MONTRÉAL, QUÉBEC--(Marketwired - Jan. 29, 2015) - 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 27, 2014.
Volume for the first quarter of fiscal 2015 was 152,608 metric tonnes, as opposed to 162,258 metric tonnes in the comparable quarter of last year, a decrease of approximately 9,700 metric tonnes. Industrial volume was lower by approximately 4,100 metric tonnes due to timing in deliveries. Liquid volume also decreased by approximately 3,600 metric tonnes. In the first quarter of fiscal 2014, the Company benefited from additional volume under a one-year contract with a high fructose corn syrup ("HFCS") substitutable account in western Canada which ended in March 2014. Consumer volume decreased by approximately 1,700 metric tonnes due mainly to timing in customers' retail promotions. Finally, export volume was approximately 300 metric tonnes lower than the comparable quarter last year.
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 loss of $2.0 million before income taxes, which was added back to arrive at the adjusted results.
Adjusted gross margin, at $25.3 million, was approximately $0.5 million higher than the comparable quarter last year. The reduction in operating costs of approximately $3.1 million more than offset the decrease in adjusted gross margin as a result of lower volume. On a per metric tonne basis, adjusted gross margin was $165.95 compared to $152.71 for the first quarter of fiscal 2014, an increase of $13.24. The increase in the adjusted gross margin per metric tonne is due to lower operating costs. Following the workforce reduction in September 2014 at the Montreal refinery, the Company reduced labour costs in the first quarter by approximately $1.3 million versus the comparable quarter in fiscal 2014. In addition, the Company benefited from energy costs savings of approximately $0.8 million, half of which is explained by the reduction in natural gas prices during the first quarter of the current year. The additional savings are due to the conversion from an interruptible gas contract in fiscal 2014 to a firm gas contract in the current year at the Montreal refinery as last year, approximately $0.4 million was spent on the purchase of expensive replacement natural gas while interrupted. Finally, in the first quarter of fiscal 2014, an unusual breakdown at the Vancouver refinery represented $1.0 million in additional maintenance costs and also contributed to higher refining costs as a result of some incremental labour costs to catch up on lost production volume.
Adjusted EBIT of $17.7 million was $0.2 million lower when compared to the same quarter of last year. The higher adjusted gross margin was offset by an increase in administrative costs mainly due to higher consultant fees associated with the process improvement review of the Montreal refinery.
For the quarter, free cash flow was $1.2 million higher than the comparable quarter in fiscal 2014, due mostly to lower income taxes paid, partially offset by higher capital expenditures and higher interest paid.
In November 2014, the Company received approval from the Toronto Stock Exchange to proceed with a normal course issuer bid ("NCIB"). Under the NCIB, the Company may purchase up to 1,000,000 common shares. The NCIB commenced on November 27, 2014 and may continue until November 26, 2015.
Overall, total sales volume is expected to be slightly lower in fiscal 2015 as compared to fiscal 2014.
Following the Montreal workforce reduction in September 2014, the Company expects to achieve labour savings of approximately $5.0 million in fiscal 2015 compared to fiscal 2014.
The Company expects energy costs in fiscal 2015 to be reduced by approximately $3.0 million when compared to fiscal 2014. In fiscal 2015, the Montreal refinery secured a firm gas supply contract with its natural gas provider which is expected to generate net savings of approximately $1.8 million when compared to fiscal 2014. Furthermore, approximately 75% of fiscal 2015's natural gas requirements have been hedged at average prices comparable to or below to those realized in fiscal 2014. The un-hedged volume will be purchased on the spot market and should benefit from the current low prices of natural gas. As a result, the Company anticipates additional energy cost savings of approximately $1.2 million.
In addition, natural gas futures positions for fiscal 2016 to 2019 have also been taken. Some of these positions are at prices higher than current market values, 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.
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 at a lower selling margin in fiscal 2015 than fiscal 2014 due to market competitiveness.
