Rogers Sugar Inc.: Fourth Quarter 2011 Results

MONTREAL, QUEBEC--(Marketwire - Nov. 14, 2011) - Rogers Sugar Inc. (TSX:RSI)

Message to Shareholders:

On behalf of the Board of Directors, I am pleased to present the highlights of the financial results of Rogers Sugar Inc. (the "Company") for the three months and year ended October 1, 2011.

Results for the fourth quarter and year ended October 1, 2011 and September 30, 2010 are as follows:

			For the three months ended							For the year ended
			October 1 2011 (unaudited)				September 30 2010 (unaudited)			October 1 2011 (unaudited)			September 30 2010 (unaudited)
(In metric tonnes) Volume			170,880				192,171			649,078			682,149
(In thousands of dollars)
Gross margin		$	33,399			$	53,237		$	96,359		$	87,639
Expenses:
	Administration and selling		5,298				6,088			20,019			20,056
	Distribution		2,432				2,130			7,960			7,723
	Depreciation and amortization		(14	)			246			549			656
Earnings before interest and provision for income taxes ("EBIT")			25,683				44,773			67,831			59,204
Interest expense			3,386				3,358			11,579			14,214
Provision for (recovery of) income taxes			5,819				7,705			12,032			(224	)
Net earnings		$	16,478			$	33,710		$	44,220		$	45,214

Fourth quarter volume decreased by approximately 21,300 metric tonnes from the comparable quarter in fiscal 2010. Export volume was approximately 19,900 metric tonnes lower than the previous year. In fiscal 2010 approximately 20,000 metric tonnes were shipped to the U.S. against the Tier II duty program in the fourth quarter, with no deliveries this year against that program. Both industrial and consumer volumes were also lower in fiscal 2011 by approximately 1,900 and 300 metric tonnes respectively. This was due mainly to timing in deliveries for the industrial segment. Liquid volume was higher by approximately 800 metric tonnes, due to increased demand from current customers.

For the year, total sales volume of 649,078 metric tonnes represented a decrease of 4.8% over the previous year. The total volume decrease of approximately 33,100 metric tonnes is due mainly to lower export volume of approximately 23,800 metric tonnes and lower liquid volume of approximately 16,600 metric tonnes. This was partially offset by higher industrial volume of approximately 5,000 metric tonnes and higher consumer volume of approximately 2,300 metric tonnes.

Export sales volume was lower by 23,800 metric tonnes in fiscal 2011. In fiscal 2010 the Company benefitted from an unexpected export market opportunity. High refined sugar prices in the U.S., due to a tight supply environment, combined with a sudden decline of world raw sugar values in the spring of 2010, created this export sale opportunity. As a result, the Company was able to sell approximately 41,600 metric tonnes in 2010 to the U.S. Even though the Company incurred Tier II duty costs of approximately $360.00 per metric tonne, the sale still generated a contribution to our financial results. This year's export sales decline to the U.S. was partially offset by higher sales to Mexico this year.

The decrease of 16,600 metric tonnes in liquid volume for fiscal 2011 is due mainly to the loss of HFCS substitutable business as a result of higher raw sugar values during the year, versus lower HFCS values.

Industrial volume was higher by approximately 5,000 metric tonnes during the year due mainly to timing in deliveries and contracts with new customers. Consumer volume increased by approximately 2,300 metric tonnes for the year, due mainly to the recapture of previously lost business.

With the mark-to-market of all derivative financial instruments and embedded derivatives in non-financial instruments at the end of each reporting period, the Company's operating results could have large fluctuations. This accounting income does not represent a complete understanding of factors and trends affecting the business. We therefore prepared adjusted gross margin and adjusted earnings results to reflect the performance of the Company during the reporting period, which are non-GAAP measures. 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 mark-to-market of derivative financial instruments and embedded derivatives in non-financial instruments.

