Rogers Sugar Income Fund
TSX : RSI.UN

Rogers Sugar Income Fund

November 20, 2008 16:00 ET

Rogers Sugar Income Fund: Fourth Quarter 2008 Results

Higher Adjusted EBITDA for the Quarter. New U.S. Quotas Opened During the Quarter. Lower Interest Cost for the Quarter, Before Mark-To-Market of Interest Swap.

MONTREAL, QUEBEC--(Marketwire - Nov. 19, 2008) -

Message to Unitholders:

On behalf of the Board of Trustees, I am pleased to present the highlights of the financial results of Rogers Sugar Income Fund (TSX:RSI.UN) (the "Fund") for the three months and year ended September 30, 2008.

Results for the fourth quarter and year ended September 30, 2008 and 2007 as follows:



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For the three months ended For the year ended
September 30 September 30
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2008 2007 2008 2007
(unaudited) (unaudited) (unaudited) (unaudited)
(In metric tonnes)
Volume 190,516 177,382 693,130 689,742
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(In thousands
of dollars)
Gross margin $23,983 $19,542 $107,110 $107,064
Expenses:
Administration
and selling 5,162 5,305 20,107 19,355
Distribution 3,225 3,528 11,613 10,838
Product
withdrawal/
recall (reversal)
provision (300) (600) (300) (600)
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Earnings before
interest, provision
for income taxes
and depreciation
and amortization
("EBITDA") 15,896 11,309 75,690 77,471
Depreciation and
amortization 3,357 3,182 12,929 12,606
Interest expense 4,522 3,784 15,673 15,402
(Recovery of)
provision for
income taxes (3,419) (3,225) (727) 4,336
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Net earnings $11,436 $7,568 $47,815 $45,127
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Fourth quarter volume increased by 13,100 metric tonnes from the comparable quarter in fiscal 2007. This was due mainly to higher liquid and export volume of approximately 12,000 and 8,000 metric tonnes respectively. The increase in liquid volume was due to the recovery of an HFCS liquid substitutable account earlier in the year. The increase in export volume occurred as a result of a special increase in the U.S. refined sugar quota. Exceptionally, in August 2008, due to a potential shortage of refined sugar following severe damages to a major U.S. cane refinery, the United States Department of Agriculture ("USDA") announced an increase of 272,155 metric tonnes in its refined sugar quota. Of that amount, 40,000 metric tonnes was allocated specifically to Canada, 68,278 metric tonnes to Mexico, and the remaining 163,877 metric tonnes to a global quota to be filled on a first come first served basis. This initial quota was opened August 14, 2008 and will close at the latest, December 31, 2008. All Canadian refiners can participate in the shipments of refined sugar against the global quota, but the increase of 40,000 tonnes to the Canada-specific quota can only be supplied by beet sugar from Taber. As a result, Lantic was able to deliver approximately 9,700 metric tonnes against these quotas in the last quarter of the fiscal year, while export sales to Mexico were approximately 1,700 metric tonnes lower during the quarter.

Industrial volume was lower by approximately 3,800 from the comparable quarter, due to the loss of a large account earlier in the year, while consumer volume was also lower by approximately 3,100 metric tonnes from the comparable quarter in fiscal 2007, due mainly to increased competition from other Canadian refiners and refined sugar importers.

For the year 2008, volume increased by 3,400 metric tonnes or 0.5%. Liquid volume for the year was up by 23,100 metric tonnes due in large part to the recovery of HFCS substitutable business, mainly in the western operations. This offset a similar volume decrease of 23,200 metric tonnes in industrial volume due to the loss of a large industrial account in eastern Canada. Export volume increased by 11,400 metric tonnes due mainly to the opening of the quota discussed previously. In addition, during the year, approximately 16,000 metric tonnes of refined sugar was shipped to Mexico, an increase of 4,000 metric tonnes over the previous year. Consumer volume decreased by approximately 8,000 metric tonnes during the year, after two years of stability in that segment. The major reason for that decrease is due mainly to the increase in competitive activity as mentioned above.

Due to the adoption of new accounting policies, effective October 1, 2006, for derivative financial instruments, the Fund's operating results could have large fluctuations. These fluctuations are due to the mark-to-market of all derivative financial instruments and embedded derivatives in non-financial instruments and reversal of transitional balances at the end of the reporting period. This accounting income does not reflect the performance of the Fund. We therefore prepared adjusted gross margin and adjusted earnings results to reflect the performance of the Fund during the reporting period. This adjusted performance is comparable to the earnings reported in previous interim reports. In this press release, we will discuss adjusted gross margins, which reflect the operating income without the impact of the transitional results from adopting this new accounting policy, mark-to-market of derivative financial instruments and embedded derivatives in non-financial instruments.



