Rogers Sugar Inc.

Good morning, ladies and gentlemen, and welcome to the Rogers Sugar 3rd 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 on how to queue up. Please note that this call is being recorded today, August 14, 2023, at 8 a.m. Eastern Time. I would 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. Thank you all for joining us today. Before we begin, please be reminded that today's call may include forward-looking statements regarding our future operations and expectations. Such statements involve known and unknown risk 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 archive recording of this call will also be available on our website. Now that the formalities are out of the way, I'd like to start by discussing how we are delivering on our goals with the capacity expansion project we announced today, as well as with our solid quarterly results that once again demonstrate our business is generating consistent, profitable growth. I'll then pass the microphone to John Sebastian Curard, our VP Finance and CFO, who can add more detail. Let's start with something we are quite excited about. our investment in upgrading the Eastern Canadian capacity and logistics capabilities. As those who follow us closely will know, our intention is to deliver consistent, profitable growth by concentrating our efforts on supplying the domestic market, which has very strong fundamentals that support long-term demand for our sugar. These strong fundamentals are particularly evident in Ontario and Quebec, where the food manufacturing industry is expanding to supply domestic consumption as well as export markets. Food manufacturers are building factories in the region to take advantage of Canada's favourable sugar economics and proximity to millions of consumers on both sides of the border. That creates robust long-term demand for the sugar we produce. Given that favourable long-term outlook, we are very excited to announce today that we are proceeding with the expansion of our eastern Canadian capacity to the optimization of our Montreal plant, as well as investing in our logistic capabilities in Montreal and the Greater Toronto Area. The project includes adding new refining equipment at our Montreal plant, which will increase refining capacity by approximately 20%. The project also includes construction of a new bulk rail loading section in Montreal to serve increased shipments to the Greater Toronto Area, as well as expansion of our GTA distribution capabilities. I should note here that most construction work in Montreal will be done inside an existing building on site, which will allow production to continue without disruption. We will start construction this fall and expect a new capacity will begin to come on stream about 24 months later. The total investment will be approximately $200 million, which is higher than the $160 million we had previously communicated. JS can go into more detail, but the higher number reflects factors such as inflation, exchange rate impacts on equipment we are sourcing from Europe, and more clarity on requirements as we progress from preliminary engineering to detailed engineering planning. For 135 years, our company has focused on the long term. This investment in our future is in keeping with that philosophy, putting us in an even better position to benefit from strong industry fundamentals in the coming years. By expanding the refining capacity close to our customer base in eastern Canada and the U.S., we reduce our reliance on transporting sugar from our Vancouver plant. This will reduce freight costs and improve margins. It will also leave our western capacity available to support our growth opportunities. Importantly, the project also enhances our ability to produce sugar in Canadian-owned and operated facilities in Canadian communities. We also support the long-term growth of the food manufacturing industry in Canada with all the jobs it creates. In short, this project is good for our customers, our shareholders, our local communities, and our industry as a whole. We are very excited about this next step. Now turning to our third quarter results. This is another very solid quarter for the business, in keeping with our focus on delivering consistent profitable growth. In fact, this is our sixth straight quarter of year-over-year growth in EBITDA. In the quarter, we continue to see strong demand for sugar. Volumes for the quarter were the second highest third quarter volume in our 135-year history, trailing only last year when we had a one-time event that drove up demand. Improved pricing drove a modest financial improvement from the same period last year, despite the lower volume in the current quarter. Our maple business saw a slight decline in financial performance due to lower volume as a result of reduced demand and unfavorable market dynamics. Offsetting those factors, maple continues to benefit from higher average selling prices and our investments in automation, which are reducing production costs. Now, looking more specifically at our sugar segment results, volumes were 190,000 metric tons in sales, a decrease of 11,900 metric tons when compared to the same period last year. In the first nine months of the year, sales totaled more than 579,000 metric tons in line with the same period last year. Last year's quarter was unusually strong due to an unforeseen peak in demand we experienced in the second half of 2022, resulting from disruption that caused tightness in the market that allowed us to capture opportunistic sales. We continue to see firm demand for sugar-containing products across North America and strong volumes in the fourth quarter to date. Trends affecting the business continued into the third quarter with adjusted gross margin improving as a result of strong demand for quality sugar and improved pricing. The benefit of higher selling prices was partly offset by inflationary pressures on operating costs, as well as lower sugar volumes. Now I'd like to say a few words about our Tabor beet crop. You may have seen some of the news about poor growing conditions in Alberta from drought. It is important to note that our beet crop is minimally impacted by these poor weather conditions because most of our acres have access to irrigation. We believe at this point we will have enough water available to us to allow for normal growing