MONTRÉAL, QUÉBEC--(Marketwired - Jan. 30, 2014) - Rogers Sugar Inc. (TSX:RSI)
Message to Shareholders: On behalf of the Board of Directors, I am pleased to present the unaudited condensed consolidated interim financial results of Rogers Sugar Inc. (the "Company") for the three months ended December 28, 2013.
Volume for the first quarter was 162,258 metric tonnes, as opposed to 156,415 metric tonnes in the comparable quarter of last year, an increase of approximately 5,800 metric tonnes. Industrial volume was higher by approximately 4,700 metric tonnes due to the additional volume with existing and new customers. Consumer volume was higher by approximately 1,300 metric tonnes due mainly to timing in customers' retail promotions. Liquid volume also increased by approximately 3,600 metric tonnes due mainly to the recovery of a high fructose corn syrup ("HFCS") substitutable account in western Canada. These increases were offset by lower export volume of approximately 3,800 metric tonnes, mainly explained by a decrease in exports to Mexico.
With the mark-to-market of all derivative financial instruments and embedded derivatives in non-financial instruments at the end of each reporting period, our accounting income does not represent a complete understanding of factors and trends affecting the business. Consistent with previous reporting, we therefore prepared adjusted gross margin and adjusted earnings results to reflect the performance of the Company during the period without the impact of the mark-to-market of derivative financial instruments and embedded derivatives in non-financial instruments. At the end of the first quarter the accounting results had a mark-to-market gain of $1.5 million before income taxes, which was deducted to arrive at the adjusted results.
For the quarter, adjusted gross margin decreased by approximately $4.6 million, when compared to the same quarter of last year. On a per metric tonne basis, adjusted gross margin was $152.71 compared to $187.65 for the first quarter of last year, a decrease of $34.94. The decrease in the adjusted gross margin and adjusted gross margin rate is due mainly to the unfavourable sales mix with higher industrial and liquid sales and lower export sales, as export sales normally have a higher margin rate. In addition, the increase in consumer volume was more than offset by lower margin rate in that segment due to an increase in competitive pressure from both domestic and import sellers. Revenues generated from by-products were lower by approximately $0.8 million compared to last year, due mainly to lower beet acreage of approximately 6,000 acres. Finally, operating costs were higher than the comparable quarter due to higher costs incurred in Vancouver and Montreal. The unusual breakdown that occurred at the end of fiscal 2013 at the Vancouver refinery added $1.0 million in maintenance cost during the first quarter when compared to last year and also contributed to higher refining costs as a result of some additional labour costs incurred in catching up on lost production volume. The Montreal refinery incurred approximately $0.4 million in additional energy costs due to the purchase of expensive auxiliary natural gas and oil when supply was interrupted as per the delivery terms of the natural gas provider, as a result of unusual cold weather during the month of December.
Adjusted EBIT of $17.9 million was $4.5 million lower when compared to the same quarter of last year due to the lower adjusted gross margin rate as discussed above.
For the quarter, free cash flow was $13.6 million, as compared to $18.1 million in fiscal 2013. The decrease was due mainly to the lower adjusted operating results.
Overall volume for fiscal 2014 is expected to be comparable to fiscal 2013 although the sales mix is forecast to be different with higher consumer and industrial volume and lower export volume. Adjusted gross margin rate is expected to be lower in fiscal 2014 due to an increasingly competitive environment in all domestic segments. In addition, U.S. export sales margins will be lower than fiscal 2013 as surplus inventory in the U.S. exacerbated downward pressure on U.S. selling prices.
The Taber sugar beet slicing campaign was completed by the end of January. We are now estimating total beet sugar production at approximately 95,000 metric tonnes, once the thick juice campaign is completed in the spring of 2014.
