Rogers Sugar Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 5 speakers on the call.

Operator

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, 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, answer session at 5:30 pm Eastern Time. I would now like to turn the conference over to Mike Walton, President and CEO.

Operator

Please go ahead, Mr. Walton.

Speaker 1

Thank you, operator, and good evening, everyone. Joining me for today's call is Jean Sebastien Couillard, VP Finance and CFO. During today's call, I will review the Q2 results of 2023 and trends in our industry. Please be reminded that today's call may include forward looking statements 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.

Speaker 1

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 Q2 results. The strong industrial demand in the domestic market that has been evident for the past 5 quarters Continued during the Q2 of fiscal 2023. Improved pricing in our Sugar segment drove a modest improvement in financial performance Roger Sugar is to take advantage of Canada's favorable sugar dynamics and growing industrial and food manufacturing demand. 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.

Speaker 1

In the Q2, our Maple business saw a slight decline in financial performance due to high inflation and slightly lower volumes 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 Volumes reached more than 195,000 metric tons in sales, which is largely in line with the same quarter last year. In the 1st 6 months of the year, Sales totaled more than 388,000 metric tons, an increase for the first half of twenty twenty three Our Industrial segment increased by more than 5,000 metric tons compared to the same quarter last year, partially offset by inflationary pressures on operating costs and higher storage costs for raw sugar. During the quarter, we added raw sugar storage Turning now to our Taber beef crop. As I mentioned previously, we finished the processing campaign with a 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 beefs, we Despite slightly lower volumes in the Q2, we are maintaining our full year sales guidance, which reflects our flexible operating structure, assessment to our customers and the continued use of the domestic market.

Speaker 1

Additionally, to mitigate the production shortfall of our Taber facility, We have increased production at our Montreal and Vancouver facilities and continue to prioritize domestic sales. In the Q2, we concluded negotiations for a new 2 year agreement with the Alberta Sugar Beet Growers We are in the final phase of design and planning. The detailed engineering study is expected to be completed during the Q3, and we look forward to providing an update this session. 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.

Speaker 1

In Maple, adjusted EBITDA lowered in the 2nd quarter session to normal, resulting in higher retail demand. We expect to partially mitigate the difficult business conditions Adjusted gross margin was lower than the comparable period as the Maple segment continues to be negatively impacted by lower volumes, inflationary pressures, As I mentioned last quarter, feedback that a price increase for the 2023 crop, which came into effect on March 1. And to date, we have been able to successfully recover this higher commodity price. This year's maple syrup crop was lower than average crop due to unfavorable weather conditions. Additionally, as I mentioned, the automation projects at 2 of our bottling plants, Both came online during the Q2 with immediate impact.

Speaker 1

The projects are focused on streamlining bottling operations and we are encouraged by the notable impact we are already having on reducing variable costs. We will continue to monitor our operations 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, J. S.

Speaker 1

S.

Speaker 2

Whang:] Thank you, Mike, and good evening, everyone. In the Q2 of 2023, our consolidated adjusted EBITDA was $25,000,000 up $1,000,000 from the same quarter last session to remain strong for the remainder of fiscal 2023. We anticipate this will drive improved results despite ongoing inflationary pressures in 2023. We expect to mitigate the unfavorable business environment with recently negotiated price increases 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 session.

Speaker 2

Adjusted EBITDA in the sugar segment was $22,600,000 in the 2nd quarter, up 6% in the same quarter last year. The pricing increases have more than offset the market based inflationary pressures on cost. Adjusted gross margin Adjusted gross margin increased by approximately $16 to $175 per metric ton. Distribution costs were stable in the quarter, while administration and selling expenditures increased by $1,700,000 from the prior year quarter, Our 2023 sales volumes expectations remains at 805,000 metric tons despite the lower than expected beet sugar volume Overall, our annual expectation represents an increase of 10,000 metric tons over our fiscal 2022 volume. Session.

Speaker 2

Our largest segment, industrial, is expected to increase by 3% as demand for sugar containing product remains high. Finally, as expected, export volumes should decrease by approximately 15 Gross margin in the 2nd quarter increased slightly over the Q1 as the volume was slightly higher. While this indication is encouraging, Inflationary pressures continued to affect our operating costs in the quarter, particularly as it relates to packaging, energy and labor. 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.

