MONTRÉAL, QUÉBEC--(Marketwired - July 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 and nine months ended June 28, 2014.
Volume for the third quarter was 158,489 metric tonnes, as opposed to 165,304 metric tonnes in the comparable quarter of last year, a decrease of approximately 6,800 metric tonnes. Year-to-date volume of 475,609 metric tonnes was approximately 3,000 metric tonnes higher than last year. Industrial volume was higher by approximately 1,300 metric tonnes for the quarter and 7,400 metric tonnes year-to-date due to additional volume with existing and new customers. As expected, liquid volume for the quarter was lower by approximately 6,600 metric tonnes when compared to the third quarter of 2013 as a one-year contract with a high fructose corn syrup ("HFCS") substitutable account in Western Canada ended at the end of the second quarter. Year-to-date, liquid volume is higher by approximately 3,100 metric tonnes due to timing in deliveries in this one-year contract. The Company entered into a new multi-year national agreement with a major consumer account that took effect in January 2014 but has not reached its full distribution yet, which combined with a general weakness in the consumer market contributed to the decrease of 3,300 metric tonnes for the quarter. We expect the volume gained with this multi-year agreement to ultimately more than offset the fact that we did not re-sign another important Eastern consumer account. On a year-to-date basis, volume was higher by approximately 1,200 metric tonnes due to the timing in the start of the multi-year agreement and the termination of the Eastern consumer account. Export volume for the quarter was higher by approximately 1,800 metric tonnes due to timing in shipments under the Canada-specific quota to the U.S. versus last year's comparable quarter. Year-to-date, export volume is lower than last year by approximately 8,700 metric tonnes due to 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. Earnings before interest and income taxes ("EBIT") included a mark-to-market loss of $8.4 million for the third quarter and a gain of $9.9 million year-to-date, which were added or deducted to calculate adjusted EBIT and gross margin results.
For the third quarter, adjusted gross margin increased by approximately $1.2 million when compared to the same quarter of last year. Included in the prior year's third quarter adjusted gross margin is a $1.9 million cost for future pension plan updates following the signing of a three-year labour agreement in Montreal. Excluding this charge for 2013, adjusted gross margin for the current quarter decreased by $0.7 million. On a per metric tonne basis, adjusted gross margin for the quarter was $105.91 as opposed to $94.01 but comparable to the previous year's quarter of $105.51, when we exclude the additional fiscal 2013 pension plan charge. The slight increase is due mainly to the sales mix with a decrease in lower margin liquid volume partially offset by lower consumer volume. Included in the adjusted gross margin for the current quarter is a $0.5 million reduction in maintenance costs for a claim submitted against the Company's insurance carrier relating to the unusual equipment breakdown that occurred in September 2013 in Vancouver. Year-to-date adjusted gross margin was $57.9 million compared to $64.6 million in fiscal 2013 while the adjusted gross margin rate per tonne was $121.84, a decrease of $14.79 compared to last year's comparable period. The decrease is explained by the unfavourable sales mix, lower by-product revenues of $1.5 million and additional energy costs of approximately $1.4 million incurred in the first half of the current year for auxiliary natural gas. Finally, the unusual equipment breakdown that occurred at the end of fiscal 2013 at the Vancouver refinery added $0.5 million in maintenance cost, after taking into consideration the $0.5 million insurance claim, and also contributed to higher refining costs as some additional labour costs were incurred in catching up on lost production volume during the first quarter of the current year.
Adjusted EBIT of $9.9 million was approximately $1.2 million higher than the same quarter last year due to the variation in adjusted gross margin, as explained above. Administration and selling expenses were comparable to the prior year third quarter but include offsetting items. During the quarter, the Company recorded a non-cash administrative expense of $1.0 million resulting from a decision to terminate the only remaining salaried defined benefit pension plan, for which years of service had been frozen since 2008. In addition, the Company incurred additional consulting fees. These two items were offset by a reduction in employee benefits provisions. Year-to-date adjusted EBIT of $36.2 million was approximately $7.7 million lower than last year due mainly to lower adjusted gross margins of $6.6 million, higher distribution expenses of $0.7 million, due to one-time demurrage costs as well as additional storage costs incurred in the second quarter as a result to the large carryover of beet sugar inventories at the end of last fiscal year, and higher administration and selling expenses of approximately $0.3 million due to timing of expenses.
