Rogers Sugar Inc.
TSX : RSI

Rogers Sugar Inc.

July 30, 2015 16:00 ET

Rogers Sugar Inc.: Interim Report for the 3rd Quarter 2015 Results

- Higher Adjusted EBIT and Adjusted Gross Margin Rate for the Quarter and Year-To-Date

- Higher Free Cash Flow of $3.4 Million and $6.9 Million for the Quarter and Year-To-Date, Respectively

- New Four Year Agreement Signed With the Alberta Beet Sugar Growers

MONTREAL, QUEBEC--(Marketwired - July 30, 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 and nine months ended June 27, 2015.

Volume for the third quarter of fiscal 2015 was 160,713 metric tonnes compared to 158,489 metric tonnes in the comparable quarter of last year, an increase of approximately 2,200 metric tonnes. Year-to-date, volume of 465,900 metric tonnes was approximately 9,700 metric tonnes lower than last year. Industrial volume was higher for the quarter by approximately 900 metric tonnes but lower year-to-date by approximately 1,700 metric tonnes due to timing in deliveries. Consumer volume was lower for the quarter and year-to-date by approximately 400 metric tonnes and 5,900 metric tonnes, respectively. The decrease year-to-date is partially attributable to the timing in agreements with major accounts whereby a new multi-year agreement started on January 1, 2014 and another agreement with a major account ended March 31, 2014, thus resulting in additional volume in the second quarter of fiscal 2014. In addition, timing in customers' retail promotions also contributed to the decrease in consumer volume. Liquid volume increased by approximately 3,300 metric tonnes for the quarter due to additional volume from existing customers. Year-to-date, the liquid segment has decreased by approximately 2,400 metric tonnes. The additional volume drawn by existing customers in fiscal 2015 partially offset the loss of volume following the completion of a one-year contract with a high fructose corn syrup ("HFCS") substitutable account in Western Canada which ended in March 2014. Finally, export volume was approximately 1,600 metric tonnes lower for the quarter and 300 metric tonnes higher year-to-date.

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 $8.6 million and $9.2 million for the third quarter and year-to-date, respectively, which were added to calculate adjusted EBIT and gross margin results.

Adjusted gross margin amounted to $19.4 million, an improvement of approximately $2.6 million versus last year's comparable quarter. The variance is largely attributable to the 2014 workforce reduction at the Montreal refinery which decreased labour costs in the third quarter by approximately $1.1 million versus the comparable quarter in fiscal 2014. In addition, adjusted gross margin increased due to higher sales volume and improved overall sales margin rates. As a result, on a per metric tonne basis, adjusted gross margin was favourable at $120.91 compared to $105.91, an increase of $15.00.

Despite lower volume, year-to-date adjusted gross margin, at $61.8 million, was $3.9 million higher than the same period last year. The adjusted gross margin rate per metric tonne was $132.71 compared to $121.84, an increase of $10.87 per metric tonne. The favourable increase in adjusted gross margin rate per tonne is due mainly to a reduction in labour and energy costs of approximately $4.1 million and $2.6 million, respectively. During fiscal 2015, the Company benefited from energy cost savings as a result of a decline in natural gas prices as well as the conversion from an interruptible gas contract in fiscal 2014 to a firm gas contract in the current year at the Montreal refinery. Labour and energy costs savings were partially offset by lower adjusted gross margin as a result of lower sales volume and by an increase in operating costs at the Taber beet factory as a result of severe beet deterioration at the end of the slicing campaign.

Administration and selling expenses were comparable to the third quarter of fiscal 2014 but include offsetting items. In the comparable quarter last year, 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. Without this additional pension expense, administration and selling expenses were $1.0 million higher than the third quarter of fiscal 2014 due to higher employee benefits and timing of expenses. Year-to-date, administration and selling expenses were $0.4 million higher than last year or $1.4 million higher if we exclude the pension expense with regard to the termination of the salaried defined benefit pension plan. The increase year-to-date is due mainly to higher consultant fees as a result of the completion of the process improvement review in Montreal and higher employee benefits.

Distribution expenses were $0.2 million higher for the current quarter and $0.2 million lower year-to-date when compared to last year.

As a result, adjusted EBIT was $12.3 million for the third quarter of fiscal 2015 versus $9.9 million for the comparable quarter and $39.9 million year-to-date, versus $36.2 million for the comparable period last year.

