Rogers Sugar Inc.
TSX : RSI

Rogers Sugar Inc.

November 18, 2014 16:01 ET

Rogers Sugar Inc.: Fourth Quarter 2014 Results

- Adjusted Gross Margin for the Quarter Higher Than Fourth Quarter Last Year and Comparable Year-To-Date

- Additional Administrative Expenses for the Quarter and Year-To-Date Due to Productivity Improvement Driven Workforce Reductions in Montreal And Non-Cash Pension Plan Expense

MONTRÉAL, QUÉBEC--(Marketwired - Nov. 18, 2014) - 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 September 27, 2014.

Results for the fourth quarter and fiscal years 2014 and 2013 are as follows:

For the three months ended For the years ended
September 27, 2014
(unaudited)
September 28, 2013 (1)
(unaudited)
September 27, 2014
(unaudited)
September 28, 2013 (1)
(unaudited)
(In metric tonnes)
Volume 170,767 176,641 646,376 649,274
(In thousands of dollars)
Gross margin $ 15,077 $ 17,330 $ 82,939 $ 84,791
Expenses:
Administration and selling expenses 9,238 3,425 24,304 18,187
Distribution 2,133 2,166 8,801 8,110
Results from operating activities ("EBIT") 3,706 11,739 49,834 58,494
Net finance costs 2,492 2,627 10,556 9,127
Income tax expense 340 2,603 10,049 12,875
Net earnings $ 874 $ 6,509 $ 29,229 $ 36,492
Net earnings per share basic $ 0.01 $ 0.07 $ 0.31 $ 0.39
(1) Adjusted to reflect the impact relating to the implementation of the amendments to IAS 19 (2011), Employee benefits, which can be found in note 3 (q) (i) of the September 27, 2014 consolidated financial statements.

The fourth quarter volume decreased by approximately 5,900 metric tonnes versus the comparable quarter last year. Liquid volume decreased by approximately 4,800 metric tonnes in the fourth quarter of fiscal 2014 due to a HFCS substitutable contract that ended in March 2014. Industrial and export volumes were also lower by approximately 2,000 metric tonnes and 800 metric tonnes, respectively, due to timing in deliveries. These decreases were slightly offset by an increase of approximately 1,700 metric tonnes in the consumer market due to timing in customer promotions.

The Company's total sugar deliveries were lower for the year. For fiscal 2014, total sales volume of 646,376 metric tonnes decreased by approximately 2,900 metric tonnes or 0.4% over the previous year.

The industrial segment increased by approximately 5,400 metric tonnes due to volume gained from new and existing customers.

Total consumer volume was higher than last year by approximately 2,900 metric tonnes. The Company entered into a new multi-year national agreement with a major consumer account that took effect in January 2014. The volume gained from this new multi-year agreement was somewhat offset by the fact that the Company did not re-sign another important Eastern consumer account starting in the second half of the current fiscal year.

The increases in industrial and consumer segments were more than offset by a reduction in export volume of approximately 9,500 metric tonnes. In fiscal 2013, the Company delivered approximately 15,000 metric tonnes to Mexico. In fiscal 2014, the Mexican market had surplus inventories and as a result, export volume to Mexico was minimal. The loss of the Mexican volume was somewhat mitigated by approximately 5,600 metric tonnes entered against the U.S. global quota that opened and closed on October 1, 2013.

Finally, the liquid segment decreased by approximately 1,700 metric tonnes compared to the previous fiscal year due to timing in deliveries of certain accounts.

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 adjusted 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) September 27, 2014
(unaudited)
September 28, 2013
(unaudited)
September 27, 2014
(unaudited)
September 28, 2013
(unaudited)
Mark-to-market adjustment $ (6,148 ) $ (1,756 ) $ (1,432 ) $ (7,972 )
Cumulative timing differences (2,763 ) 1,544 2,436 10,646
Total adjustment to cost of sales $ (8,911 ) $ (212 ) $ 1,004 $ 2,674

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 $7.5 million was recorded on sugar futures contracts, versus a gain of $0.7 million for the comparable quarter of fiscal 2013, as world raw sugar values decreased from the closing values of the previous quarter. Year-to-date, a mark-to-market loss of $5.3 million was recorded as compared to a loss of $7.2 million for fiscal 2013. For natural gas, a mark-to-market loss of $1.0 million was recorded for the quarter versus a negligible mark-to-market gain for last year's comparable quarter as natural gas prices decreased since the end of the third quarter of fiscal 2014. Year-to-date, a mark-to-market gain of $0.5 million was recorded in 2014 compared to a loss of $1.2 million in the prior year. Foreign exchange forward contracts and embedded derivatives, on which foreign exchange movements have an impact, had a combined mark-to-market gain of $2.3 million for the quarter and a gain of $3.4 million for the year as a result of the movement of the Canadian dollar versus the U.S. dollar. In fiscal 2013, the Company recorded a loss of $2.5 million and a gain of $0.4 million for the quarter and for the year, respectively.