With the increase in the discount rate at the end of fiscal 2013, defined benefit pension expense is expected to be approximately $1.1 million lower than last year's reported pension expense. When taking into account the change in accounting policy for IAS 19, Employee benefits, pension expense should be approximately $2.2 million lower than the 2013 restated pension expense. In fiscal 2014, total pension cash contributions are expected to increase by approximately $4.5 million as the Company will make a one-time cash contribution for future benefit plan updates committed in fiscal 2013 and will fund a senior executive retirement plan ("SERP") as a result of the withdrawal by a senior executive following his retirement.
Winter thus far has been colder than previous years. As a result, the Montreal refinery gas supply was interrupted for multiple days in December, which is unusual. As such, Montreal's fiscal energy costs could be higher than fiscal 2013 if such interruptions continue in the next quarter.
| FOR THE BOARD OF DIRECTORS, |
| (SIGNED) |
| Stuart Belkin, Chairman |
| Vancouver, British Columbia - January 30, 2014 |
MANAGEMENTS' DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") dated January 30, 2014 of Rogers Sugar Inc. ("Rogers") should be read in conjunction with the unaudited condensed consolidated interim financial statements and notes thereto for the period ended December 28, 2013, as well as the audited consolidated financial statements and MD&A for the year ended September 28, 2013. The quarterly condensed consolidated financial statements and any amounts shown in this MD&A were not reviewed nor audited by our external auditors.
Management is responsible for preparing the MD&A. This MD&A has been reviewed and approved by the Audit Committee of Rogers and its Board of Directors.
Non-GAAP measures
In analyzing our results, we supplement our use of financial measures that are calculated and presented in accordance with GAAP, with a number of non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a company's historical performance, financial position or cash flow that excludes (includes) amounts, or is subject to adjustments that have the effect of excluding (including) amounts, that are included (excluded) in most directly comparable measures calculated and presented in accordance with GAAP. Non-GAAP financial measures are not standardized; therefore, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar businesses. We strongly encourage investors to review our consolidated financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.
We use these non-GAAP financial measures in addition to, and in conjunction with, results presented in accordance with GAAP. These non-GAAP financial measures reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, may provide a more complete understanding of factors and trends affecting our business.
In the MD&A, we discuss the non-GAAP financial measures, including the reasons that we believe that these measures provide useful information regarding our financial condition, results of operations, cash flows and financial position, as applicable and, to the extent material, the additional purposes, if any, for which these measures are used. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures are contained in the MD&A.
Forward-looking statements
This report contains certain forward-looking statements, which reflect the current expectations of Rogers and Lantic Inc. (together referred to as "the Company") with respect to future events and performance. Wherever used, the words "may" "will," "anticipate," "intend," "expect," "plan," "believe," and similar expressions identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Although this is not an exhaustive list, the Company cautions investors that statements concerning the following subjects are, or are likely to be, forward-looking statements: future prices of raw sugar, natural gas costs, the opening of special refined sugar quotas in the United States, beet production forecasts, the status of labour contracts and negotiations, the level of future dividends and the status of government regulations and investigations. Forward-looking statements are based on estimates and assumptions made by the Company in light of its experience and perception of historical trends, current conditions and expected future developments, as well as other factors that the Company believes are appropriate and reasonable in the circumstances, but there can be no assurance that such estimates and assumptions will prove to be correct. This could cause actual performance or results to differ materially from those reflected in the forward-looking statements, historical results or current expectations.
Additional information relating to the Company, including the Annual Information Form, Quarterly and Annual reports and supplementary information is available on SEDAR at www.sedar.com.
Internal disclosure controls
In accordance with Regulation 52-109 respecting certification of disclosure in issuers' interim filings, the Chief Executive Officer and Vice-President Finance have designed or caused it to be designed under their supervision, disclosure controls and procedures.
In addition, the Chief Executive Officer and Vice-President Finance have designed or caused it to be designed under their supervision internal controls over financial reporting ("ICFR") to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes.
The Chief Executive Officer and the Vice-President Finance have evaluated whether or not there were any changes to the Company's ICFR during the three month period ended December 28, 2013 that have materially affected, or are reasonably likely to materially affect, the Company's ICFR. No such changes were identified through their evaluation.