Free cash flow was $1.6 million lower than the comparable quarter in fiscal 2013, mainly explained by higher capital expenditure spending, due to timing, somewhat offset by lower deferred financing charges of $0.5 million. Year-to-date, free cash flow was $21.9 million compared to $32.5 million for fiscal 2013. The decrease is mainly due to lower adjusted EBIT of $8.5 million, excluding the additional pension charges of both fiscal years, additional capital expenditure spending due to timing and additional cash pension contributions of $1.6 million.
In November 2013, 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 5,000,000 common shares. The NCIB program commenced on November 27, 2013 and may continue to November 26, 2014. During the second quarter of fiscal 2014, the Company purchased 85,400 common shares for a total cash consideration of $0.4 million. All shares purchased were cancelled.
During the quarter, the Company entered into a $10.0 million five-year interest rate swap agreement at a rate of 2.09%, effective June 30, 2014. During the second quarter of fiscal 2014, the Company exercised its option to extend its revolving credit facility under the same terms and conditions of the credit agreement entered into on June 28, 2013. The maturity date of the revolving credit facility was therefore extended to June 28, 2019. In the third quarter of fiscal 2013, the Company entered into a five-year interest swap agreement with a starting date of June 28, 2013, at a rate of 2.09% for an initial amount of $50.0 million, declining to $30.0 million by the end of the agreement.
Overall volume for fiscal 2014 is expected to be slightly below fiscal 2013 with lower export volume partially offset by higher industrial volume and modest consumer volume increase. Adjusted gross margin rate is expected to be lower in fiscal 2014 due to an unfavourable sales mix as well as additional operating costs incurred in the current year as discussed above.
The Company hired a process improvement consulting firm to review the Montreal refinery cost structure. Their analysis started during the third quarter and will continue until the end of the calendar year. More significant administrative costs will be incurred in the fourth quarter related to this project and for which, meaningful savings are expected in fiscal 2015 through process improvement and labour reductions.
The Company performed actuarial evaluations for its four pension plans as of December 31, 2013. As a result of favourable returns on its pension plan assets, combined with an increase in the discount rate as of December 31, 2013, deficits in all plans were significantly reduced or eliminated. Consequently, the Company approved the termination of the Pension Plan for Salaried Employees in B.C. and Alberta (the "Salaried Plan") as of December 31, 2014. Years of service for the Salaried Plan had been frozen since 2008. Year-to-date, the Company contributed $6.7 million for all of its defined benefit plans, of which $0.8 million was specific to the Salaried Plan. In fiscal 2013, defined benefit contributions amounted to $8.4 million, of which, $3.4 million was attributable to the Salaried Plan. Total defined benefit pension plan contributions for the year are expected to be slightly less than fiscal 2013. A further reduction in defined benefit pension plan contribution of approximately $3.0 million is expected in fiscal 2015.