Free cash flow was $3.4 million higher than the comparable quarter in fiscal 2014. Year-to-date, free cash flow, at $28.8 million, was $6.9 million higher than the comparable period of fiscal 2014. The increase in free cash flow for the quarter is due mainly to lower interest paid of $1.4 million, lower income taxes paid of $0.8 million and lower net capital expenditures of $0.8 million. Year-to-date, pension contributions were $3.7 million lower than the comparable period last year. In addition, income taxes and interest paid were lower by $3.6 million and $1.2 million, respectively. The increase in free cash flow is also explained by a cash inflow from the issuance of common shares as opposed to the repurchase of common shares in the comparable period of fiscal 2014. These positive variances were partially offset by an increase of $1.5 million in net capital expenditures.

In May 2015, The Company reached a four-year agreement with the Alberta Sugar Beet Growers Association. This new agreement will ensure the continuity and stability of beet sugar production in Taber over the next four years.

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.

These labour savings, as well as the year-to-date energy savings, are expected to be generally offset by a reduction in adjusted gross margin as a result of lower sales volume.

Administration and selling expenses for fiscal 2015 are expected to decrease due to one-time events that occurred in fiscal 2014. The process improvement analysis at the Montreal refinery resulted in incremental consulting fees and severance costs and additional non-cash pension expense was recorded in fiscal 2014 as a result of the termination of a defined benefit pension plan.

FOR THE BOARD OF DIRECTORS,
Stuart Belkin, Chairman
Vancouver, British Columbia - July 30, 2015

MANAGEMENTS' DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis ("MD&A") dated July 30, 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 June 27, 2015, 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 June 27, 2015 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 27,
2015
(Unaudited)
June 28,
2014
(Unaudited)
June 27,
2015
(Unaudited)
June 28,
2014
(Unaudited)
Volume (metric tonnes) 160,713 158,489 465,900 475,609
Revenues $ 130,592 $ 128,432 $ 386,438 $ 392,607
Gross margin 10,854 8,353 52,620 67,862
Administration and selling expenses 4,873 4,852 15,448 15,066
Distribution expenses 2,233 2,024 6,455 6,668
Earnings before interest and provision for income taxes (EBIT) $
3,748
$
1,477
$
30,717
$
46,128
Net finance costs 2,272 2,675 8,633 8,064
Provision for income taxes 426 (312 ) 5,852 9,709
Net earnings (loss) $ 1,050 $ (886 ) $ 16,232 $ 28,355
Net earnings (loss) per share - basic $ 0.01 $ (0.01 ) $ 0.17 $ 0.30

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
For the nine
months ended
(In thousands) June 27, 2015
(Unaudited)
June 28, 2014
(Unaudited)
June 27, 2015
(Unaudited)
June 28, 2014
(Unaudited)
Mark-to-market adjustment (excluding interest swap) $ (5,588 ) $ (3,987 ) $ (7,508 ) $ 4,716
Cumulative timing differences (2,990 ) (4,446 ) (1,700 ) 5,199
Total adjustment to cost of sales $ (8,578 ) $ (8,433 ) $ (9,208 ) $ 9,915

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 year-to-date. For raw sugar, a mark-to-market loss of $1.7 million was recorded as compared to a mark-to-market loss of $0.9 million in the comparable quarter last year. Year-to-date, a mark-to-market loss of $2.9 million was recorded versus a market-to-market gain of $2.1 million last year. There was no significant movement in natural gas prices for the quarter but prices decreased substantially compared to the beginning of the year. As a result, a mark-to-market loss of $0.1 million and $8.3 million were recorded in the current quarter and year-to-date, respectively. In fiscal 2014, a mark-to-market loss of $0.4 million for the quarter and a mark-to-market gain of $1.5 million were recorded. Foreign exchange forward contracts and embedded derivatives, on which foreign exchange movements have an impact, had a combined mark-to-market loss of $3.8 million for the quarter, versus a $2.7 million loss for the comparable quarter last year. Year-to-date, a mark-to-market gain of $3.7 million was recorded in fiscal 2015 versus a gain of $1.1 million last year.

Cumulative timing differences, as a result of 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 sugar and related foreign exchange paper transactions are largely offset by corresponding gains or losses from the physical transactions, namely 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 of the current year, the total cost of sales adjustment is a loss of $8.6 million to be added to the consolidated operating results versus a loss of $8.4 million for the comparable quarter last year. Year-to-date, the total cost of sales adjustment is a loss of $9.2 million to be added to the consolidated operating results compared to a gain of $9.9 million to be deducted from the consolidated operating results for the same period last year.