Results of operations
| Consolidated Results | For the three months ended | |||
| (In thousands of dollars, except for volume and per share information) |
December 28, 2013 (Unaudited) |
December 29, 2012 (1)
(Unaudited) |
||
| Volume (metric tonnes) | 162,258 | 156,415 | ||
| Revenues | $ | 136,876 | $ | 142,376 |
| Gross margin | 26,303 | 30,423 | ||
| Administration and selling expenses | 4,732 | 4,657 | ||
| Distribution expenses | 2,146 | 2,329 | ||
| Earnings before interest and provision for income taxes (EBIT) | $ | 19,425 | $ | 23,437 |
| Net finance costs | 2,546 | 2,202 | ||
| Provision for income taxes | 4,363 | 5,295 | ||
| Net earnings | $ | 12,516 | $ | 15,940 |
| Net earnings per share - basic | $ | 0.13 | $ | 0.17 |
| (1) | Adjusted to reflect the impact relating to the implementation of the amendments to IAS 19, Employee benefits, which can be found in Note 3 a) of the December 28, 2013 unaudited condensed consolidated financial statements. |
In the normal course of business, the Company uses derivative financial instruments consisting of sugar futures, foreign exchange forward contracts, natural gas futures and interest rate swaps. The Company sells refined sugar to some clients in U.S. dollars. These sales contracts are viewed as having an embedded derivative if the functional currency of the customer is not U.S. dollars, the embedded derivative being the source currency of the transaction, U.S. dollars. Derivative financial instruments and embedded derivatives are marked-to-market at each reporting date, with the unrealized gains/losses charged to the consolidated statement of earnings with a corresponding offsetting amount charged to the consolidated statement of financial position.
Management believes that the Company's financial results are more meaningful to management, investors, analysts and any other interested parties when financial results are adjusted by the gains/losses from financial derivative instruments and from embedded derivatives for which adjusted financial results provide a more complete understanding of factors and trends affecting our business. This measurement is a non-GAAP measurement.
Management uses the non-GAAP adjusted results of the operating company to measure and to evaluate the performance of the business through its adjusted gross margin, adjusted EBIT and adjusted net earnings. In addition, management believes that these measures are important to our investors and parties evaluating our performance and comparing such performance to past results. Management also uses adjusted gross margin, adjusted EBIT and adjusted net earnings when discussing results with the Board of Directors, analysts, investors, banks and other interested parties.
The results of operations would therefore need to be adjusted by the following:
| Income (loss) | For the three months ended |
|||||
| (In thousands) | December 28, 2013 (Unaudited) |
December 29, 2012 (Unaudited) |
||||
| Mark-to-market adjustment (excluding interest rate swap) | $ | (5,847 | ) | $ | (3,262 | ) |
| Cumulative timing differences | 7,371 | 4,334 | ||||
| Total adjustment to cost of sales | $ | 1,524 | $ | 1,072 | ||
A significant part of the above mark-to-market adjustment relates to the movement in the price of raw sugar, which decreased during the first quarter of 2014 and 2013 but decreased more significantly in 2014. As a result, a $7.8 million loss was recorded in the first quarter of fiscal 2014 as compared to a $3.9 million loss in the comparable quarter of last year. For natural gas, mark-to-market losses of $0.2 million and $0.3 million were recorded in the first quarter of 2014 and 2013, respectively, as there was limited fluctuations in the price of natural gas during each period. Foreign exchange forward contracts and embedded derivatives, on which foreign exchange movements have an impact, had a combined mark-to-market gain of $2.1 million for the quarter and of $1.0 million in the comparable quarter of last year.
The cumulative timing differences are as a result that mark-to-market gains or losses 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 related foreign exchange paper transactions are largely offset by corresponding gains or losses from the physical transactions being the sale and purchase contracts with customers and suppliers. This adjustment is added to the mark-to-market results to arrive at the total adjustment to cost of sales. For the first quarter, the total cost of sales adjustment is a gain of $1.5 million to be deducted from the consolidated operating results compared to a gain of $1.1 million in fiscal 2013 comparable quarter.