Speaker 2

Free cash flow for the last 12 months was $51,800,000 an increase of $5,200,000 compared to the same period last year. This estimate does not include our Montreal capacity expansion 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 a payment of a $0.09 per share dividend a session in relation with the results of the Q2 and consistent with the dividend paid in previous quarters over the last several years. Overall, the Q2 of 2023 has continued with the same trends we saw in the Q1 and the second half of twenty twenty two.

Speaker 2

The Maple segment continues to be impacted by inflationary pressures and challenging market dynamics. However, increased pricing A firm need for sugar containing products across North America is providing strong demand for our sugar products

Operator

Your first question comes from Michael Van Aelst from TD Securities. Please go ahead.

Speaker 3

Hey, guys. It's Evan in for Mike. First question, I guess, on the Maple. I was wondering, well, your gross margin or your gross margin rate as a percentage of sales came in below what you had reported in the Q1. I was wondering if you could talk a little bit about the gross margin pressure that you're seeing quarter over quarter.

Speaker 3

Like Why did it decline more in Q2 versus Q1?

Speaker 2

Yes. I mean, I There is the trend in the market is very competitive. We have seen some of our costs, especially on the fixed costs side not Being amortized as much as we would like them to be. Volume is a bit of a key here. So if you look, our volume has not been as high as it's been in the past And that's impacting the overall recovery of those fixed costs.

Speaker 2

So the market the maple market remains challenging. We are able to put through price increases. However, it's still lagging with some of the inflationary pressures that we have been recently facing.

Speaker 3

Okay. And in terms of price increases, what's the timing for those? Are they all in now? Or is there more coming as the months progress?

Speaker 1

Evan, the price increases come up as contracts are renewed and as they come up through the cycles of renegotiation. A lot of them are sequence with the PPAC price increase, which was March 1. So we'll see those in forward quarters as the new contracts come online.

Speaker 3

Okay, great. And in terms of the, I guess, efficiencies

Speaker 1

Yes. So our automation projects have been a really bright spot in the Maple business, and the team delivered these projects on time, on budget, and we're seeing the benefits of these already

Speaker 3

Okay, great. Turning to sugar, I guess, So, yes, your gross margin rate was quite strong. Is all the pricing now in this quarter or is there still more pricing to come in future quarters? And if so, how much? And Will those price increases just simply offset further rising costs?

Speaker 3

Or will they boost margins further?

Speaker 1

Yes. Evan, the sugar contracts come up for renewal regularly throughout the year. We're in that cycle now, and so we'll continue To secure price increases to offset any inflationary costs in the market as we negotiate those new contract renewals.

Speaker 3

Okay, great. And I guess last question, for the admin and selling expenses in Sugar, can you quantify how much Stock based comp was included in this quarter. If I'm not mistaken, last year had About $1,300,000 of stock based comp extends and there was an amount as well related to the departure of the previous CEO. So So can you quantify how much stock based comp is in this quarter?

Speaker 2

I think it's about the same. We're in the same ballpark than last quarter. And last year, we had the departure of the CEO. You are correct. This year, the stock price has rallied and as we're looking at the stock based demand by the end of this year And makes it fairly sensitive to stock price because it's directly related to the stock price and the closer we get to the date a session.

Speaker 2

A valuation then the Monte Carlo model that values those gets puts more weight towards the recent stock price.

Speaker 3

Okay. So then in terms of your guidance for admin and selling to be stable in fiscal 'twenty three, is that Stable excluding stock based comp or is that an all in stable all in number?

Speaker 2

It is stable considering excluding Stock based comp and if stock price moves, then there will be a direct impact on our selling items.

Speaker 3

Okay.

Operator

Your next question comes from Andrew Leno from National Bank.

Speaker 4

I'll start with Sugar. I just wanted to make sure and to clarify. I mean, I know you guys hedge almost everything, if not everything, but I just wanted to check For the number 11 prices, are you fully hedged or is there any exposure that could show up in the results as the price has gone out?