In addition, under short-term interest expense, the Company recorded a mark-to-market gain of $0.5 million and a mark-to-market loss of $0.6 million for the quarter and the year-to-date, respectively, on the mark-to-market of interest rate swaps, versus a mark-to-market loss of $0.1 million and $0.5 million for the comparable periods last year.

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
For the nine
months ended
(In thousands of dollars, except per share information) June 27, 2015
(Unaudited)
June 28, 2014
(Unaudited)
June 27, 2015
(Unaudited)
June 28, 2014
(Unaudited)
Gross margin as per financial statements $ 10,854 $ 8,353 $ 52,620 $ 67,862
Adjustment as per above 8,578 8,433 9,208 (9,915 )
Adjusted gross margin 19,432 16,786 61,828 57,947
EBIT as per financial statements 3,748 1,477 30,717 46,128
Adjustment as per above 8,578 8,433 9,208 (9,915 )
Adjusted EBIT 12,326 9,910 39,925 36,213
Net earnings (loss) as per financial statements 1,050 (886 ) 16,232 28,355
Adjustment to cost of sales as per above 8,578 8,433 9,208 (9,915 )
Adjustment for mark-to-market of finance costs (456 ) 137 586 541
Deferred taxes on above adjustments (2,112 ) (2,228 ) (2,761 ) 2,404
Adjusted net earnings $ 7,060 $ 5,456 $ 23,265 $ 21,385
Net earnings per share basic, as per financial statements $ 0.01 $ (0.01 ) $ 0.17 $ 0.30
Adjustment for the above 0.07 0.07 0.08 (0.07 )
Adjusted net earnings per share basic $ 0.08 $ 0.06 $ 0.25 $ 0.23

Volume for the third quarter of fiscal 2015 was 160,713 metric tonnes compared to 158,489 metric tonnes in the comparable quarter of last year, an increase of approximately 2,200 metric tonnes. Year-to-date, volume of 465,900 metric tonnes was approximately 9,700 metric tonnes lower than last year. Industrial volume was higher for the quarter by approximately 900 metric tonnes but lower year-to-date by approximately 1,700 metric tonnes due to timing in deliveries. Consumer volume was lower for the quarter and year-to-date by approximately 400 metric tonnes and 5,900 metric tonnes, respectively. The decrease year-to-date is partially attributable to the timing in agreements with major accounts whereby a new multi-year agreement started on January 1, 2014 and another agreement with a major account ended March 31, 2014, thus resulting in additional volume in the second quarter of fiscal 2014. In addition, timing in customers' retail promotions also contributed to the decrease in consumer volume. Liquid volume increased by approximately 3,300 metric tonnes for the quarter due to additional volume from existing customers. Year-to-date, the liquid segment has decreased by approximately 2,400 metric tonnes. The additional volume drawn by existing customers in fiscal 2015 partially offset the loss of volume following the completion of a one-year contract with a high fructose corn syrup ("HFCS") substitutable account in Western Canada which ended in March 2014. Finally, export volume was approximately 1,600 metric tonnes lower for the quarter and 300 metric tonnes higher year-to-date.

Revenues for the quarter were $130.6 million versus $128.4 million for the comparable period to last year. The increase is mainly explained by higher sales volume. Year-to-date, revenues were lower than the same period last year due to a lower level of sales achieved during the year, combined with an average lower value of raw sugar in fiscal 2015.

As previously mentioned, gross margin of $10.9 million for the quarter and $52.6 million year-to-date does not reflect the economic margin of the Company, as it includes a loss of $8.6 million for the current quarter for the mark-to-market of derivative financial instruments explained earlier and a loss of $9.2 million for fiscal 2015 year-to-date. We will therefore comment on adjusted gross margin results.

Adjusted gross margin amounted to $19.4 million, an improvement of approximately $2.6 million versus last year's comparable quarter. The variance is largely attributable to the 2014 workforce reduction at the Montreal refinery which decreased labour costs in the third quarter by approximately $1.1 million versus the comparable quarter in fiscal 2014. In addition, adjusted gross margin increased due to higher sales volume and improved overall sales margin rates. As a result, on a per metric tonne basis, adjusted gross margin was favourable at $120.91 compared to $105.91, an increase of $15.00.