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Gain/(Loss) For the three months ended For the year ended
September 30 September 30
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(In thousands 2008 2007 2008 2007
of dollars) (unaudited) (unaudited) (unaudited) (unaudited)
Mark-to-market
adjustment,
including
transitional
amortization $(8,717) $(2,649) $(2,041) $2,824
Timing in
recognition of
liquidation
(gain) or loss
for sugar
inventory, sales
& purchase
contracts, natural
gas contracts
and foreign
exchange futures 2,641 (6,217) 1,225 (3,600)
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Total $(6,076) $(8,866) $(816) $(776)
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In addition, the Fund recorded at the end of the fourth quarter, a mark-to-market loss of $1.4 million on the mark-to-market of an interest swap, shown under interest expense. Therefore, the total adjustment to net earnings before income taxes and distributable cash for the quarter is $7.5 million and $2.2 million for the year-to-date.

Adjusted financial information is as follows:



-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended For the year ended
September 30 September 30
-------------------------------------------------------------------------
(In thousands 2008 2007 2008 2007
of dollars) (unaudited) (unaudited) (unaudited) (unaudited)

Gross margin
as per above $23,983 $19,542 $107,110 $107,064
Adjustment as
per above 6,076 8,866 816 776
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Adjusted gross
margin 30,059 28,408 107,926 107,840
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EBITDA as per above 15,896 11,309 75,690 77,471


-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended For the year ended
September 30 September 30
-------------------------------------------------------------------------
(In thousands 2008 2007 2008 2007
of dollars) (unaudited) (unaudited) (unaudited) (unaudited)

Adjustment as
per above 6,076 8,866 816 776
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Adjusted EBITDA 21,972 20,175 76,506 78,247
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Net earnings as
per above 11,436 7,568 47,815 45,127
Adjustment to cost
of sales as per
above 6,076 8,866 816 776
Adjustment for
mark-to-market
interest swap 1,394 - 1,394 -
Deferred taxes
on above (2,357) (2,844) (563) (296)
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Adjusted net
earnings $16,549 $13,590 $49,462 $45,607
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For the quarter, adjusted gross margin rate was $157.78 compared to $160.15 in fiscal 2007. The decrease of $2.37 per metric tonne was due mainly to a less favourable sales mix with higher HFCS liquid substitutable business, and to a higher energy rate as compared with fiscal 2007's fourth quarter.

For the year, adjusted gross margin rate was $155.71 in fiscal 2008 compared to $156.34 in fiscal 2007. The Taber pre-hedge contributed $6.6 million or almost $9.60 per metric tonne in fiscal 2007, as opposed to $2.2 million and $3.17 per metric tonne in fiscal 2008. Discounting the impact of the Taber pre-hedge, adjusted gross margin rate increased in fiscal 2008 due mainly to improved selling margins and good operational results in Taber.

Distribution costs were $0.3 million lower than the comparable quarter in fiscal 2007 due in large part to Taber's reduced outside warehousing costs. For the year, costs were higher by $0.8 million, as more products had to be warehoused in Taber, early in the year, following another large beet crop.

Administration costs were slightly lower for the quarter and $0.7 million higher for year. The unfavourable variance for the year was due mainly to an income of $1.4 million realized on the sale of a Seat on the New York Commodity Exchange in fiscal 2007. This was partially offset by lower pension costs and post-retirement benefits of approximately $0.9 million in fiscal 2008.

On March 22, 2006, Lantic announced a product withdrawal/recall due to metallic strands inadvertently entering the distribution system for certain products shipped to the Ontario and Maritime markets. After reviewing the incident with the Canadian Food Inspection Agency (the "CFIA"), it was decided to recall all sugar and products manufactured with such sugar during the period concerned.

An initial provision of $2.0 million was recorded in fiscal 2006, as an estimate for the costs to be incurred by Lantic. To date, all but one claim has been settled. Based on previous settlements achieved, and the level of complexity of the remaining claim, the provision has been reduced to approximately $0.3 million at September 2008. As a result $0.3 million was reversed to income in fiscal 2008, while $0.6 million had been reversed in fiscal 2007.

Following the amalgamation of Lantic Sugar Limited and Rogers Sugar Ltd. in June 2008 to form Lantic Inc., the Company entered into a new five year term revolving credit facility with a syndicate of lenders for an amount of $200.0 million. The funds from this new revolving facility plus available cash were used to repay the term debt then outstanding. In order to fix the interest rate on a substantial part of the expected drawdown on the new credit facility, the Company, on July 7, 2008, entered into a five-year interest swap agreement for an amount of $70.0 million, at a base rate of 4.0%. Interest expense for the quarter was higher by $0.7 million from the comparable quarter of fiscal 2007. This unfavourable variance was due to a mark-to-market charge on the interest swap of $1.4 million during the quarter. Without this charge, interest expense would have been $0.7 million lower for the quarter and $1.1 million lower for the year.