Speaker 2

Yes. So our position is to mitigate risks. So we don't really take speculative position on ROW 11. And so we're not there we are actually, I would consider we

Speaker 1

are properly hedged for that.

Speaker 4

Okay. That's great to hear. Thank you, Jess. The other question I have is a bit about competition, especially in sugar. And Mike, you made a bit of a reference that you have no problem with it, So to speak.

Speaker 4

But I was just wondering if you can expand a little bit. I mean, commentary and some news we've seen out there on the talk of significant Can you talk to that on how you should it come online if how could you respond to that?

Speaker 1

Andreen, thanks. It's a great question. And as you can imagine, we monitor supply and demand carefully in Canada. It's a preoccupation as We meet our commitments to our domestic customers on the contracts they have in place. As I said in the past, I've been around a little while, as you know, in the I'm going to be one of the old guys.

Speaker 1

But Canada has always been a competitive market, and we're not new to this. And Roger has been in business for over 135 years. And we're pretty proud of the track records we have in serving the market and understanding the market. And we're addressing the, as you know, the What we see is continued strong demand in the domestic market by looking at our own expansion options in Eastern Canada. So We'll remain focused on that.

Speaker 1

And in summary, in my view, it's a great time to be in Sugar Business in Canada.

Speaker 4

And the other question I have, it's more on sugar, but you mentioned shifting some volumes to Vancouver and Montreal because of the beach shortfall. Can you talk a bit about the capacity in

Speaker 1

association. Yes. Thanks, Andre. Yes, we're running the plants Hard in Vancouver and Montreal both and both plants are responding very well. We're very pleased with the performance we're getting out of And they're confident we'll continue to meet the contracted sugar commitments that we have in the market.

Speaker 1

We flex that's the beauty of having the multi sites Manufacturing platform, we flex our strength and go to the needs as required in the market from time to time.

Speaker 4

Okay, Great. Thank you. And the last one for me in Maple and I'll jump in the queue. But have you seen any significant new competition in Maple or it's just the same

Speaker 1

Yes, I have not seen any new competition in the maple business at all, Andrew.

Speaker 4

Okay. Thanks very much, guys.

Operator

Your next question comes from Neban Glohin from BMO Capital Markets. Please go ahead.

Speaker 4

Thanks and good evening guys.

Speaker 2

Hi. I was hoping

Speaker 4

we could chat on the sugar segment. Just wondering if you're able to quantify the volumes that you're currently transferring from West to East And then the incremental cost associated with those transfers?

Speaker 2

We don't really We don't really quantify these numbers as it's because it can be linked to some of our customers. I think from a Cost perspective, I think the we've been doing the transfers for the last few years. And the main reason is we had some letter issues in Taber. So we had some again this year. But If you recall, we had some issues 2 years ago.

Speaker 2

And so the demand being such, we've been moving. So we're expecting our distribution costs to be

Speaker 4

And then maybe just on sugar as well. When we think about margin for the back half of the year, it looks like comps Sorry to get a bit tougher in the Q4. Is there anything you can comment on sort of year over year increases in margins Q3 relative to Q4.

Speaker 2

Well, we're I think if

Speaker 3

you look at our margin

Speaker 2

in the On the sugar side, it's cyclical and so not all the quarters are the same. And so we're expecting to The same type of cycle and it's really based on the product mix or a customer mix that goes throughout the year. So We will anticipate that our margin for the second half of the year will be aligned with what we've seen in the past.

Speaker 4

Okay. That's helpful. And then I guess just the last one for me was on the expansion project. Just wondering if you can provide an

Speaker 2

As we are completing the detailed engineering, our goal here is not to overly stress our balance sheet and to make sure we bring options to the table that will be a good compromise between that and between the needs of our shareholder Our current shareholders, so we will come back with a detailed plan as we do a formal announcement or formal review of our project probably in the summer.

Operator

Mr. Walton, there are no further questions at this time. You may proceed.

Speaker 1

Thank you, operator, and thank you, everybody, for participating, and we'll speak to you on the next quarter. Thank you.

Operator

Ladies and gentlemen, this

Powered by Quartr
Earnings Conference Call
Rogers Sugar Q2 2023
00:00 / 00:00