| FOR THE BOARD OF DIRECTORS, |
| (SIGNED) |
| Stuart Belkin, Chairman |
| Vancouver, British Columbia - July 30, 2014 |
MANAGEMENTS' DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") dated July 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 June 28, 2014, as well as the audited consolidated financial statements and MD&A for the year ended September 28, 2013. 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 June 28, 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 | For the nine months ended | |||||||
| (In thousands of dollars, except for volume and per share information) |
June 28, 2014 (Unaudited) |
June 29, 2013 (1) (Unaudited) |
June 28, 2014 (Unaudited) |
June 29, 2013 (1) (Unaudited) |
|||||
| Volume (metric tonnes) | 158,489 | 165,304 | 475,609 | 472,633 | |||||
| Revenues | $ | 128,432 | $ | 138,403 | $ | 392,607 | $ | 412,598 | |
| Gross margin | 8,353 | 14,402 | 67,862 | 67,461 | |||||
| Administration and selling expenses | 4,852 | 4,842 | 15,066 | 14,762 | |||||
| Distribution expenses | 2,024 | 2,002 | 6,668 | 5,944 | |||||
| Earnings before net finance costs and provision for income taxes (EBIT) | $ | 1,477 | $ | 7,558 | $ | 46,128 | $ | 46,755 | |
| Net finance costs | 2,675 | 2,457 | 8,064 | 6,500 | |||||
| Provision for income taxes | (312 | ) | 1,299 | 9,709 | 10,272 | ||||
| Net (loss) earnings | $ | (886 | ) | $ | 3,802 | $ | 28,355 | $ | 29,983 |
| Net (loss) earnings per share - basic | $ | (0.01 | ) | $ | 0.04 | $ | 0.30 | $ | 0.32 |
(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 June 28, 2014 unaudited condensed consolidated interim 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 | For the nine months ended | |||||||||
| (In thousands) | June 28, 2014 (Unaudited) |
June 29, 2013 (Unaudited) |
June 28, 2014 (Unaudited) |
June 29, 2013 (Unaudited) |
|||||||
| Mark-to-market adjustment (excluding interest swap) | $ | (3,987 | ) | $ | (2,411 | ) | $ | 4,716 | $ | (6,216 | ) |
| Cumulative timing differences | (4,446 | ) | 1,273 | 5,199 | 9,102 | ||||||
| Total adjustment to cost of sales | $ | (8,433 | ) | $ | (1,138 | ) | $ | 9,915 | $ | 2,886 | |
Price movements in raw sugar and natural gas as well as the movement in value of the U.S. dollar resulted in a mark-to-market loss during the quarter and a mark-to-market gain for the year-to-date. For raw sugar, a mark-to-market loss of $0.9 million was recorded as compared to a mark-to-market loss of $1.7 million in the comparable quarter of last year. Year-to-date, a mark-to-market gain of $2.1 million was recorded as compared to a mark-to-market loss of $7.9 million in fiscal 2013. With the slight decrease in natural gas prices during the quarter, a mark-to-market loss of $0.4 million was recorded versus a mark-to-market loss of $1.3 million for the comparable quarter. On a year-to-date basis, a mark-to-market gain of $1.5 million was recorded following the increase in natural gas prices for the year compared to a mark-to-market loss of $1.2 million in fiscal 2013. Foreign exchange forward contracts and embedded derivatives, on which foreign exchange movements have an impact, resulted in a combined mark-to-market loss of $2.7 million for the quarter and a mark-to-market gain of $1.1 million year-to-date. For the comparable periods in fiscal 2013, the combined mark-to-market adjustment was a gain of $0.6 million for the quarter and $2.9 million year-to-date.
The cumulative timing differences are a result of the fact 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 third quarter, the total cost of sales adjustment, to be added to the consolidated operating results, is a loss of $8.4 million compared to a loss of $1.1 million in the third quarter of 2013,. Year-to-date, the total cost of sales adjustment, to be deducted from the consolidated operating results, is a gain of $9.9 million compared to a gain of $2.9 million in 2013.