In addition, under short-term interest expense, the Company recorded a mark-to-market loss of $0.1 million for the quarter, as compared to a gain of $0.5 million last year, on the mark-to-market of an interest rate swap. The mark-to-market loss in fiscal 2014 relates to a new five-year 2.09% interest rate swap of $50.0 million, decreasing to $40.0 million in June 2015 and to $30.0 million in June 2016. Last year's gain is as a result of losses recorded in previous quarters that were reversed with the passage of time of the previous 4.005% interest rate swap of $70.0 million.
The following is a table showing the adjusted consolidated results (non-GAAP) without the above mark-to-market results:
| Consolidated Results | For the three months ended | |||||
| (in thousands except per share information) | December 28, 2013 (Unaudited) |
December 29, 2012 (1)
(Unaudited) |
||||
| Gross margin as per financial statements | $ | 26,303 | $ | 30,423 | ||
| Adjustment as per above | (1,524 | ) | (1,072 | ) | ||
| Adjusted gross margin | 24,779 | 29,351 | ||||
| EBIT as per financial statements | 19,425 | 23,437 | ||||
| Adjustment as per above | (1,524 | ) | (1,072 | ) | ||
| Adjusted EBIT | 17,901 | 22,365 | ||||
| Net earnings as per financial statements | 12,516 | 15,940 | ||||
| Adjustment to cost of sales as per above | (1,524 | ) | (1,072 | ) | ||
| Adjustment for mark-to-market of finance costs | 66 | (478 | ) | |||
| Deferred taxes on above adjustments | 345 | 304 | ||||
| Adjusted net earnings | $ | 11,403 | $ | 14,694 | ||
| Net earnings per share basic, as per financial statements | $ | 0.13 | $ | 0.17 | ||
| Adjustment for the above | (0.01 | ) | (0.01 | ) | ||
| Adjusted net earnings per share basic | $ | 0.12 | $ | 0.16 | ||
| (1) | Adjusted to reflect the impact relating to the implementation of the amendments to IAS 19, Employee benefits, which can be found in Note 3 a) of the December 28, 2013 unaudited condensed consolidated financial statements. |
Volume for the first quarter was 162,258 metric tonnes, as opposed to 156,415 metric tonnes in the comparable quarter of last year, an increase of approximately 5,800 metric tonnes. Industrial volume was higher by approximately 4,700 metric tonnes due to the gain of additional volume with existing and new customers. Consumer volume was higher by approximately 1,300 metric tonnes due mainly to timing in customers' retail promotions. Liquid volume also increased by approximately 3,600 metric tonnes due mainly to the recovery of a high fructose corn syrup ("HFCS") substitutable account in western Canada. These increases were offset by lower export volume of approximately 3,800 metric tonnes, mainly explained by a decrease in exports to Mexico.
Revenues for the quarter were $5.5 million lower than the previous year's comparable quarter, due to an average lower value of raw sugar in fiscal 2014, somewhat offset by a higher level of sales achieved during the current quarter.
As previously mentioned, gross margin of $26.3 million for the quarter does not reflect the economic margin of the Company, as it includes a gain of $1.5 million for the mark-to-market of derivative financial instruments explained earlier. We will therefore comment on adjusted gross margin results.