Administration and selling expenses for fiscal 2015 are expected to decrease. One-time events occurred in fiscal 2014, such as the process improvement analysis at the Montreal refinery which resulted in incremental consulting fees and severance costs. Furthermore, additional non-cash pension expense was recorded in fiscal 2014 as a result of a decision to terminate a defined benefit pension plan.
| FOR THE BOARD OF DIRECTORS, |
| (SIGNED) |
| Stuart Belkin, Chairman |
| Vancouver, British Columbia - January 29, 2015 |
MANAGEMENTS' DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") dated January 29, 2015 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 27, 2014, as well as the audited consolidated financial statements and MD&A for the year ended September 27, 2014. The quarterly condensed consolidated interim 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 27, 2014 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 27, 2014 (Unaudited) |
December 28, 2013 (Unaudited) |
||
| Volume (metric tonnes) | 152,608 | 162,258 | ||
| Revenues | $ | 128,726 | $ | 136,876 |
| Gross margin | 23,364 | 26,303 | ||
| Administration and selling expenses | 5,488 | 4,732 | ||
| Distribution expenses | 2,116 | 2,146 | ||
| Earnings before interest and provision for income taxes (EBIT) | $ | 15,760 | $ | 19,425 |
| Net finance costs | 2,960 | 2,546 | ||
| Provision for income taxes | 3,385 | 4,363 | ||
| Net earnings | $ | 9,415 | $ | 12,516 |
| Net earnings per share - basic | $ | 0.10 | $ | 0.13 |
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 unaudited condensed consolidated interim statement of earnings with a corresponding offsetting amount charged to the unaudited condensed 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. These 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 27, 2014 (Unaudited) |
December 28, 2013 (Unaudited) |
||||
| Mark-to-market adjustment (excluding interest rate swap) | $ | (1,999 | ) | $ | (5,847 | ) |
| Cumulative timing differences | 38 | 7,371 | ||||
| Total adjustment to cost of sales | $ | (1,961 | ) | $ | 1,524 | |
A significant portion of the above mark-to-market adjustment relates to the movement in natural gas prices, which decreased significantly in fiscal 2015 while the comparable quarter of fiscal 2014 only saw a modest decrease. As a result, mark-to-market losses of $4.0 million and $0.2 million were recorded in the first quarter of fiscal 2015 and fiscal 2014, respectively. Foreign exchange forward contracts and embedded derivatives, on which foreign exchange movements have an impact, had a combined mark-to-market gain of $1.8 million for the quarter and of $2.1 million in the comparable quarter of last year. Finally, the movement in price of raw sugar resulted in a $0.3 million gain compared to a $7.8 million loss in the first 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 loss of $2.0 million to be added to the consolidated operating results compared to a gain of $1.5 million to be deducted from the consolidated operating results in the fiscal 2014 comparable quarter.
In addition, under short-term interest expense, the Company recorded a mark-to-market loss of $0.2 million for the quarter, as compared to a loss of $0.1 million last year, on the mark-to-market of the interest rate swaps.
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 27, 2014 (Unaudited) |
December 28, 2013 (Unaudited) |
||||
| Gross margin as per financial statements | $ | 23,364 | $ | 26,303 | ||
| Adjustment as per above | 1,961 | (1,524 | ) | |||
| Adjusted gross margin | 25,325 | 24,779 | ||||
| EBIT as per financial statements | 15,760 | 19,425 | ||||
| Adjustment as per above | 1,961 | (1,524 | ) | |||
| Adjusted EBIT | 17,721 | 17,901 | ||||
| Net earnings as per financial statements | 9,415 | 12,516 | ||||
| Adjustment to cost of sales as per above | 1,961 | (1,524 | ) | |||
| Adjustment for mark-to-market of finance costs | 206 | 66 | ||||
| Deferred taxes on above adjustments | (778 | ) | 345 | |||
| Adjusted net earnings | $ | 10,804 | $ | 11,403 | ||
| Net earnings per share basic, as per financial statements | $ | 0.10 | $ | 0.13 | ||
| Adjustment for the above | 0.01 | (0.01 | ) | |||
| Adjusted net earnings per share basic | $ | 0.11 | $ | 0.12 | ||
Volume for the first quarter was 152,608 metric tonnes, as opposed to 162,258 metric tonnes in the comparable quarter of last year, a decrease of approximately 9,700 metric tonnes. Industrial volume was lower by approximately 4,100 metric tonnes due to timing in deliveries. Liquid volume also decreased by approximately 3,600 metric tonnes. In the first quarter of fiscal 2014, the Company benefited from additional volume under a one-year contract with a high fructose corn syrup ("HFCS") substitutable account in western Canada which ended in March 2014. Consumer volume decreased by approximately 1,700 metric tonnes mainly due to timing in customers' retail promotions. Finally, export volume was approximately 300 metric tonnes lower than the comparable quarter last year.