In addition, under short-term interest expense, the Company recorded a mark-to-market loss of $0.1 million for the quarter and $0.5 million year-to-date as opposed to a mark-to-market gain of $0.4 million for the quarter and $1.9 million year-to-date for the comparable periods last year, on the mark-to-market of an interest rate swap. The mark-to-market loss in fiscal 2014 relates to the 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 and the new five-year 2.09% interest rate swap of $10.0 million entered into in the third quarter of 2014. Last year's gain is 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 interim consolidated results (non-GAAP) without the above-noted mark-to-market results:
| Consolidated Results | For the three months ended |
For the nine months ended |
||||||||||
| June 28, 2014 (Unaudited) |
June 29, 2013(1)
(Unaudited) |
June 28, 2014 (Unaudited) |
June 29, 2013(1)
(Unaudited) |
|||||||||
| Gross margin as per financial statements | $ | 8,353 | $ | 14,402 | $ | 67,862 | $ | 67,461 | ||||
| Adjustment as per above | 8,433 | 1,138 | (9,915 | ) | (2,886 | ) | ||||||
| Adjusted gross margin | 16,786 | 15,540 | 57,947 | 64,575 | ||||||||
| EBIT as per financial statements | 1,477 | 7,558 | 46,128 | 46,755 | ||||||||
| Adjustment as per above | 8,433 | 1,138 | (9,915 | ) | (2,886 | ) | ||||||
| Adjusted EBIT | 9,910 | 8,696 | 36,213 | 43,869 | ||||||||
| Net (loss) earnings as per financial statements | (886 | ) | 3,802 | 28,355 | 29,983 | |||||||
| Adjustment to cost of sales as per above | 8,433 | 1,138 | (9,915 | ) | (2,886 | ) | ||||||
| Adjustment for mark-to-market of finance costs | 137 | (438 | ) | 541 | (1,867 | ) | ||||||
| Deferred taxes on above adjustments | (2,228 | ) | (323 | ) | 2,404 | 1,002 | ||||||
| Adjusted net earnings | $ | 5,456 | $ | 4,179 | $ | 21,385 | $ | 26,232 | ||||
| Net (loss) earnings per share basic, as per financial statements | $ | (0.01 | ) | $ | 0.04 | $ | 0.30 | $ | 0.32 | |||
| Adjustment for the above | 0.07 | - | (0.07 | ) | (0.04 | ) | ||||||
| Adjusted net earnings per share basic | $ | 0.06 | $ | 0.04 | $ | 0.23 | $ | 0.28 | ||||
(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 June 28, 2014 unaudited condensed consolidated interim financial statements.
Volume for the third quarter was 158,489 metric tonnes, as opposed to 165,304 metric tonnes in the comparable quarter of last year, a decrease of approximately 6,800 metric tonnes. Year-to-date volume of 475,609 metric tonnes was approximately 3,000 metric tonnes higher than last year. Industrial volume was higher by approximately 1,300 metric tonnes for the quarter and 7,400 metric tonnes year-to-date due to additional volume with existing and new customers. As expected, liquid volume for the quarter was lower by approximately 6,600 metric tonnes when compared to the third quarter of 2013 as a one-year contract with a high fructose corn syrup ("HFCS") substitutable account in Western Canada ended at the end of the second quarter. Year-to-date, liquid volume is higher by approximately 3,100 metric tonnes due to timing in deliveries in this one-year contract. The Company entered into a new multi-year national agreement with a major consumer account that took effect in January 2014 but has not reached its full distribution yet, which combined with a general weakness in the consumer market contributed to the decrease of 3,300 metric tonnes for the quarter. We expect the volume gained with this multi-year agreement to ultimately more than offset the fact that we did not re-sign another important Eastern consumer account. On a year-to-date basis, volume was higher by approximately 1,200 metric tonnes due to the timing in the start of the multi-year agreement and the termination of the Eastern consumer account. Export volume for the quarter was higher by approximately 1,800 metric tonnes due to timing in shipments under the Canada-specific quota to the U.S. versus last year's comparable quarter. Year-to-date, export volume is lower than last year by approximately 8,700 metric tonnes due to a decrease in exports to Mexico.
As previously mentioned, gross margin of $8.4 million for the quarter and $67.9 million year-to-date does not reflect the economic margin of the Company, as it includes a loss of $8.4 million for the quarter and a gain of $9.9 million year-to-date for the mark-to-market of derivative financial instruments explained earlier. We will therefore comment on adjusted gross margin results.