For the quarter, adjusted gross margin decreased by approximately $4.6 million, when compared to the same quarter of last year. On a per metric tonne basis, adjusted gross margin was $152.71 compared to $187.65 for the first quarter of last year, a decrease of $34.94. The decrease in the adjusted gross margin and adjusted gross margin rate is due mainly to the unfavourable sales mix with higher industrial and liquid sales and lower export sales, as export sales normally have a higher margin rate. In addition, the increase in consumer volume was more than offset by lower margin rate in that segment due to an increase in competitive pressure from both domestic and import sellers. Revenues generated from by-products were lower by approximately $0.8 million compared to last year, due mainly to lower beet acreage of approximately 6,000 acres. Finally, operating costs were higher than the comparable quarter due to higher costs incurred in Vancouver and Montreal. The unusual breakdown that occurred at the end of fiscal 2013 at the Vancouver refinery added $1.0 million in maintenance cost during the first quarter when compared to last year and also contributed to higher refining costs as a result of some additional labour costs incurred in catching up on lost production volume. The Montreal refinery incurred approximately $0.4 million in additional energy costs due to the purchase of expensive auxiliary natural gas and oil when supply was interrupted as per the delivery terms of the natural gas provider, as a result of unusual cold weather during the month of December.
Selling and administrative expenses remained relatively stable when compared to the first quarter of fiscal 2013. Distribution costs were $0.2 million lower than last year at $2.1 million due to lower export volume.
Finance costs for the quarter include a mark-to-market loss of $0.1 million as compared to a gain of $0.5 million in fiscal 2013 for the interest rate swap. Without the above mark-to-market adjustments, finance expenses for the quarter were $0.2 million lower than fiscal 2013 due to lower interest rate on the interest rate swap.
Provision for income taxes was lower by $0.9 million from the comparable quarter of fiscal 2013 which is due to lower profitability at the operating level.
Statement of quarterly results
The following is a summary of selected financial information of the consolidated financial statements and non-GAAP measures of the Company for the last eight quarters.
| QUARTERS | |||||||||
| 2014 (Unaudited) |
2013 (1)
(Unaudited) |
2012 (Unaudited) |
|||||||
| (In thousands of dollars, except for volume, margin rate and per share information) | 1-Q | 4-Q | 3-Q | 2-Q | 1-Q | 4-Q | 3-Q | 2-Q | |
| Volume (MT) | 162,258 | 176,641 | 165,304 | 150,914 | 156,415 | 164,539 | 157,786 | 146,494 | |
| Revenues | 136,876 | 145,840 | 138,403 | 131,819 | 142,376 | 150,469 | 147,687 | 144,132 | |
| Gross margin | 26,303 | 17,329 | 14,402 | 22,635 | 30,423 | 18,077 | 18,207 | 17,923 | |
| EBIT | 19,425 | 11,739 | 7,558 | 15,760 | 23,437 | 11,072 | 11,180 | 11,583 | |
| Net earnings | 12,516 | 6,510 | 3,802 | 10,241 | 15,940 | 6,944 | 6,909 | 6,528 | |
| Gross margin rate per MT | 162.11 | 98.10 | 87.12 | 149.99 | 194.50 | 109.86 | 115.39 | 122.35 | |
| Per share | |||||||||
| Net earnings | |||||||||
| Basic | 0.13 | 0.07 | 0.04 | 0.11 | 0.17 | 0.07 | 0.07 | 0.07 | |
| Diluted | 0.13 | 0.07 | 0.04 | 0.11 | 0.16 | 0.07 | 0.07 | 0.07 | |
| Non-GAAP Measures | |||||||||
| Adjusted gross margin | 24,779 | 17,541 | 15,540 | 19,683 | 29,351 | 21,696 | 19,642 | 23,065 | |
| Adjusted EBIT | 17,901 | 11,951 | 8,696 | 12,808 | 22,365 | 14,691 | 12,615 | 16,725 | |
| Adjusted net earnings | 11,403 | 6,818 | 4,179 | 7,359 | 14,694 | 9,782 | 7,641 | 9,841 | |
| Adjusted gross margin rate per MT | 152.71 | 99.30 | 94.01 | 130.43 | 187.65 | 131.86 | 124.49 | 157.45 | |
| Adjusted net earnings per share | |||||||||
| Basic | 0.12 | 0.07 | 0.04 | 0.08 | 0.16 | 0.10 | 0.08 | 0.10 | |
| Diluted | 0.12 | 0.07 | 0.04 | 0.08 | 0.15 | 0.10 | 0.08 | 0.10 | |
| (1) | Adjusted to reflect the impact relating to the implementation of the amendments to IAS 19, Employee benefits, which can be found in Note 3 a) of the December 28, 2013 unaudited condensed consolidated financial statements. |
Historically the first quarter (October to December) of the fiscal year is the best quarter for adjusted gross margins and adjusted net earnings due to the favourable sales mix of products sold. This is due to the increased sales of baked goods during that period of the year. At the same time, the second quarter (January to March) is historically the lowest volume quarter, resulting in lower revenues, adjusted gross margins and adjusted net earnings.
