note that approximately 50% of our industrial sugar sales go into sugar-containing products that are sold in the United States, a market 10 times the size of ours. with consistently strong demand. In the second quarter, our maple business saw a slight decline in financial performance due to high inflation and slightly lower volume, despite higher average selling prices. We expect the challenging market conditions in our maple segment to remain through the second half of the fiscal year. We plan to mitigate the unfavorable market dynamics with recently negotiated price increases and productivity improvements from recent automation investments. Now turning more specifically to our sugar segment results, in sugar, volumes reached more than 195,000 metric tons in sales, which is largely in line with the same quarter last year. In the first six months of the year, sales totaled more than 388,000 metric tons, an increase for the first half of 2023 of 3.1% over the same period last year. During the quarter, Higher industrial and liquid volumes largely offset declines in consumer and export volumes. Our industrial segment increased by more than 5,000 metric tons compared to the same quarter last year, almost directly offsetting the planned decline in export volumes. Increased industrial volumes were driven by continued strong demand for sugar-containing products in the domestic market and the United States. Our consumer business lowered by 1,400 metric tons from the same quarter last year, with quarterly sales now in line with pre-pandemic levels. Adjusted gross margin increased from the same period last year due to improved average pricing for refined sugar products driven by continued strong demand. The benefit of higher selling prices was partially offset by inflationary pressures on operating costs and higher storage costs for raw sugar. During the quarter, we added raw sugar storage capacity at our Montreal plant to support the growing demand for refined sugar in eastern Canada and reduce supply chain risk. Turning now to our Tabor beet crop. As I mentioned previously, we finished the processing campaign with lower sugar production than last year due to unfavorable weather conditions in the latter stage of the growing period, which has reduced the expected sugar content from the beet. ended the production season with 105,000 metric tons, 15,000 metric tons lower than last year's crop. Despite the lower volumes from unfavorable weather, work done previously to improve our processing continues to pay dividends. Despite slightly lower volumes in the second quarter, we are maintaining our full-year sales guidance, which reflects our flexible operating structure, our commitment to our customers, and the continued strong demand of the domestic market. Additionally, to mitigate the production shortfall of our Tabor facility, we have increased production at our Montreal and Vancouver cane sugar facilities and continue to prioritize domestic sales. In the second quarter, we concluded negotiations for a new two-year agreement with the Alberta sugar beet growers for the supply of sugar beet to the Tabor beet plant that will start with our 2023 crop. In terms of our prospective capacity expansion project, we are in the final phase of design and planning. The detailed engineering study is expected to be completed during the third quarter, and we look forward to providing an update this summer. As you'd expect, we are monitoring how industry capacity will evolve over coming years as planned expansions and facilities come online, and we are very comfortable with our competitive position. Now turning to the Maple segment, In maple, adjusted EBITDA lowered in the second quarter, largely due to lower sales volume from existing customers and unfavorable market dynamics. Our maple business segment has been impacted by high inflation, resulting in softer demand over the last year. We anticipate a recovery over the longer term as inflation levels return to normal, resulting in higher retail demand. We expect to partially mitigate the difficult business conditions in the second half of the year, as new pricing with key customers is taking effect and automation projects for bottling operations are implemented in our Quebec flag. Adjusted gross margin was lower than the comparable period, as the maple segment continues to be negatively impacted by lower volume, inflationary pressures, partially offset by improved average selling price. Now I'd like to briefly provide an update to the maple pricing and the 2023 maple crop. As I mentioned last quarter, CPAC, that a price increase for the 2023 crop, which came into effect on March 1st, and to date, we have been able to successfully recover this higher commodity price. This year's maple syrup crop was a lower than average crop due to unfavorable weather conditions. Additionally, as I mentioned, the automation projects at two of our bottling plants both came online during the second quarter with immediate impact. The projects are focused on streamlining bottling operations and we are encouraged by the notable impact they are already having on reducing variable costs. We will continue to monitor our operations and pursue additional automation projects where we see opportunities for further improvement. Finally, before handing the call over to JS, I just want to say thank you to our employees whose dedication and effort have led to another great quarter and strong first half of the year. Thank you for your commitment to delivering essential ingredients to our customers. Over to you, Jeff.