For the third quarter, adjusted gross margin increased by approximately $1.2 million when compared to the same quarter of last year. Included in the prior year's third quarter adjusted gross margin is a $1.9 million cost for future pension plan updates following the signing of a three-year labour agreement in Montreal. Excluding this charge for 2013, adjusted gross margin for the current quarter decreased by $0.7 million. On a per metric tonne basis, adjusted gross margin for the quarter was $105.91 as opposed to $94.01 but comparable to the previous year's quarter of $105.51, when we exclude the additional fiscal 2013 pension plan charge. The slight increase is due mainly to the sales mix with a decrease in lower margin liquid volume partially offset by lower consumer volume. Included in the adjusted gross margin for the current quarter is a $0.5 million reduction in maintenance costs for a claim submitted against the Company's insurance carrier relating to the unusual equipment breakdown that occurred in September 2013 in Vancouver. Year-to-date adjusted gross margin was $57.9 million compared to $64.6 million in fiscal 2013 while the adjusted gross margin rate per tonne was $121.84, a decrease of $14.79 compared to last year's comparable period. The decrease is explained by the unfavourable sales mix, lower by-product revenues of $1.5 million and additional energy costs of approximately $1.4 million incurred in the first half of the current year for auxiliary natural gas. Finally, the unusual equipment breakdown that occurred at the end of fiscal 2013 at the Vancouver refinery added $0.5 million in maintenance cost, after taking into consideration the $0.5 million insurance claim, and also contributed to higher refining costs as some additional labour costs were incurred in catching up on lost production volume during the first quarter of the current year.
Administration and selling expenses were comparable to the prior year third quarter but include offsetting items. During the quarter, the Company recorded a non-cash administrative expense of $1.0 million resulting from a decision to terminate the only remaining salaried defined benefit pension plan, for which years of service had been frozen since 2008. In addition, the Company incurred additional consulting fees. These two items were offset by a reduction in provision for employee benefits. Year-to-date, administration and selling expenses were approximately $0.3 million higher due to timing of expenses.
Distribution costs for the quarter were in line with the comparable quarter of last year. On a year-to-date basis, distribution costs were $0.7 million higher than last year due to the timing in deliveries under the global and Canada specific quotas, 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.
Finance costs include a mark-to-market loss on the interest swap of $0.1 million for the quarter and $0.5 million year-to-date while last year's comparable periods resulted in a mark-to-market gain of $0.4 million and $1.9 million, respectively. Without the above mark-to-market adjustment, interest expense for the quarter was lower by approximately $0.4 million due mainly to a lower interest rate on the interest rate swap. Year-to-date interest expense is lower by approximately $0.8 million for the same reason.
The provision for income taxes includes a deferred tax recovery of $2.2 million for the quarter and a deferred tax expense of $2.4 million year-to-date for the mark-to-market adjustment as compared to a recovery of $0.3 million for the quarter and an expense of $1.0 million year-to-date for the comparable periods of last year. On an adjusted basis, the provision for income taxes was approximately $1.9 million for the quarter and $7.3 million year-to date as compared to a provision of $1.6 million for the quarter and $9.3 million year-to-date for the comparable periods of last year. The decrease for the quarter and year-to-date is due mainly to the decrease in adjusted earnings before income taxes as a result of the lower adjusted gross margins.
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.