Revenues for the quarter were $8.2 million lower than the previous year's comparable quarter due to a lower level of sales achieved during the current quarter, combined with an average lower value of raw sugar in fiscal 2015.
As previously mentioned, gross margin of $23.4 million for the quarter does not reflect the economic margin of the Company, as it includes a loss of $2.0 million for the mark-to-market of derivative financial instruments explained earlier. We will therefore comment on adjusted gross margin results.
Adjusted gross margin, at $25.3 million, was approximately $0.5 million higher than the comparable quarter last year. The reduction in operating costs of approximately $3.1 million more than offset the decrease in adjusted gross margin as a result of lower volume. On a per metric tonne basis, adjusted gross margin was $165.95 compared to $152.71 for the first quarter of fiscal 2014, an increase of $13.24. The increase in the adjusted gross margin per metric tonne is due to lower operating costs. Following the workforce reduction in September 2014 at the Montreal refinery, the Company reduced labour costs in the first quarter by approximately $1.3 million versus the comparable quarter in fiscal 2014. In addition, the Company benefited from energy costs savings of approximately $0.8 million, half of which is explained by the reduction in natural gas prices during the first quarter of the current year. The additional savings are due to the conversion from an interruptible gas contract in fiscal 2014 to a firm gas contract in the current year at the Montreal refinery as last year, approximately $0.4 million was spent on the purchase of expensive replacement natural gas while interrupted. Finally, in the first quarter of fiscal 2014, an unusual breakdown at the Vancouver refinery represented $1.0 million in additional maintenance costs and also contributed to higher refining costs as a result of some incremental labour costs to catch up on lost production volume.
Adjusted EBIT of $17.7 million was $0.2 million lower when compared to the same quarter of last year. The higher adjusted gross margin was offset by an increase in administrative costs mainly due to higher consultant fees associated with the completion of the process improvement review of the Montreal refinery. Distribution costs were comparable to the first quarter of fiscal 2014.
Finance costs for the quarter include a mark-to-market loss of $0.2 million as compared to a loss of $0.1 million in fiscal 2014 for the interest rate swaps. Without the above mark-to-market adjustments, finance expenses for the quarter were $0.3 million higher than fiscal 2014 explained by a higher level of borrowings as a result of higher inventories, due to timing.
Provision for income taxes, excluding the tax impact of the above mark-to-market gains and losses, was comparable to the first quarter of fiscal 2014.
Statement of quarterly results
The following is a summary of selected financial information of the unaudited condensed consolidated interim financial statements and non-GAAP measures of the Company for the last eight quarters.