The cumulative timing differences are a result of mark-to-market gains or losses which are recognized by the Company only when sugar is sold to a customer and when natural gas is used. The gains or losses on the sugar and the related foreign exchange forward transactions are largely offset by corresponding gains or losses from the physical transactions being the sale and purchase contracts with customers and suppliers. The year-end adjustment is the total of all quarterly results. This adjustment is added to the mark-to-market results to arrive at the total adjustment to cost of sales. For fiscal 2014, the total cost of sales adjustment is a gain of $1.0 million to be deducted from the consolidated operating results compared to a total cost of sales gain of $2.7 million to be deducted from the consolidated operating results in fiscal 2013 to arrive at the adjusted operating results for both fiscal years, respectively.

The Company also recorded a mark-to-market gain of $0.1 million and a loss of $0.4 million for the quarter and for the year, respectively for the mark-to-market of interest rate swaps under finance costs, as compared to a mark-to-market loss of $0.1 million and a mark-to-market gain of $1.8 million for the fourth quarter of 2013 and for fiscal 2013, respectively, as recorded mark-to-market losses from the previous years were reversed from the passage of time of the previous interest rate swap.

The total adjustment for the net earnings before income taxes for the quarter was a loss of $8.8 million compared to a loss of $0.3 million for the comparative quarter in 2013. For the full year, the total adjustment to earnings before income taxes was a gain of $0.6 million for fiscal 2014 compared to a gain of $4.5 million in the previous year.

Adjusted consolidated financial information is as follows:

For the three months ended For the year ended
(In thousands of dollars) September 27 2014
(unaudited)
September 28 2013 (1)
(unaudited)
September 27 2014
(unaudited)
September 28 2013 (1)
(unaudited)
Gross margin as per above $ 15,077 $ 17,330 $ 82,939 $ 84,791
Adjustment as per above 8,911 212 (1,004 ) (2,674 )
Adjusted gross margin 23,988 17,542 81,935 82,117
EBIT as per above 3,706 11,739 49,834 58,494
Adjustment as per above 8,911 212 (1,004 ) (2,674 )
Adjusted EBIT 12,617 11,951 48,830 55,820
Net earnings as per above 874 6,509 29,229 36,492
Adjustment to cost of sales as per above 8,911 212 (1,004 ) (2,674 )
Adjustment for mark-to-market interest rate swap (108 ) 80 433 (1,787 )
Deferred taxes on above (2,291 ) 16 113 1,018
Adjusted net earnings $ 7,386 $ 6,817 $ 28,771 $ 33,049
Adjusted net earnings, per share basic $ 0.08 $ 0.07 $ 0.31 $ 0.35
(1) Adjusted to reflect the impact relating to the implementation of the amendments to IAS 19 (2011), Employee benefits, which can be found in note 3 (q) (i) of the September 27, 2014 consolidated financial statements.

For the quarter, the adjusted gross margin rate was $140.47 per metric tonne as compared to $99.31 per metric tonne for the comparative quarter in 2013, an increase of $41.16 per metric tonne. The increase is explained in part by a one-time profit of $1.9 million, or $11.13 per metric tonne, triggered by the receipt of a raw sugar vessel in advance, when compared to our needs, in order to capitalize from favourable spreads in the #11 world raw sugar futures. In addition, the increase was also due to negative events that occurred in the last quarter of fiscal 2013 such as higher cost of raw material in Taber and higher maintenance costs in Vancouver due to an unusual breakdown and poorer overall plant performances. Finally, the sales mix had a positive impact on adjusted gross margin per metric tonne for the current quarter with lower industrial and liquid volumes and higher consumer volume when compared to the fourth quarter of fiscal 2013.

Adjusted gross margin was $81.9 million, $0.2 million lower than last year. On a per metric tonne basis, adjusted gross margin was comparable to last year at $126.76 but includes several offsetting items.

As explained above, the Company recorded, in the last quarter of the year, a one-time profit of $1.9 million triggered by the receipt of a raw sugar vessel in advance of our needs. In addition, the adjusted gross margin of fiscal 2013 included a $1.9 million charge for committed future pension benefit updates. These two items increased adjusted gross margin by $3.8 million or $5.88 per metric tonne in fiscal 2014.