| 2014 (Unaudited) |
2013 (1)
(Unaudited) |
2012 (Unaudited) | ||||||||
| (In thousands of dollars, except for volume, margin rate and per share information) | 3-Q | 2-Q |
1-Q | 4-Q | 3-Q | 2-Q | 1-Q | 4-Q | ||
| Volume (MT) | 158,489 | 154,862 | 162,258 | 176,641 | 165,304 | 150,914 | 156,415 | 164,539 | ||
| Revenues | 128,432 | 127,299 | 136,876 | 145,840 | 138,403 | 131,819 | 142,376 | 150,469 | ||
| Gross margin | 8,353 | 33,206 | 26,303 | 17,329 | 14,402 | 22,636 | 30,423 | 18,077 | ||
| EBIT | 1,477 | 25,226 | 19,425 | 11,739 | 7,558 | 15,760 | 23,437 | 11,072 | ||
| Net (loss) earnings | (886 | ) | 16,725 | 12,516 | 6,510 | 3,802 | 10,241 | 15,940 | 6,944 | |
| Gross margin rate per MT | 52.70 | 214.42 | 162.11 | 98.10 | 87.12 | 149.99 | 194.50 | 109.86 | ||
| Per share | ||||||||||
| Net (loss) earnings | ||||||||||
| Basic | (0.01 | ) | 0.18 | 0.13 | 0.07 | 0.04 | 0.11 | 0.17 | 0.07 | |
| Diluted | (0.01 | ) | 0.16 | 0.13 | 0.07 | 0.04 | 0.11 | 0.16 | 0.07 | |
| Non-GAAP Measures | ||||||||||
| Adjusted gross margin | 16,786 | 16,382 | 24,779 | 17,541 | 15,540 | 19,684 | 29,351 | 21,696 | ||
| Adjusted EBIT | 9,910 | 8,402 | 17,901 | 11,951 | 8,696 | 12,808 | 22,365 | 14,691 | ||
| Adjusted net earnings | 5,456 | 4,526 | 11,403 | 6,818 | 4,179 | 7,359 | 14,694 | 9,782 | ||
| Adjusted gross margin rate per MT | 105.91 | 105.78 | 152.71 | 99.30 | 94.01 | 130.43 | 187.65 | 131.86 | ||
| Adjusted net earnings per share | ||||||||||
| Basic | 0.06 | 0.05 | 0.12 | 0.07 | 0.04 | 0.08 | 0.16 | 0.10 | ||
| Diluted | 0.06 | 0.05 | 0.12 | 0.07 | 0.04 | 0.08 | 0.15 | 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 June 28, 2014 unaudited condensed consolidated interim 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 a favourable sales mix of products sold. This is due to 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 $20.0 million for the quarter, versus $22.0 million in the comparable quarter of fiscal 2013, a decrease of $2.0 million. The main reason for the decrease is due to a decrease in net earnings of $4.7 million (before any mark-to-market adjustment) offset by lower interest paid and pension contributions of $1.0 million and $0.5 million, respectively, both due to timing.
Year-to-date cash flow from operations is positive $20.5 million as opposed to $7.0 million for the comparable period of last year, an improvement of $13.5 million. The improvement is due mainly to a decrease in total working capital variance of $12.8 million versus last year's year-to-date variance, due mainly to a lower increase in inventories as well as a positive variation in accounts payable versus a negative variation in fiscal 2013. In addition, interest and income taxes paid resulted in a positive variation of $1.3 million and $0.5 million, respectively, and gross margin (before any mark-to-market adjustment) increased by $0.4 million. These positive variations were slightly offset with an increase in pension contributions of $1.6 million.
Total capital expenditures were $2.2 million and $0.9 million higher for the quarter and year-to-date, respectively, than the previous year, due mainly to timing of projects when compared to fiscal 2013.