| QUARTERS | ||||||||||
| 2015 (Unaudited) |
2014 (Unaudited) |
2013 (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) | 152,608 | 170,767 | 158,489 | 154,862 | 162,258 | 176,641 | 165,304 | 150,914 | ||
| Revenues | 128,726 | 139,688 | 128,432 | 127,299 | 136,876 | 145,840 | 138,403 | 131,819 | ||
| Gross margin | 23,364 | 15,077 | 8,353 | 33,206 | 26,303 | 17,330 | 14,402 | 22,636 | ||
| EBIT | 15,760 | 3,706 | 1,477 | 25,226 | 19,425 | 11,739 | 7,558 | 15,760 | ||
| Net earnings (loss) | 9,415 | 874 | (886 | ) | 16,725 | 12,516 | 6,509 | 3,802 | 10,241 | |
| Gross margin rate per MT | 153.10 | 88.29 | 52.70 | 214.42 | 162.11 | 98.11 | 87.12 | 149.99 | ||
| Per share | ||||||||||
| Net earnings (loss) | ||||||||||
| Basic | 0.10 | 0.01 | (0.01 | ) | 0.18 | 0.13 | 0.07 | 0.04 | 0.11 | |
| Diluted | 0.10 | 0.01 | (0.01 | ) | 0.16 | 0.13 | 0.07 | 0.04 | 0.11 | |
| Non-GAAP Measures | ||||||||||
| Adjusted gross margin | 25,325 | 23,988 | 16,786 | 16,382 | 24,779 | 17,542 | 15,540 | 19,684 | ||
| Adjusted EBIT | 17,721 | 12,617 | 9,910 | 8,402 | 17,901 | 11,951 | 8,696 | 12,808 | ||
| Adjusted net earnings | 10,804 | 7,386 | 5,456 | 4,526 | 11,403 | 6,817 | 4,179 | 7,359 | ||
| Adjusted gross margin rate per MT | 165.95 | 140.47 | 105.91 | 105.78 | 152.71 | 99.31 | 94.01 | 130.43 | ||
| Adjusted net earnings per share | ||||||||||
| Basic | 0.11 | 0.08 | 0.06 | 0.05 | 0.12 | 0.07 | 0.04 | 0.08 | ||
| Diluted | 0.11 | 0.08 | 0.06 | 0.05 | 0.12 | 0.07 | 0.04 | 0.08 | ||
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.
| For the three months ended | ||||||
(In thousands of dollars) |
December 27, 2014 (Unaudited) |
December 28, 2013 (Unaudited) |
||||
| Cash flow from operating activities | $ | (7,969 | ) | $ | 3,454 | |
| Cash flow from financing activities | 9,311 | (470 | ) | |||
| Cash flow from investing activities | (1,366 | ) | (948 | ) | ||
| Net (decrease) increase in cash and cash equivalents | $ | (24 | ) | $ | 2,036 | |
Cash flow from operations was negative $8.0 million in the first quarter of 2015, as opposed to positive $3.5 million in the comparable quarter of fiscal 2014. The negative variation of $11.5 million is mostly explained by a higher non-cash working capital variation of negative $25.4 million compared to negative $8.7 million in fiscal 2014 due mainly to a significant year-over-year variation in trade and other receivables, inventories and trade and other payables. This variation was slightly offset by lower EBIT of $3.7 million and lower income taxes paid of $2.0 million.
The variation in cash flow from financing activities is attributable to a higher year-over-year variation in borrowings under the revolving credit facility of $8.0 million in the first quarter of 2015 versus the first quarter of fiscal 2014. In addition, Lantic had a bank overdraft variation of $1.8 million in the current quarter compared to the first quarter last year.
Capital expenditures were higher by $0.4 million in the first quarter of 2015 due timing in spending on capital projects.
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 27, 2014 (Unaudited) |
December 28, 2013 (Unaudited) |
|||||
| Cash flow from operations | $ | (7,969 | ) | $ | 3,454 | ||
| Adjustments: | |||||||
| Changes in non-cash working capital | 25,394 | 8,741 | |||||
| Changes in non-cash income taxes payable | (479 | ) | (361 | ) | |||
| Changes in non-cash interest payable | (182 | ) | (185 | ) | |||
| Mark-to-market and derivative timing adjustments | 2,167 | (1,458 | ) | ||||
| Financial instruments non-cash amount | (2,936 | ) | 4,123 | ||||
| Capital expenditures | (1,366 | ) | (948 | ) | |||
| Investment capital expenditures | 206 | 229 | |||||
| Free cash flow | $ | 14,835 | $ | 13,595 | |||
| Declared dividends | $ | 8,463 | $ | 8,470 | |||
Free cash flow was $1.2 million higher than the comparable quarter in fiscal 2014 mostly due to lower income taxes paid related to timing, somewhat offset by higher capital expenditures and higher interest paid.