This positive variance was offset by higher energy costs in Montreal than fiscal 2013 of $1.4 million due to the purchase of expensive auxiliary natural gas and oil when natural gas supply was interrupted, as per the delivery terms of the natural gas provider. The Montreal refinery was interrupted 49 days this fiscal year compared to 27 days in fiscal 2013. Lower by-product revenues of approximately $1.3 million also contributed to the decrease in adjusted gross margin and adjusted gross margin per metric tonne, as a result of lower beet acreage harvested in fiscal 2014 when compared to fiscal 2013. Finally, the unfavourable sales mix had an impact on adjusted gross margin with an increase in industrial volume and a decrease in export sales, as the latter traditionally have a higher margin rate.

Administration and selling expenses were higher by approximately $5.8 million and $6.1 million compared to the same quarter of fiscal 2013 and for the 2013 fiscal year, respectively. In fiscal 2014, the Company hired a process improvement consulting firm to review the Montreal refinery cost structure and its manufacturing process. Following the analysis and a thorough review of the Montreal operations with its production team, the Company announced in September 2014 a reduction in the hourly workforce of 59 employees through a combination of layoffs, early retirements and voluntary departures. As a direct result of this analysis, the Company expensed $2.5 million for consulting fees and severance costs in the fourth quarter of fiscal 2014 for a total of $2.8 million for the year. During the current quarter, the Company increased the non-cash expense for the termination of the defined benefit Pension Plan for the Salaried Employees in B.C. and Alberta ("Salaried Plan") from $1.0 million, recorded in the third quarter of fiscal 2014, to $2.2 million to reflect the decrease in interest rates that occurred in the quarter. Lastly, in addition to the above-mentioned items, administration and selling expenses were higher than the previous year due to higher legal costs and marketing expenses associated with the launch of new products.

Distribution expenses for the quarter were comparable to the same period last year. For the year, distribution expenses were approximately $0.7 million higher than last year due to one-time demurrage costs as well as additional storage costs due to the large carryover of beet sugar inventories at the end of last fiscal year.

Net finance costs for the quarter were comparable to the fourth quarter of fiscal 2013, when we exclude the mark-to-market gain and loss on the interest rate swaps. For the year, the Company recorded a mark-to-market loss of $0.4 million compared to a mark-to-market gain of $1.8 million. When we exclude the mark-to-market variation, interest expense for fiscal 2014 fiscal year was $0.8 million lower than fiscal 2013 explained mainly by a reduction in interest rate on the new interest rate swap agreements. Effective June 30, 2014, the Company entered into a 5-year interest rate swap agreement at a rate of 2.09% for a value of $10.0 million. In addition, effective June 28, 2013, the Company entered into a 5-year interest rate swap agreement also at a rate of 2.09% for an initial value of $50.0 million, decreasing to $40.0 million on June 29, 2015 and to $30.0 million on June 28, 2016. The Company's previous 5-year interest rate swap agreement of $70.0 million at a rate of 4.005% expired on June 28, 2013.

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 amounts, 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 IFRS. 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
September 27 2014
(unaudited)
September 28 2013
(unaudited)
September 27 2014
(unaudited)
September 28 2013
(unaudited)
Operating activities:
Cash flow from operating activities $ 11,419 $ 30,635 $ 31,965 $ 37,653
Adjustments:
Changes in non-cash working capital (7,825 ) (20,187 ) 2,984 3,452
Changes in non-cash income taxes payable (433 ) (499 ) 760 1,423
Changes in non-cash interest payable (1,582 ) (1,668 ) (33 ) 368
Mark-to-market and derivative timing adjustments 8,803 292 (571 ) (4,461 )
Financial instruments non-cash amount 1,916 (877 ) 4,621 6,458
Capital expenditures (5,688 ) (4,201 ) (11,569 ) (9,117 )
Investment capital expenditures 2,017 850 2,869 1,430
(Buy back) issue of securities - - (372 ) 92
Deferred financing charges - (119 ) (90 ) (569 )
Free cash flow $ 8,627 $ 4,226 $ 30,564 $ 36,729
Declared dividends $ 8,463 $ 8,470 $ 33,858 $ 67,751

Free cash flow for the quarter was $4.4 million higher than the comparable quarter of fiscal 2013 due to higher adjusted results from operating activities of $0.7 million, lower cash pension contributions, as compared to a pension expense of $4.2 million, slightly offset by higher capital expenditures, net of investment capital expenditures, of $0.3 million. Free cash flow for fiscal 2014 was $6.2 million lower than the previous year. The decrease is due mainly to lower adjusted results from operating activities of $7.0 million and higher capital expenditures, net of investment capital expenditures, of $1.0 million. This was partially offset with a decrease in interest and income taxes paid of $1.8 million.

OUTLOOK

In fiscal 2014, the Company secured a multi-year national agreement with a major consumer account but did not re-sign an important Eastern consumer account. The net impact is expected to increase volume in this segment for the next fiscal year.