conditions. Our beets have been planted. While it is still very early predict, we expect our crop to produce normal yields. Additionally, last quarter I mentioned we have increased production at our Montreal and Vancouver cane facilities to augment production from Tabor to continue meeting our commitments to our customers and serve increased overall demand. Our plant's are running very well and we continue to use our multiple refiners across the country to ensure uninterrupted supply. Also, we are pleased to see the settlement of the Vancouver port labour dispute. We were fortunate that we saw no impact on our operations as we had ample raw sugar on hand on the dock that carried us through. Turning to our outlook, as a result of market dynamics and the timing of export sales, we now anticipate 2023 volumes of 800,000 metric tons, down slightly from our previous forecast of 805,000 metric tons. At the beginning of the year, we set out our expectations with our goal of supporting domestic market, with increases in industrial demand more than offsetting the planned decline in exports. However, timing of contracted volume being pulled by our domestic customers does not always line up perfectly with the completion of our export commitments. As always, we will take advantage of opportunistic export sales when supply and price conditions align. In summary, demand is strong, and we have not seen any losses in our market share. We continue to be well positioned to service the growing food and beverage manufacturing sectors across Canada. As I noted in a previous quarter, we are currently very satisfied with our sugar volume, we remain focused on improved pricing and in delivering improved results. Now turning to our maple segment. Adjusted EBITDA declined slightly in the third quarter, largely due to lower sales volumes driven by consumer spending. Despite lower sales volumes and inflationary pressures, adjusted gross margin improved by 130 basis points compared to the same period last year. as we see the benefits of an improved average selling price and reduced costs due to our automation projects. As I mentioned last quarter, the automation projects for bottling operations at two of our maple plants both came online during the second quarter with an immediate impact on reducing variable costs. We see the contribution to improved financial performance in our adjusted gross margin and expect this contribution to continue for the remainder of 2023 and beyond. We continue to pursue additional projects where we see opportunities. Now, as I usually do, I want to say a few words about our employees. They are essential to delivering reliable, high-quality sugar and maple products. We would not be steadily growing the business without their dedication. We had a strong start to the year. I want to thank them for their commitment. Now I'll turn it over to JS to provide more information on the current quarter as well as an update on the financing status of the capacity project.

Thank you, Mike, and good morning, everyone. Before I speak to our strong third quarter results, I would like to take a few minutes to discuss the financing of our Eastern Canada Capacity and Logistics Expansion Project. As Mike mentioned, the total investment of this important initiative is estimated at approximately $200 million. We are in the process of evaluating several financing options with the objective of aligning the financing plan of this project to our current capitalization profile and credit fundamentals. As such, our financing plan will include a combination of debt and equity or equity-like options. Later today, the Provincial Minister of Economy, Innovation and Energy, Mr. Pierre Fitzgibbon, is expected to join us at our Montreal office to formally announce the support of the Quebec government for our project. This support will be in a form of project-based secured loans from Investis Small Québec for an amount up to $65 million. Also, as you will have seen in our third quarter regulatory filing, the Board of Directors of Rogers has approved the filing of a short-form base shelf prospectus in connection with expected financing initiatives over the next 25 months. This document has been filed with the securities authorities this morning and will provide us flexibility to manage our capitalization needs in the near future. As the project advances, we will continue to evaluate our financing options and will update the market at the appropriate time. The key point I would like to reiterate is that we are undertaking this growth investment in a way that ensures our capitalization structure remains stable throughout the project construction phases and once operational, continuing to provide a strong return to our shareholder while maintaining our good credit fundamentals are priorities for us. As Mike noted, the anticipated investments total approximately 200 million, is greater than the amount of 160 million previously communicated about a year ago. The increase in our estimate is due to several factors that were assessed during the detail and planning and engineering evaluation stage. For example, our detail analysis showed that we needed to upgrade the power supply of the whole plant to accommodate the incremental production. Furthermore, our initial estimate was impacted by several global economic factors, such as the recent inflationary cost pressures and the reduction in value of the Canadian dollars as several pieces of equipment will originate from Europe. Our analysis shows that the expected margin of the new capacity should more than offset the increase in our estimated construction costs and provide a financial return similar to what we are currently generating from our sugar segment. We plan and invest for the long term, and we are very excited about this project, as the added capacity will position us for long-term growth and allow us to maintain our position as the leading sugar supplier in Canada. Now I will turn to our third quarter 2023 results. Consolidated adjusted EBITDA was $23.7 million, up $0.6 million from the same quarter last year, as our sugar segment continued to drive improved performance. We expect sugar demand and pricing to remain strong for the remainder of fiscal 2023, despite lower volumes in the quarter and inflationary pressures on costs. For maple, we expect the challenging market environment