Thank you, Mike, and good evening, everyone. In the second quarter of 2023, our consolidated adjusted EBITDA was $25 million, up $1 million from the same quarter last year, as our sugar segments continued to drive improved performance for 2023. The favorable impact of the strength of our sugar segments was partially offset by softer results in our maple segments in the second quarter. We expect sugar demand and pricing to remain strong for the remainder of fiscal 2023. We anticipate this will drive improved results despite ongoing inflationary pressures and lower-than-expected production out of our Tabor sugar beet facility. For maple, we anticipate the challenging market dynamics to continue in the second half of 2023. We expect to mitigate the unfavorable business environment with recently negotiated price increases and with the benefits of newly implemented production automation initiatives at our plants. I will now focus the next portion of my remarks on the sugar sector. Adjusted EBITDA in the sugar sector was $22.6 million in the second quarter, up 6% in the same quarter last year. As Mike mentioned, volumes were largely in line with the second quarter of last year. We continue to prioritize our sales effort on serving the domestic markets to meet the incremental demand seen from our industrial customers. We have done so by improving the throughput of our cane sugar facilities and by limiting our export volume. Our improvement in adjusted EBITDA in the quarter was driven by increased pricing for refining activity. The favorable impact of increased pricing was partially upset by higher production costs and higher administration and selling costs. Demand in the domestic sugar market remained strong, in particular from our industrial customers, and on average, the pricing increases have more than offset the market-based inflationary pressures on cost. Adjusted gross margins increased in the quarter by 2.9 million, or 9% from the same quarter last year. On a per-unit basis, adjusted gross margins increased by approximately $16 to $175 per metric ton. Distribution costs were stable in the quarter, while administrations and selling expenditures increased by $1.7 million from the prior year quarter, mainly due to higher accrual for share-based compensation expenditures, reflecting the recent increase in our share price. 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 high financial results and largely mitigate the ongoing inflationary pressures. Our 2023 sales volumes expectations remains at 805,000 metric times, despite the lower than expected beet sugar volumes produced this year. Our output considers increased throughput from our Vancouver and Montreal facilities as compared to prior years. Overall, our annual expectation represents an increase of 10,000 metric times over our fiscal 2022 volumes. In fiscal 2023, Our consumer volumes are expected to remain stable, while liquid volumes are expected to increase by 4% as we anticipate customer demand to remain strong. Our largest segment, industrials, is expected to increase by 3% as demand for sugar-containing products remains high. Finally, as expected, export volumes 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 continue my remarks with some comments on our maple segment. Our maple segment continued to be negatively impacted by inflationary pressure and unfavorable market dynamics in the second quarter. As a result, adjusted EBITDA was lowered in last year by $0.2 million at $2.4 million. This reflects the unfavorable impact of lower volume and higher costs, which were not offset by the benefits of recent pricing increases. For the maple business segment, we believe that higher sales volume remains the key to higher profitability in the future. Gross margin in the second quarter increased slightly over the first quarter, as the volume was slightly higher. While this indication is encouraging, the market remains highly competitive, with global demand being impacted by high inflation. We continue to carefully manage our operations to remain competitive in the market. Inflationary pressures continue to affect our operating costs in the quarter, particularly as it relates to packaging, energy, and labor. As a result, adjusted gross margin was 7.2% each quarter, down from 8% during the same quarter last year. Moving forward for the second half of 2023, we anticipate our maple segment to continue to be negatively impacted by softer retail demand caused by lingering high inflation and challenging market dynamics. Pricing increases will continue as contracts come up for renegotiation. and our automation projects are expected to drive improved efficiency and lower production costs for the remainder of 2023. Before closing, I would like to highlight a few other related financial items. Our adjusted net earnings for the second quarter were $9.1 million, or $0.09 per share, unchanged from the comparable period last year. Free cash flow for the last 12 months was $51.8 million, an increase of $5.2 million compared to the same period last year. The increase was mainly due to higher adjusted EBITDA, excluding the non-cash impact. Our capital expenditures for fiscal 2023 are expected to be similar to last year, with spending mainly related to image 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 maples. This estimate does not include our Montreal Capacity Extension project. As Mike mentioned, this exciting growth opportunity is progressing well, and we expect to provide further updates over the summer. Today, we are also announcing that the Board of Directors approved the payment of a $0.09 per share dividend in relation with the results of the second quarter and consistent with the dividend paid in previous quarters over the last several years. Overall, the second quarter of 2023 as continued with the same trends we saw in the first quarter and the second half of 2022. The maple segment continues to be impacted by inflationary pressures and challenging market dynamics. However, increased pricing and improved efficiency should help mitigate the difficult market conditions we have been facing over the last year. That being said, the ongoing strength in our sugar business, which represents over 90% of our first six-month adjusted EBITDA, 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 current inflationary pressures. With that, I would like to turn the call back over to the operator for questions.