Despite lower volume, year-to-date adjusted gross margin, at $61.8 million, was $3.9 million higher than the same period last year. The adjusted gross margin rate per metric tonne was $132.71 compared to $121.84, an increase of $10.87 per metric tonne. The favourable increase in adjusted gross margin rate per tonne is due mainly to a reduction in labour and energy costs of approximately $4.1 million and $2.6 million, respectively. During fiscal 2015, the Company benefited from energy cost savings as a result of a decline in natural gas prices as well as the conversion from an interruptible gas contract in fiscal 2014 to a firm gas contract in the current year at the Montreal refinery. Labour and energy costs savings were partially offset by lower adjusted gross margin as a result of lower sales volume and by an increase in operating costs at the Taber beet factory as a result of severe beet deterioration at the end of the slicing campaign.

Administration and selling expenses were comparable to the third quarter of fiscal 2014 but include offsetting items. In the comparable quarter last year, 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. Without this additional pension expense, administration and selling expenses were $1.0 million higher than the third quarter of fiscal 2014 due to higher employee benefits and timing of expenses. Year-to-date, administration and selling expenses were $0.4 million higher than last year or $1.4 million higher if we exclude the pension expense with regard to the termination of the salaried defined benefit pension plan. The increase year-to-date is due mainly to higher consultant fees as a result of the completion of the process improvement review in Montreal and higher employee benefits.

Distribution expenses were $0.2 million higher for the current quarter and $0.2 million lower year-to-date when compared to last year.

As a result, adjusted EBIT was $12.3 million for the third quarter of fiscal 2015 versus $9.9 million for the comparable quarter and $39.9 million year-to-date, versus $36.2 million for the comparable period last year.

Finance costs for the quarter include a mark-to-market gain on the interest rate swaps of $0.5 million for the quarter and a loss of $0.6 million year-to-date while last year's comparable periods resulted in a loss of $0.1 million and $0.5 million, respectively. Without the above mark-to-market adjustments, finance expenses for the quarter were $0.2 million and $0.5 million higher year-to-date than the comparable periods of last year. The increase is due to a higher level of borrowings as a result of higher inventories.

The provision for income taxes includes a deferred tax revenue of $2.1 million and $2.8 million for the current quarter and year-to-date for the mark-to-market adjustment as compared to a revenue of $2.2 million for the quarter and an expense of $2.4 million year-to-date for the comparable periods of last year. On an adjusted basis, the provision for income taxes was approximately $2.5 million for the quarter and $8.6 million year-to date as compared to a provision of $1.9 million for the quarter and $7.3 million year-to-date for the comparable periods of last year. The increase for the quarter and year-to-date is due mainly to an increase in adjusted earnings before income taxes.

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.

2015
(Unaudited)
2014
(Unaudited)
2013
(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) 160,713 152,579 152,608 170,767 158,489 154,862 162,258 176,641
Revenues 130,592 127,120 128,726 139,688 128,432 127,299 136,876 145,840
Gross margin 10,854 18,402 23,364 15,077 8,353 33,206 26,303 17,330
EBIT 3,748 11,209 15,760 3,706 1,477 25,226 19,425 11,739
Net earnings (loss) 1,050 5,767 9,415 874 (886 ) 16,725 12,516 6,509
Gross margin rate per MT 67.54 120.61 153.10 88.29 52.70 214.42 162.11 98.11
Per share
Net earnings (loss)
Basic 0.01 0.06 0.10 0.01 (0.01 ) 0.18 0.13 0.07
Diluted 0.01 0.06 0.10 0.01 (0.01 ) 0.16 0.13 0.07
Non-GAAP Measures
Adjusted gross margin 19,432 17,071 25,325 23,988 16,786 16,382 24,779 17,542
Adjusted EBIT 12,326 9,878 17,721 12,617 9,910 8,402 17,901 11,951
Adjusted net earnings 7,060 5,400 10,804 7,386 5,456 4,526 11,403 6,817
Adjusted gross margin rate per MT 120.91 111.88 165.95 140.47 105.91 105.78 152.71 99.31
Adjusted net earnings per share
Basic 0.08 0.06 0.11 0.08 0.06 0.05 0.12 0.07
Diluted 0.08 0.06 0.11 0.08 0.06 0.05 0.12 0.07

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 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