to remain through 2023. Let's continue my remarks with a review of the sugar segment. Adjusted EBITDA in the sugar segment was $20.7 million in the third quarter, up 4% from the same quarter last year. Our total sales volume was down 6% compared to the same period last year. As you might recall, in the second half of 2022, the market was experiencing supply tightness that led to an unforeseen peak in demand in our industrial segment during that period. That makes for a difficult comparable on a quarter-to-quarter basis. However, we saw that underlying demand was strong in 2023 as the total sales volume was our second-highest third quarter on record. Our improvement in adjusted EBITDA in the quarter was driven by increased pricing on refining activities, This was partially offset by higher production costs and lower sales volume. Adjusted gross margin increased in the quarter by 2.3 million, or 8% from the same quarter last year. On a per unit basis, adjusted gross margin increased by approximately $21 to $159 per metric ton, driven by higher pricing from strong domestic demand. Distribution costs increased by 1.8 million from prior year period, mainly due to incremental logistical costs incurred to move sugar from our western facilities to support the eastern demand, as well as the lower-than-expected production in Tabor. Administration and selling expenditures were down slightly compared to prior year quarter, due to lower compensation costs attributable mainly to lower share-based compensation expenses. Looking ahead, we have slightly reduced our 2023 sales volume expectations to 800,000 metric tons. This still represents an increase of 5,000 metric tons over our fiscal 2022 volume, which was our highest sales volume year on record. In fiscal 2023, our consumer volumes are expected to remain stable, while liquid volumes are expected to increase by 1% driven by continued strong demand. Our largest segment, industrial, is expected to increase by 2% as demand for sugar-containing products remains firm. As we reassess our segment variances for 2023, We now expect export volume to decrease by 9%. While we continue to focus our sales on capturing the strong economics available in the Canadian market, we will sell into key markets where available and when we can be opportunistic. Additionally, out of an abundance of caution, we have begun importing a limited volume of refined white sugar from Central America to ensure we can mitigate the shortfall of our current year table crop and support the needs of the Canadian domestic markets. We continue to believe in the strength of the underlying North American demand for refined sugar. Our view is blustered by our competitive advantages and favorable market dynamics across all our customer segments. We continue to expect increased pricing to support our financial results and largely mitigate the ongoing inflationary pressures. I will now move to our maple segment. In the third quarter, our maple segment continued to be negatively impacted by inflationary pressures and lower global demand for maple syrup. Adjusted EBITDA at 3 million was slightly lower than the same quarter last year and below our initial expectations. Lower volumes and higher costs more than offset the benefits of recent favorable pricing action. We are beginning to see the positive impacts of improved purchasing and production automation. The initiatives we put forward in recent months are driving efficiencies and mitigating some of the impacts of ongoing inflationary pressures related to energy and labor. As a result, Our adjusted gross margin improved to 9.5% in the current quarter. For the remainder of 2023, we continue to expect the maple business sales volume to be challenged as we factor the impact of global reduction in market demand for maple syrup. We anticipate this challenge to be mitigated in part by negotiated price increases with key customers and lower production costs driven by automation and recently negotiated supply agreement for packaging materials. Before closing, I would like to highlight a few other related financial items. Our adjusted net earnings for the third quarter were $8.7 million, up from $8.4 million last year. On a per share basis, that represents $0.08 per share. Free cash flow for the last 12 months was $47.8 million, a slight decrease of $1.6 million compared to the same period last year, mainly related to timings. For 2023, we expect our capital expenditures to be approximately $25 million on various capital projects in sugar and approximately $1 million in maple. The nature of such spending is similar to prior years and focused on initiatives mainly related to improvement of our current facilities and improved business processes. This estimate is separate from the $200 million investment in our Eastern Canada expansion project. For 2023, we anticipate spending about $10 million in relation to the expansion project $6.9 million of which has already been spent on the planning and detail engineering stages. Today, we are also announcing that the Board of Directors approved the payment of a $0.09 per share dividend in relation to the results of the third quarter. This is consistent with the quarterly dividends paid for the last several years. Overall, the third quarter of 2023 has largely continued with the same trends we have seen since the second half of 2022. In sugar, which represents over 85% of our business, The trends remain favorable as strong sugar demand and market-based pricing increases are expected to continue and provide improved results. We expect the maple segment to continue to face a challenging business environment for the remainder of 2023, driven by difficult global market conditions. We are very excited about our capacity expansion project that we formally announced today. We believe Canada remains an attractive market for investment in sugar refining and processing of value-added food products containing sugar. This is strong demand for sugar-containing product across North America, will help us manage ongoing inflationary pressures. Our company is already well positioned to benefit from those strong trends, and our capacity expansion will allow us to maintain our favorable momentum when the new volume comes on stream in approximately two years. With that, I would like to turn the call back over to the operator for questions.