In fiscal 2013 and 2014, the Company had recaptured volume from an HFCS substitutable business for a one-year contract. With the decrease in corn prices, the Company was unable to provide competitive pricing and as a result, the contract was not renewed. As such, liquid volume is anticipated to decrease by approximately 10,000 metric tonnes in fiscal 2015.

Large crops in Mexico and the U.S. in fiscal 2013 resulted in significant surplus inventories and put downward pressure on selling prices in the U.S. in fiscal 2014. In March 2014, the U.S. launched a dumping case against Mexico which may have an impact on sugar marketing and margins in the U.S. and Mexico if successful. Export opportunities will remain constrained until the dispute between the two countries is fully resolved. Total export volume is expected to decrease in fiscal 2015 as the Canada-specific quota was reduced from 12,050 to 10,300 metric tonnes, due to the U.S. / Mexico dispute. In addition, the Company's share of the volume entered under the U.S. global quota of 7,090 metric tonnes that opened and closed on October 1, 2014 was less than fiscal 2014. As a result it is estimated that export volume will decrease by approximately 5,000 metric tonnes in fiscal 2015. The Company will continue to investigate other export opportunities similar to those developed several years ago in Mexico, in order to secure additional export sales.

The industrial segment is expected to be comparable to fiscal 2014.

Overall, total sales volume is expected to be slightly lower in fiscal 2015 as compared to fiscal 2014 because of the above mentioned reasons.

The Montreal workforce was reduced by 59 employees in September 2014 following an analysis of the refinery cost structure and manufacturing process. As such, the Company expects to achieve labour savings of approximately $5.0 million in fiscal 2015 compared to fiscal 2014.

The Company has been reviewing various alternatives in order to mitigate the risk of high auxiliary energy costs as a result of interruptions from its natural gas provider. In September 2014, the Company obtained confirmation from its natural gas provider that a firm gas supply contract was accepted by La Régie de l'énergie du Québec. Therefore, the Company will no longer be subject to interruptions due to cold winter conditions and expects to generate net savings of approximately $1.8 million by not having to purchase interruptible gas.

The above savings are expected to be generally offset by a combination of lower sales volume and lower selling margins as negotiated contracts are expected to be lower in fiscal 2015 than fiscal 2014 due to market competitiveness. In addition, the Company benefitted in fiscal 2014 from a $1.9 million profit triggered by the early arrival of a raw sugar vessel which is not expected to re-occur in fiscal 2015.

Approximately 75% of fiscal 2015's natural gas requirements have been hedged at average prices comparable to those realized in fiscal 2014. Any un-hedged volume should benefit from the current low prices of nearby natural gas. In addition, limited futures positions for fiscal 2016 to 2018 have also been taken. Some of these positions are at prices higher than current market value, but are at the same or better levels than those achieved in fiscal 2014. We will continue to monitor natural gas market dynamics with the objective of minimizing natural gas costs.

Administration and selling expenses for fiscal 2015 are anticipated to decrease due to one-time events that occurred in fiscal 2014.

The termination of the Salaried Plan will help reduce the defined benefit pension plan cash contributions in the future. In fiscal 2015, defined benefit cash contributions are expected to amount to $4.0 million, which is approximately $3.5 million lower than fiscal 2014.

Significant capital projects are currently underway. Total maintenance and investment capital expenditures for fiscal 2015 should be approximately $13.0 million, of which $3.0 million will be invested in capital investment projects. The Company will continue to aggressively pursue investment capital in order to reduce costs and improve manufacturing efficiencies.

The harvest and beet slicing campaign in Taber started at the beginning of October. Early indications are favourable as the yield per acre harvested and the extraction rate achieved to date are better than forecast. Taber's beet crop, currently being harvested, is approximately 22,000 acres and if current harvesting conditions continue, we expect to produce approximately 85,000 tonnes of beet sugar in fiscal 2015.

As mentioned previously, the Government of Canada has reached an agreement in principle on the Canada-European Union Comprehensive Economic and trade Agreement ("CETA"). Under the agreement, Canada is expected to have significant financial benefits from exports of sugar-containing products. It is expected that it may take up to two years for the CETA to be ratified by all parties. In addition, the Canadian Government continues its negotiations under the Trans Pacific Partnership ("TPP") which has the potential to address market access barriers for sugar and sugar-containing products amongst TPP members. The CETA and the potential TPP trade agreement are not expected to have any impact on the Company for another two years. However, the Company will be able to react quickly should the CETA ratification process happen earlier as discussions have already begun with potential customers in Europe.

FOR THE BOARD OF DIRECTORS,
(SIGNED)
A. Stuart Belkin
Vancouver, British Columbia - November 18, 2014

Contact Information