Liquidity
The cash flow generated by the operating company, Lantic, is paid to Rogers by way of dividends and return of capital on the common shares of Lantic, and by the payment of interest on the subordinated notes of Lantic held by Rogers, after having taken reasonable reserves for capital expenditures and working capital. The cash received by Rogers is used to pay dividends to its shareholders.
Cash flow from operations was positive $3.5 million in the first quarter of 2014, as opposed to negative $5.7 million in the comparable quarter of fiscal 2013. The positive variation of $9.2 million is mostly explained by a lower non-cash working capital variation of negative $8.8 million compared to negative $18.9 million in fiscal 2013 due to a significant year-over-year variation in inventory of $8.0 million combined with a $1.4 million reduction in income taxes installments and $1.9 million in interest payments due to timing. These positive variations were slightly offset by lower adjusted net earnings of $3.3 million.
In order to provide additional information, the Company believes it is appropriate to measure free cash flow, a non-GAAP measure, which is generated by the operations of the Company and can be compared to the level of dividend paid by Rogers. 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 and including capital expenditures.
Free cash flow is as follows:
| For the three months ended | |||||||
| (In thousands of dollars) | December 28, 2013 (Unaudited) |
December 29, 2012 (Unaudited) |
|||||
| Cash flow from operations | $ | 3,454 | $ | (5,669 | ) | ||
| Adjustments: | |||||||
| Changes in non-cash working capital | 8,741 | 18,905 | |||||
| Changes in non-cash income taxes payable | (361 | ) | 2,420 | ||||
| Changes in non-cash interest payable | (185 | ) | 1,578 | ||||
| Mark-to-market and derivative timing adjustments | (1,458 | ) | (1,550 | ) | |||
| Financial instruments non-cash amount | 4,123 | 3,399 | |||||
| Capital expenditures | (948 | ) | (967 | ) | |||
| Investment capital expenditures | 229 | - | |||||
| Free cash flow | $ | 13,595 | $ | 18,116 | |||
| Declared dividends | $ | 8,470 | $ | 8,468 | |||
Free cash flow was $4.5 million lower than the comparable quarter in fiscal 2013 due to lower adjusted results from operating activities.
Changes in non-cash operating working capital, income taxes payable and interest payable represent quarter-over-quarter movement in current assets such as accounts receivables and inventories and current liabilities like accounts payable. Movements in these accounts are due mainly to timing in the collection of receivables, receipts of raw sugar and payment of liabilities. Increases or decreases in such accounts do not therefore constitute available cash for distribution. Such increases or decreases are financed from available cash or from the Company's available credit facilities of $150.0 million. Increases or decreases in short-term bank indebtedness are also due to timing issues from the above, and therefore do not constitute available cash for distribution.
Mark-to-market and financial instruments non-cash amount combined impact of $2.7 million does not represent cash items as these contracts will be settled when the physical transactions occur, which is the reason for the adjustment to free cash flow.
Capital expenditures, net of investment capital, were lower by $0.2 million in the first quarter of 2014 due mainly to $0.2 million spent on investment capital. Investment capital expenditures are added back as these capital projects are not required for the operation of the refineries but are undertaken due to operational savings to be realized when these projects are completed. Investment capital expenditures in fiscal 2014 mostly relate to the acquisition and installation of a new palletizing station at the Vancouver refinery which will start generating labour savings towards the end of fiscal 2014. An amount of $2.2 million was committed by the Company for this project, of which $0.6 million was spent in the fourth quarter of fiscal 2013. No such projects were undertaken in the first quarter of fiscal 2013.