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 dividends 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 |
For the nine months ended |
||||||||||||
| (In thousands of dollars) | June 28, 2014 (Unaudited) |
June 29, 2013 (Unaudited) |
June 28, 2014 (Unaudited) |
June 29, 2013 (Unaudited) |
|||||||||
| Cash flow from operations | $ | 19,975 | $ | 21,983 | $ | 20,546 | $ | 7,018 | |||||
| Adjustments: | |||||||||||||
| Changes in non-cash working capital | (16,415 | ) | (17,185 | ) | 10,809 | 23,639 | |||||||
| Changes in non-cash income taxes payable | 15 | 523 | 1,193 | 1,922 | |||||||||
| Changes in non-cash interest payable | 1,474 | 2,075 | 1,549 | 2,036 | |||||||||
| Mark-to-market and derivative timing adjustments | 8,570 | 700 | (9,374 | ) | (4,753 | ) | |||||||
| Financial instruments non-cash amount | (5,256 | ) | 366 | 2,705 | 7,335 | ||||||||
| Capital expenditures | (3,464 | ) | (1,307 | ) | (5,881 | ) | (4,916 | ) | |||||
| Investment capital expenditures | 623 | 460 | 852 | 580 | |||||||||
| Net issue (repurchase) of shares | - | 20 | (372 | ) | 92 | ||||||||
| Deferred financing charges | - | (450 | ) | (90 | ) | (450 | ) | ||||||
| Free cash flow | $ | 5,522 | $ | 7,185 | $ | 21,937 | $ | 32,503 | |||||
| Declared dividends | $ | 8,462 | $ | 8,470 | $ | 25,395 | $ | 59,281 | |||||
Free cash flow was $1.6 million lower than the comparable quarter in fiscal 2013, mainly explained by higher capital expenditure spending, due to timing, somewhat offset by lower deferred financing charges of $0.5 million. Year-to-date, free cash flow was $21.9 million compared to $32.5 million for fiscal 2013. The decrease is mainly due to lower adjusted EBIT of $8.5 million, excluding the additional pension charges of both fiscal years, additional capital expenditure spending due to timing and additional cash pension contributions of $1.6 million.
Changes in non-cash working capital 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.
The combined impact of the mark-to-market and financial instruments non-cash amount of $3.3 million for the quarter and of negative $6.7 million year-to-date 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 than last year by approximately $2.0 million for the quarter and by approximately $0.7 million year-to-date due mainly to timing of 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 their substantial 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 at the beginning of fiscal 2015. 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. In total, the Company expects to spend between $2.5 million and $3.0 million in fiscal 2014 on return on investment projects. During the quarter, the Company approved the purchase and installation of a new specialty packaging equipment at the Vancouver refinery for a total amount of $4.2 million, of which, approximately half will be spent in the fourth quarter of this fiscal year. Although this project is not considered an investment capital expenditure due to its longer payback, it will nonetheless generate modest labour savings in fiscal 2016 as well as improved packaging efficiency. With the approval of this project, the Company expects capital expenditures for the year, excluding investment capital expenditures, to be between $8.5 million and $9.5 million for the year.
During the second quarter, Rogers repurchased 85,400 shares under the Normal course issuer bid ("NCIB") for a total cash consideration of $0.4 million. In the second and third quarter of 2013, a total amount of $0.1 million was received following the exercise of share options by an executive of the Company.
During the second quarter of fiscal 2014, the Company exercised its option to extend its revolving credit facility under the same terms and conditions of the credit agreement entered into on June 28, 2013. The maturity date of the revolving credit facility was therefore extended to June 28, 2019. As a result, the Company paid $0.1 million in deferred financing costs during the second quarter.
The Company declared a quarterly dividend of 9.0 cents per common share for a total amount of approximately $8.5 million during the quarter. During the second quarter of fiscal 2013, the Company declared and paid an additional dividend of $33.9 million based on previously earned but undistributed free cash flow of approximately $64.7 million generated in the five fiscal years ended September 29, 2012.
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 June 28, 2014, the operating company had commitments to purchase a total of 1,257,000 metric tonnes of raw sugar, of which 174,000 metric tonnes had been priced for a total commitment of $79.1 million.
Capital resources
Lantic has $150.0 million as an authorized line of credit available to finance its operations. As discussed above, this line of credit expires in June 2019 following the recent extension of the maturity by one year. During the quarter, the Company entered into a $10.0 million five-year interest rate swap agreement at a rate of 2.09%, effective June 30, 2014. In the third quarter of fiscal 2013, the Company entered into a five-year interest swap agreement with a starting date of June 28, 2013, at a rate of 2.09% for an initial amount of $50.0 million, declining to $30.0 million by the end of the agreement.
At quarter-end, $84.0 million had been drawn from the working capital line of credit. In addition, an amount of $1.0 million in cash and cash equivalent was also available.