Gain / (Loss)		For the three months ended						For the year ended
(In thousands of dollars)		October 1 2011 (unaudited)			September 30 2010 (unaudited)			October 1 2011 (unaudited)			September 30 2010 (unaudited)
Mark-to-market adjustment	$	4,766		$	18,580		$	175		$	3,258
Cumulative timing differences		3,255			11,559			12,999			(1,979	)
Total adjustment to cost of sales	$	8,021		$	30,139		$	13,174		$	1,279

Gains or losses on these instruments are only recognized by the Company when sugar contracts are delivered to the end user or when natural gas has been used in the operations.

During the quarter, a mark-to-market loss of $0.6 million was recorded on sugar futures, as world raw sugar values increased slightly since June 2011. This resulted in a year-to-date mark-to-market loss of $8.3 million. For natural gas, a mark-to-market loss of $0.5 million was recorded for the quarter and a gain of $4.1 million was recorded for the year as the number of contracts hedged declined during the year. Foreign exchange forward contracts and embedded derivatives on which foreign exchange movements have an impact had a combined mark-to-market gain of $5.9 million for the quarter and a mark-to-market gain of $4.4 million for the year. This substantial gain for the quarter was a result of the movement of the Canadian dollar versus the U.S. dollar during the quarter.

The above mark-to-market adjustments are further adjusted by an accumulated timing impact in the recognition of liquidation gains or losses on sugar futures contracts, on natural gas contracts and on foreign exchange forwards, to arrive at the total adjustment to cost of sales.

In addition, the Company recorded a mark-to-market loss of $0.5 million for the quarter as compared to $0.2 million in fiscal 2010 and a gain of $0.9 million for the year (versus a minimal loss for fiscal 2010) for an interest swap under short-term interest expense. The gain in fiscal 2011 was a result of the shorter period left on the swap.

Therefore, the total adjustment to net earnings before income taxes and free cash flow for the quarter was a gain of $7.6 million compared to $29.9 million in fiscal 2010 and a gain of $14.0 million for the year compared to $1.2 million in fiscal 2010.

Adjusted financial information is as follows:

			For the three months ended								For the year ended
(In thousands of dollars)			October 1 2011 (unaudited)				September 30 2010 (unaudited)				October 1 2011 (unaudited)				September 30 2010 (unaudited)
Gross margin as per above		$	33,399			$	53,237			$	96,359			$	87,639
Adjustment as per above			(8,021	)			(30,139	)			(13,174	)			(1,279	)
Adjusted gross margin			25,378				23,098				83,185				86,360
EBIT as per above			25,683				44,773				67,831				59,204
Adjustment as per above			(8,021	)			(30,139	)			(13,174	)			(1,279	)
Adjusted EBIT			17,662				14,634				54,657				57,925
Net earnings as per above			16,478				33,710				44,220				45,214
Adjustment to cost of sales as per above			(8,021	)			(30,139	)			(13,174	)			(1,279	)
Adjustment for mark-to-market interest swap			467				214				(855	)			38
Future taxes on above			1,943				8,351				3,596				738
Adjusted net earnings		$	10,867			$	12,136			$	33,787			$	44,711

For the quarter, the adjusted gross margin rate was $148.51 per metric tonne compared to $120.20 per metric tonne in fiscal 2010. The increase of $28.31 per metric tonne was due mainly to:

• An adjustment of approximately $2.6 million, or approximately $15.20 per metric tonne, was recorded as a reduction of depreciation expense, following a review of all capital asset useful lives. This review resulted in the extension in useful lives of certain operating capital assets and therefore lowered depreciation expense; and
  
  
• A more favourable sales mix as compared to fiscal 2010 as over 10% of the volume shipped during the quarter in fiscal 2010 was against the U.S. Tier II duty program. A duty of U.S. $360.00 per metric tonne was paid on these sales thus reducing substantially the margin rate of last year's fourth quarter.
  