The Company declared a quarterly dividend of 9.0 cents per common share, for a total amount of $8.5 million in each of the first quarter of 2014 and 2013.
Contractual obligations
There are no significant changes in the contractual obligations table disclosed in the Management's Discussion and Analysis of the September 28, 2013 Annual Report.
At December 28, 2013, the operating companies had commitments to purchase a total of 1,493,000 metric tonnes of raw sugar, of which 116,500 metric tonnes had been priced for a total dollar commitment of $51.5 million.
Capital resources
Lantic has $150.0 million as an authorized line of credit available to finance its operation. This line of credit expires in June 2018. At quarter-end, $83.0 million had been drawn from the working capital line of credit and $5.2 million in cash was also available.
At quarter's end, inventories were higher compared to year-end due mainly to the harvest of the Taber beet crop in the first quarter of the fiscal year. Inventories are lower in fiscal 2014 than the comparable quarter of 2013 due to a lower beet acreage planted in 2013 and harvested in fiscal 2014 combined with lower raw sugar inventories in Montreal due to timing in raw sugar vessel arrivals.
Cash requirements for working capital and other capital expenditures are expected to be paid from available credit resources and from funds generated from operations.
Outstanding securities
There was no change in outstanding securities for the quarter. As at January 30, 2014 there were 94,114,260 common shares outstanding.
Critical accounting estimate and accounting policies
There are no significant changes in the critical estimate and accounting policies disclosed in the Management's Discussion and Analysis of the September 28, 2013 Annual Report.
Significant accounting policies
The significant accounting policies as disclosed in the Company's audited annual consolidated financial statements for the year ended September 28, 2013 have been applied consistently in the preparation of these unaudited condensed consolidated interim financial statements except as noted below:
- IAS 19, Employee benefits - Amendments to IAS 19 include the elimination of the option to defer the recognition of gains and losses, enhancing the guidance around measurement of plan assets and defined benefit obligations, streamlining the presentation of changes in assets and liabilities arising from defined benefit plans and the introduction of enhanced disclosures for defined benefit plans. The amendments are effective for annual periods beginning on or after January 1, 2013. The Company implemented this standard retrospectively in the first quarter of the year ended September 27, 2014. The impact from the implementation of the amendments to IAS 19, Employee benefits can be found in Note 3 a) of the December 28, 2013 unaudited condensed consolidated interim financial statements.
- IFRS 10, Consolidated financial statements - This standard provides additional guidance to determine whether an entity should be included within the consolidated financial statements of the Company. IFRS 10 replaces SIC 12, Consolidation - special purpose entities, and parts of IAS 27, Consolidated and separate financial statements. This standard is required to be adopted for annual periods beginning January 1, 2013. The adoption of the amendments had no impact on the unaudited condensed consolidated interim financial statements.
- IFRS 13, Fair value measurement - This standard replaces the fair value measurement guidance contained in individual IFRS with a single source of fair value measurement guidance. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, i.e. an exit price. The application of IFRS 13 did not have a material impact on the condensed consolidated interim financial statements other than added disclosure requirements which have been presented in notes 7, 8 and 9 to the unaudited condensed consolidated interim financial statements.
Future accounting changes
A number of new standards, and amendments to standards and interpretations, are not yet effective and have not been applied in preparing these unaudited condensed consolidated interim financial statements.
- IAS 36, Impairment of assets - The IASB has issued amendments to IAS 36, Impairment of assets, to reverse the unintended requirements in IFRS 13, Fair value measurements, to disclose the recoverable amount of every cash-generating unit to which significant goodwill or indefinite-lived intangible assets have been allocated. Under the amendments, recoverable amount is required to be disclosed only when an impairment loss has been recognized or reversed. The amendments apply retrospectively for annual periods beginning on or after January 1, 2014. The Company intends to adopt the amendment in its consolidated financial statements for the annual period beginning September 28, 2014. The extent of the impact of the adoption of IAS 36, Impairment of assets, on the consolidated financial statements of the Company has not yet been determined.