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 $0.8 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 higher by $0.4 million in the first quarter of 2015 due timing in spending on capital projects. 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.
The Company declared a quarterly dividend of 9.0 cents per common share, for a total amount of $8.5 million in the first quarter of 2015 and 2014.
Contractual obligations
There are no significant changes in the contractual obligations table disclosed in the Management's Discussion and Analysis of the September 27, 2014 Annual Report.
At December 27, 2014, the operating companies had commitments to purchase a total of 1,465,000 metric tonnes of raw sugar, of which 174,395 metric tonnes had been priced for a total dollar commitment of $78.5 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 2019. At quarter-end, $101.0 million had been drawn from the working capital line of credit and $0.1 million in cash was also available. In addition, Lantic had $2.6 million in bank overdraft as the amount of outstanding cheques at the end of the quarter exceeded the available cash balances.
At quarter's end, inventories were higher compared to year-end due mainly to the Taber beet crop in the first quarter of the fiscal year and timing in raw sugar vessel arrivals in Montreal. Inventories are also higher in fiscal 2015 than the comparable quarter of fiscal 2014 due to a higher carryover inventory of beet sugar combined with higher 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 29, 2015 there were 94,028,860 common shares outstanding.
In November 2014, the Company received approval from the Toronto Stock Exchange to proceed with a normal course issuer bid ("NCIB"). Under the NCIB, the Company may purchase up to 1,000,000 common shares. The NCIB commenced on November 27, 2014 and may continue to November 26, 2015.
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 27, 2014 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 27, 2014 have been applied consistently in the preparation of these unaudited condensed consolidated interim financial statements except as noted below:
- 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 years beginning on or after January 1, 2014. The Company adopted the amendment in the first quarter of the year ending October 3, 2015. The adoption of IAS 36, Impairment of assets, did not have an impact on the unaudited condensed consolidated interim financial statements.
- IFRIC 21, Levies - In May 2013, the IASB issued IFRIC 21, Levies. The IFRIC provides guidance on accounting for levies in accordance with the requirements of IAS 37, Provisions, contingent liabilities and contingent assets. The interpretation defines a levy as an outflow from an entity imposed by a government in accordance with legislation. It also notes that levies do not arise from executory contracts or other contractual arrangements. The interpretation also confirms that an entity recognizes a liability for a levy only when the triggering event specified in the legislation occurs. The Company adopted the amendment in the first quarter of the year ending October 3, 2015. The adoption of IFRIC 21, Levies, did not have an impact on 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.
- IFRS 9, Financial instruments - IFRS 9 (2009) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2009), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows.
IFRS 9 (2010) introduces additional changes relating to financial liabilities.
IFRS 9 (2013) includes a new general hedge accounting standard which will align hedge accounting more closely with risk management. This new standard does not fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness. However, it will provide more hedging strategies that are used for risk management to qualify for hedge accounting and introduce more judgement to assess the effectiveness of a hedging relationship.
Special transitional requirements have been set for the application of the new general hedging model.
IFRS 9 (2014) includes finalized guidance on the classification and measurement of financial assets. The final standard also amends the impairment model by introducing a new "expected credit loss" model for calculating impairment, and new general hedge accounting requirements.
The Company does not intend to early adopt IFRS 9 (2009), IFRS 9 (2010), IFRS 9 (2013) and/or IFRS 9 (2014) in its consolidated financial statements for the annual period ending on October 3, 2015. The extent of the impact of adoption of IFRS 9 Financial instruments on the consolidated financial statements of the Company has not yet been determined.