  

The increase in the year-to-date adjusted gross margin rate of $1.56 per metric tonne is due mainly to a $2.6 million adjustment in the fourth quarter to depreciation expense, as explained above. Without this adjustment, the adjusted gross margin rate would have been lower by $2.44 per metric tonne. The decrease in the adjusted gross margin rate in fiscal 2011 is a result of large premiums paid for some of our raw sugar supply bought during the year. Normally most raw cane sugar requirements are sourced in advance under long term contracts. However, in fiscal 2011, some of these long term contracts were ending and therefore some volume had to be sourced on a prompt basis in a period when raw sugar supply was very tight. As a result significant premiums were paid on approximately 20% of the raw sugar purchased in fiscal 2011. This was partially offset with higher margins earned on beet sugar sales as a result of higher raw sugar values in fiscal 2011. In addition and as explained above, gross margins were lower in the fourth quarter of fiscal 2010 as a large percentage of the volume shipped during that quarter was against the U.S. Tier II duty program for which a duty of $360.00 per metric tonne was paid.

Versus fiscal 2010, distribution costs were $0.3 million and $0.2 million higher than the comparable quarter and year-to-date respectively, due mainly to a higher level of transfers from Vancouver to Taber in the last quarter of fiscal 2011.

Administration costs were comparable on a year-to-date basis, but lower by approximately $0.8 million for the quarter due mainly to lower employee benefit expenses.

Depreciation expense was a small revenue during the quarter following the revision of useful lives of software assets which were extended and for which depreciation expense was adjusted.

Interest expense for the quarter, before mark-to-market adjustments, was lower by approximately $0.2 million due mainly to lower borrowings. Without the mark-to-market gain on the interest rate swap of $0.9 million for the year, interest expense was $1.7 million lower than fiscal 2010. The reduction was due in part to the write-off of $0.7 million for deferred financing costs following the early redemption of the Second series convertible debentures in fiscal 2010 and of lower convertible debt interest of approximately $1.0 million. The reduction in interest for convertible debentures in fiscal 2011 is due mainly to the issuance of the Fourth series debenture in fiscal 2010 in advance of the repayment of the Second series, where an additional interest cost of approximately $0.6 million was incurred, as well as to the conversion of $6.3 million of Third series debentures into common shares during fiscal 2011.

In order to provide additional information the Company measures free cash flow that is generated from operations. Free cash flow is defined as cash flow from operations excluding changes in non-cash working capital, mark-to-market and derivative timing adjustments, financial instruments non-cash amount, funds received or paid from the issue or purchase of shares and investment capital expenditures. Free cash flow 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.

Free cash flow is as follows for the quarter and year-to-date:

(In thousands of dollars)				For the three months ended								For the year ended
				October 1 2011 (unaudited)				September 30 2010 (unaudited)				October 1 2011 (unaudited)				September 30 2010 (unaudited)
Operating activities:
Cash flow from operating activities			$	38,092			$	69,056			$	22,515			$	83,203
Adjustments:
	Changes in non-cash working capital			(24,216	)			(23,991	)			27,358				(20,337	)
	Mark-to-market and derivative timing adjustments			(7,554	)			(29,925	)			(14,029	)			(1,241	)
	Financial instruments non-cash amount			5,075				(1,189	)			9,418				(3,151	)
	Capital expenditures			(4,217	)			(3,702	)			(7,728	)			(8,079	)
	Investment capital expenditures			15				1,686				175				1,713
	Net issuance of trust units			–				531				275				808
	Deferred financing charges			–				-				–				(2,365	)
Free cash flow			$	7,195			$	12,466			$	37,984			$	50,551
Declared dividends/cash distributions			$	7,551			$	10,056			$	32,714			$	40,186

Free cash flow for the quarter was $5.3 million lower than the comparable quarter in fiscal 2010. This was due mainly to the incurrence of income taxes of approximately $2.5 million in fiscal 2011 with the change to a corporation from an income trust, to higher maintenance capital expenditures of $0.5 million and to lower operational results. For the year free cash flow was $12.6 million lower than fiscal 2010. A tax provision of $7.8 million was recorded this year versus a recovery of $0.8 million in fiscal 2010. The remaining shortfall of $3.5 million is due mainly to higher investments in maintenance capital expenditures of $1.2 million and lower profitability at the operating level.