- IFRS 9, Financial instruments - IFRS 9 is a new standard which will ultimately replace IAS 39, Financial instruments: recognition and measurement, with a proposed single model for only two classification categories: amortized cost and fair value. The extent of the impact of the adoption of IFRS 9, Financial instruments on the consolidated financial statements of the Company has not yet been determined.
Risk factors
Risk factors in the Company's business and operations are discussed in the Management's Discussion and Analysis of our Annual Report for the year ended September 28, 2013. This document is available on SEDAR at www.sedar.com or on one of our websites at www.lantic.ca or www.rogerssugar.com.
Outlook
We anticipate that consumer volume will be slightly higher in 2014 than it was in 2013, largely as a result of a new multi-year national agreement with a major consumer account taking effect in January 2014. However, the consolidation of certain large retail accounts has intensified the competitiveness in this already highly competitive segment.
The Company was able to enter approximately 5,600 metric tonnes under the U.S. global quota that opened and closed on October 1, 2013. However, combining both the global quota and our Canada specific quota of 12,000 metric tonnes, we still anticipate export volume to be lower than last year as Mexican sales volume will be negligible. Large crops in Mexico and the U.S. in fiscal 2013 resulted in significant surplus inventories and will therefore limit export opportunities in these countries in fiscal 2014. In addition, surplus inventory in the U.S. exacerbated downward pressure on selling prices in the U.S. 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.
Overall, total sales volume is expected to be comparable to fiscal 2013. However, adjusted gross margin rate is expected to be lower in fiscal 2014 due to an increasingly competitive environment in all domestic segments. In addition, as mentioned above, export sales margins will be lower than fiscal 2013 due to a change in U.S. market conditions.
The Taber sugar beet slicing campaign was completed by the end of January. We are now estimating total beet sugar production at approximately 95,000 metric tonnes, once the thick juice campaign is completed in the spring of 2014, a decrease of approximately 25,000 metric tonnes compared to fiscal 2013.
Winter thus far has been colder than previous years. As a result, the Montreal refinery gas supply was interrupted for multiple days in December, which is unusual. As such, Montreal's fiscal energy costs could be higher than fiscal 2013 if such interruptions continue in the next quarter. Approximately 75% of fiscal 2014's natural gas requirements and related foreign currency have been hedged at average prices comparable to those realized in fiscal 2013. In addition, limited futures positions for fiscal 2015 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 2013. We will continue to monitor natural gas market dynamics with the objective of minimizing natural gas costs.
With the increase in the discount rate at the end of fiscal 2013, defined benefit pension expense is expected to be approximately $1.1 million lower than last year's reported pension expense. When taking into account the change in accounting policy for IAS 19, Employee benefits, pension expense should be approximately $2.2 million lower than the 2013 restated pension expense. Pension cash contributions were increased following 2013's actuarial valuations and may vary in the future as and when new actuarial valuations are done. Actuarial valuations for three of the four defined benefit plans are required as at December 31, 2013. In fiscal 2014, total pension cash contributions are expected to increase by approximately $4.5 million as the Company will make a one-time cash contribution for future benefit plan updates committed in fiscal 2013 and will fund a SERP as a result of the withdrawal by a senior executive following his retirement.
Labour negotiations continue for the last remaining smaller unit of the Montreal refinery with the intent of reaching a satisfactory agreement in the near future. However, there can be no assurance that a new agreement will be reached with the remaining union, or that the terms of such agreement will be similar to the terms of the current agreements.
The complete financial statements are available at the following address: http://media3.marketwire.com/docs/924819a_FIS.pdf.
Contact Information:
Vice-President Finance and Secretary
(514) 940-4350
(514) 527-1610 (FAX)
www.rogerssugar.com or www.Lantic.ca