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
In November 2013, the Company received approval from the Toronto Stock Exchange to proceed with a normal course issuer bid. Under the NCIB program, the Company may purchase up to 5,000,000 common shares. The NCIB program commenced on November 27, 2013 and may continue to November 26, 2014. During the second quarter of 2014, the Company purchased 85,400 common shares, for a total cash consideration of $0.4 million. All shares purchased were cancelled.
During the second and third quarter of 2013, 20,000 common shares and 3,500 common shares, respectively, were issued following the exercise of share options by an executive under the share option plan. As at July 30, 2014, there were 94,028,860 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 June 28, 2014 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 10 of the June 28, 2014 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 and proposes additional changes relating to financial liabilities. In addition, it includes a new general hedge accounting standard which will align hedge accounting more closely with risk management. 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 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.
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
The Company entered into a new multi-year national agreement with a major consumer account that took effect in January 2014 but did not re-sign an important Eastern consumer account in April 2014. We therefore anticipate that consumer volume will be slightly higher in fiscal 2014 compared to 2013.
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. Combining both the global quota and our Canada specific quota of 12,000 metric tonnes, we still anticipate export volume to be lower than fiscal 2013 as volume sold in Mexico 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. However, the U.S. has recently launched a dumping case against Mexico which could have an impact on sugar marketing and margins in the U.S. and Mexico if successful. 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 one year contract obtained from an HFCS substitutable business terminated at the end of the second quarter. With the completion of the contract, as expected, liquid volume was lower in the third quarter. We expect volume to be lower in the fourth quarter of fiscal 2014 as well but for the year to be comparable to last year's total liquid volume.
Overall volume for fiscal 2014 is expected to be slightly below fiscal 2013 with lower export volume partially offset by higher industrial volume and modest consumer volume increase. Adjusted gross margin rate is expected to be lower in fiscal 2014 due to an unfavourable sales mix as well as additional operating costs incurred in the current year as discussed above.
The Company hired a process improvement consulting firm to review the Montreal refinery cost structure. Their analysis started during the third quarter and will continue until the end of the calendar year. More significant administrative costs will be incurred in the fourth quarter related to this project and for which, meaningful savings are expected in fiscal 2015 through process improvement and labour reductions.
As a consequence of the large inventory carry-over and a reduction in export volume, a total of 22,000 acres was planted this season, which should derive approximately 80,000 metric tonnes of beet sugar under normal growing, harvesting and processing conditions.
The Company performed actuarial evaluations for its four pension plans as of December 31, 2013. As a result of favourable returns on its pension plan assets, combined with an increase in the discount rate as of December 31, 2013, deficits in all plans were significantly reduced or erased. Consequently, the Company approved the termination of the Pension Plan for Salaried Employees in B.C. and Alberta (the "Salaried Plan") as of December 31, 2014. Years of service for the Salaried Plan had been frozen since 2008. Year-to-date, the Company contributed $6.7 million for all of its defined benefit plans, of which, $0.8 million was specific to the Salaried Plan. In fiscal 2013, defined benefit contributions amounted to $8.4 million, of which, $3.4 million was attributable to the Salaried Plan. Total defined benefit pension plan contributions for the year are expected to be slightly less than fiscal 2013. A further reduction in defined benefit pension plan contribution of approximately $3.0 million is expected in fiscal 2015.
Approximately 75% of fiscal 2015's natural gas requirements have been hedged at average prices comparable to those that will be realized in fiscal 2014. In addition, futures positions for fiscal 2016 to 2018 have also been taken. We will continue to monitor natural gas market dynamics with the objective of minimizing natural gas costs.
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 started with potential customers in Europe.
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/RSI_FS_Q3_F2014_ENG.pdf
Contact Information:
VP Finance and Secretary
(514) 940-4350
(514) 527-1610 (FAX)
investors@lantic.ca
www.rogerssugar.com or www.Lantic.ca