- IAS 19, Employee benefits - In November 2013, the IASB issued amendments to pension accounting under IAS 19, Employee benefits. The amendments introduce a relief (practical expedient) that will reduce the complexity and burden of accounting for certain contributions from employees or third parties. The Company intends to adopt these amendments in its consolidated financial statements for the annual period beginning on October 4, 2015. The extent of the impact of adoption of IAS 19 Employee benefits on the consolidated financial statements of the Company has not yet been determined.
- IFRS 15, Revenue from contracts with customers - The standard contains a single model that applies to contracts with customers and two approaches to recognising revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and judgemental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. The new standard applies to contracts with customers. It does not apply to insurance contracts, financial instruments or lease contracts, which fall in the scope of other IFRSs. The Company intends to adopt IFRS 15 in its consolidated financial statements for the annual period beginning on October 1, 2017. The extent of the impact of adoption of the standard 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 27, 2014. This document is available on SEDAR at www.sedar.com or on one of our websites at www.lantic.ca or www.rogerssugarinc.com.
Outlook
The industrial and consumer segments are expected to recover the decrease in volume from the first quarter of fiscal 2015 and the Company anticipates that volume for both segments to be slightly above fiscal 2014.
The 2013 one-year contract for an HFCS substitutable business was not renewed in fiscal 2014. With continued low corn prices, opportunities to provide competitive pricing are constrained. As such, liquid volume is anticipated to decrease by approximately 10,000 metric tonnes in fiscal 2015.
Total export volume is expected to decrease in fiscal 2015 as the Canada-specific quota was reduced from 12,050 metric tonnes to 10,300 metric tonnes, due to the U.S. / Mexico anti-dumping 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 lower in fiscal 2015 than in fiscal 2014. Export opportunities will remain limited in the U.S. and Mexico until the dispute between both countries is fully resolved. As a result, it is estimated that export volume will decrease by approximately 4,000 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.
Overall, total sales volume is expected to be slightly lower in fiscal 2015 as compared to fiscal 2014.
Following the Montreal workforce reduction in September 2014, the Company expects to achieve labour savings of approximately $5.0 million in fiscal 2015 compared to fiscal 2014.
The Company expects energy costs in fiscal 2015 to be reduced by approximately $3.0 million when compared to fiscal 2014. In fiscal 2015, the Montreal refinery secured a firm gas supply contract with its natural gas provider which is expected to generate net savings of approximately $1.8 million when compared to fiscal 2014. Furthermore, approximately 75% of fiscal 2015's natural gas requirements have been hedged at average prices comparable to or below to those realized in fiscal 2014. The un-hedged volume will be purchased on the spot market and should benefit from the current low prices of natural gas. As a result, the Company anticipates additional energy cost savings of approximately $1.2 million.
In addition, natural gas futures positions for fiscal 2016 to 2019 have also been taken. Some of these positions are at prices higher than current market values, 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.
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 at a lower selling margin in fiscal 2015 than fiscal 2014 due to market competitiveness. In addition, the Company benefited in fiscal 2014 from a $1.9 million profit 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, which is not expected to re-occur in fiscal 2015.
Administration and selling expenses for fiscal 2015 are expected to decrease. One-time events occurred in fiscal 2014, such as the process improvement analysis at the Montreal refinery which resulted in incremental consulting fees and severance costs. Furthermore, additional non-cash pension expense was recorded in fiscal 2014 as a result of a decision to terminate a defined benefit pension plan.
The Taber sugar beet slicing campaign will be completed in February 2015. We are estimating total beet sugar production at approximately 85,000 metric tonnes, once the thick juice campaign is completed in the spring of 2015.
In fiscal 2015, defined benefit pension plan 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 are estimated at 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 complete financial statements are available at the following address: http://media3.marketwire.com/docs/IFRS_Q1_2015_ENG.pdf.
Contact Information:
Vice-President Finance and Secretary
(514) 940-4350
(514) 527-1610 (FAX)
www.rogerssugarinc.com or www.Lantic.ca