As a result, total term loan and short-term interest expenses are lower as total borrowings were reduced for the quarter and for the year, and borrowing rates were also lower than the previous year.

A year-end adjustment was recorded in future taxes due to changes in future tax rates, and changes which resulted from the amalgamation of Lantic Sugar Limited and Rogers Sugar Ltd. into Lantic Inc.

The Fund measures distributable cash. Distributable cash is not intended to be representative of cash flows or results of operations determined in accordance with GAAP. It may also not be comparable to similar measures used by other companies or income trusts. Distributable cash is meant to show to the Unitholders the ability of the Fund to pay distributions based on the operating performance of the Fund and its operating subsidiary during the specified period.



-------------------------------------------------------------------------
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(In thousands For the three months ended For the year ended
of dollars) September 30 September 30
-------------------------------------------------------------------------
2008 2007 2008 2007
(unaudited) (unaudited) (unaudited) (unaudited)
Operating
activities:
Cash flow from
operating
activities $9,001 $28,188 $23,002 $88,607
Capital expenditures (1,849) (2,188) (7,254) (6,945)
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Standardized
distributable cash 7,152 26,000 15,748 81,662
Adjustments:
Changes in non-cash
working capital 4,125 (26,553) 31,669 (24,669)
Mark-to-market and
derivative timing
adjustments 7,470 8,866 2,210 776
Financial instruments
non-cash amount (4,071) 5,724 1,725 (1,460)
Investment capital
expenditures 326 206 597 929
Repurchase (net of
issuance) of
trust units (1,586) (1,317) (806) (4,665)
Deferred financing
charges (921) - (921) -
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Adjusted
distributable cash $12,495 $12,926 $50,222 $52,573
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Declared
distributions $(10,096) $(9,657) $(40,082) $(37,728)
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Adjusted distributable cash for the quarter was $0.4 million lower than the comparable quarter in fiscal 2007 mainly due to the payment of deferred financing charges on the new revolving credit facility.

In fiscal 2008, the Fund distributed $40.1 million, or $0.4567 per unit, compared to $37.7 million, or $0.4285 per unit in fiscal 2007. On a consolidated basis, adjusted distributable cash for fiscal 2008 was $50.2 million compared to $52.6 million in fiscal 2007. The decrease was due mainly to lower adjusted EBITDA of $1.7 million, and the payment of deferred financing charges in fiscal 2008. The Fund distributed 80.0% of its distributable cash in fiscal 2008 compared to 71.8% in fiscal 2007.

For the quarter, the Fund repurchased and cancelled 374,900 units under its Normal Course Issuer Bid for a value of $1.6 million. This Normal Course Issuer Bid expires on November 27, 2008. Our intent is to continue with a new Normal Course Issuer Bid for next year. The Fund will again purchase units if the price trading range does not reflect what we consider to be the fair value of the units.

On October 27, 2008, the USDA announced that the Government of Mexico had informed the USDA that Mexico would continue to export sugar to the U.S. under the duty-free access provided by the North American Free Trade Agreement ("NAFTA") and therefore the portion allocated to Mexico will not be used and was available for re-allocation by the USDA. As a result, the 68,278 metric tonnes which were initially allocated to Mexico were re-allocated by the USDA to a global refined sugar quota to be supplied on a first-come-first-served basis. The USDA reallocated this global quota under five tranches, the first being of 28,278 metric tonnes opening October 30, 2008 and four other tranches of 10,000 metric tonnes opening every two weeks thereafter.

The recent decline in natural gas prices has allowed the Company to hedge most of its winter gas requirements and almost 80% of its 2009 summer requirements at average prices lower than the previous year. In addition, owing to the recent decline in prices, between 30% and 60% of our expected natural gas usage has been hedged for the years 2010 through 2013 at prices at or better than fiscal 2008. On the other hand, the lower Canadian dollar value, combined with the new carbon tax imposition in the provinces of Quebec and British Columbia, will offset some of the benefits of the lower natural gas prices.

In the month of November, a new five-year labour contract was agreed to with the main unit (representing approximately 85% of the unionized employees) of the Montreal refinery unionized employees, at competitive market rates.

On October 31, 2006, Canada's Minister of Finance made an announcement concerning the imposition of a distribution tax on distributions from publicly traded income trusts. This legislation was enacted in June 2007, and if no further changes are brought forward in legislation over the next two years, a distribution tax on distributions from traded income trusts will be imposed in calendar 2011.

FOR THE BOARD OF TRUSTEES,

(Signed)

Edward Y. Baker,

Montreal, Quebec

November 20, 2008

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