Since January 1, 2011, the Company pays a quarterly dividend of 8.5 cents per share for a total dollar value of approximately $7.6 million per quarter. Prior to January 1, 2011, under the income trust structure a distribution of interest income of 3.83 cents per month or 11.5 cents per quarter was paid. For a taxable Canadian shareholder, the current quarterly dividend of 8.5 cents is equivalent to the 11.5 cents interest distribution that was made before the conversion. For the fiscal year a total of 25.5 cents of dividends and 11.5 cents of interest (for the period of October 1, 2010 to December 31, 2010) were declared for a total of 37 cents per share or $32.7 million.

On September 29, 2011, the Secretary of Agriculture of the United States announced the opening of a quota for refined sugar, due to tightness in the U.S. market for refined sugar, of 136,078 metric tonnes effective October 3, 2011 and closing November 30, 2011. Of that total an amount of 25,000 metric tonnes was allocated specifically to Canada and the balance of 111,078 metric tonnes was allocated to global suppliers on first-come, first served basis. The global quota was filled October 25, 2011 and is therefore closed to any further shipments. Rogers, through its cane refineries, was able to enter approximately 10,000 metric tonnes by the closing date against the global quota. Rogers, as the only producer of Canadian origin refined sugar, is the only Canadian producer who participates in the Canada specific quota of 25,000 metric tonnes. Shipments of beet sugar from Taber, against the Canada specific quota of 25,000, will be maximized until the closing date of November 30, 2011. Following this Rogers will still have its annual refined sugar U.S. quota of approximately 12,000 metric tonnes which will be shipped later in the year. This special quota to the U.S. will help the Company increase its volume and adjusted gross margins in fiscal 2012.

The total sweetener market increased slightly in fiscal 2011 and we believe this trend will continue over the next number of years. In Canada we have not yet experienced the recent U.S. trend whereby some food manufacturers changed their product formulations from HFCS to liquid sucrose. In fact the opposite happened in Canada in fiscal 2011 as some food and mainly beverage manufacturers switched from liquid sucrose to HFCS due to high raw sugar values. We believe that in Canada this movement to HFCS will greatly diminish in the next year as most food manufacturers with the ability to move to HFCS have already done so.

The higher world raw sugar prices that currently exist will positively impact the adjusted gross margin of all domestic beet sugar sales, except for HFCS substitutable sales. Taber's beet crop acreage, currently being harvested, is approximately 34,000 acres and if current harvesting conditions continue we should derive approximately 110,000 tonnes of beet sugar for fiscal 2012. The harvest and beet slicing campaign started in mid-September and the early indications are favourable as the yield per acre harvested and the extraction rate achieved to date are superior than forecast.

The current crop being harvested is the last one under the present contract. Negotiations will start in late calendar 2011 and we anticipate agreeing to a new multi-year contract with the Alberta Sugar Beet Growers within a few months. The higher price of raw sugar values during the last two years have increased the returns to the Growers and should make sugar beet production attractive against other competing crops.

Over half of fiscal 2012's natural gas requirements have been hedged at average prices comparable to those realized in fiscal 2011. Any un-hedged volume should benefit from the current low prices of natural gas and therefore increase adjusted gross margin rates. In addition, futures positions for fiscal 2012 to 2014 have been taken. Some of these positions are at prices higher than the current market values but at the same or better levels than achieved in fiscal 2011. We will continue to monitor natural gas market dynamics with the objective of minimizing natural gas costs.

FOR THE BOARD OF DIRECTORS,

Signed

A. Stuart Belkin

Vancouver, British Columbia

November 23, 2011