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
For the nine
months ended
(In thousands of dollars) June 27, 2015
(Unaudited)
June 28, 2014
(Unaudited)
June 27, 2015
(Unaudited)
June 28, 2014
(Unaudited)
Cash flow from operating activities $ 614 $ 19,975 $ 13,607 $ 20,546
Cash flow from financing activities 10,444 (14,461 ) 3,794 (16,864 )
Cash flow from investing activities (2,119 ) (3,464 ) (7,057 ) (5,881 )
Net increase (decrease) in cash and cash equivalents $ 8,939 $ 2,050 $ 10,344 $ (2,199 )

Cash flow from operations was positive $0.6 million in the third quarter of 2015, compared to $20.0 million in the comparable quarter of fiscal 2014. The negative variation of $19.4 million is due mainly to a significant year-over-year variation in inventories as the level of inventories increased during the quarter while decreasing in the comparable quarter of last year. This was due mainly to the timing in the receipt of raw sugar vessels. Some of the negative variation was offset by higher EBIT of $2.3 million as well as lower interest paid and lower income taxes paid of $1.4 million and $0.8 million, respectively. Finally, non-cash changes in fair value of derivative financial instruments of $0.2 million also reduced the negative variance. Year-to-date, cash flow from operations was positive $13.6 million compared to $20.5 million last year, a variation of $6.9 million. The year-to-date variation is explained by lower earnings before income taxes of $16.0 million and a negative non-cash working capital variation of $8.3 million due mainly to a large decrease in trade payable from year-end. These negative variances were somewhat offset by a positive non-cash variation in fair value of financial instruments of $9.1 million, lower pension contributions of $3.7 million and lower income taxes paid and interest paid of $3.6 million and $1.2 million, respectively.

Cash flow from financing activities was positive $10.4 million for the current quarter versus negative $14.5 million for the comparable quarter last year. The variation is mostly attributable to an increase in borrowings for the current quarter as opposed to a reduction in the comparable quarter, as a result of higher inventory level. Year-to-date, cash flow from financing activities was positive $3.8 million compared to negative $16.9 million, a variation year-over-year of $20.7 million as cash and cash equivalents increased by approximately $9.5 million and trade payable decreased by approximately $11.9 million since the start of the year. This was partially offset by a cash inflow from the issuance of common shares as opposed to the repurchase of common shares in the comparable period of fiscal 2014.

Capital expenditures were lower by $1.3 million for the current quarter when compared to the third quarter last year but higher year-to-date by $1.2 million due to 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 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 27, 2015
(Unaudited)
June 28, 2014
(Unaudited)
June 27, 2015
(Unaudited)
June 28, 2014
(Unaudited)
Cash flow from operations $ 614 $ 19,975 $ 13,607 $ 20,546
Adjustments:
Changes in non-cash working capital 7,549 (16,415 ) 19,144 10,809
Changes in non-cash income taxes payable (31 ) 15 (648 ) 1,193
Changes in non-cash interest payable (153 ) 1,474 (146 ) 1,549
Mark-to-market and derivative timing adjustments 8,122 8,570 9,794 (9,374 )
Financial instruments non-cash amount (5,106 ) (5,256 ) (6,413 ) 2,705
Capital expenditures (2,119 ) (3,464 ) (7,057 ) (5,881 )
Investment capital expenditures 126 623 503 852
Net issue (repurchase) of shares - - 108 (372 )
Deferred financing charges (90 ) - (90 ) (90 )
Free cash flow $ 8,912 $ 5,522 $ 28,802 $ 21,937
Declared dividends $ 8,465 $ 8,462 $ 25,393 $ 25,395

Free cash flow was $3.4 million higher than the comparable quarter in fiscal 2014. Year-to-date, free cash flow, at $28.8 million, was $6.9 million higher than the comparable period of fiscal 2014. The increase in free cash flow for the quarter is due mainly to lower interest paid of $1.4 million, lower income taxes paid of $0.8 million and lower net capital expenditures of $0.8 million. Year-to-date, pension contributions were $3.7 million lower than the comparable period last year. In addition, income taxes and interest paid were lower by $3.6 million and $1.2 million, respectively. The increase in free cash flow is also explained by a cash inflow from the issuance of common shares as opposed to the repurchase of common shares in the comparable period of fiscal 2014. These positive variances were partially offset by an increase of $1.5 million in net capital expenditures.

Changes in non-cash operating working capital, income taxes payable and interest payable represent quarter-over-quarter movements 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 factors, and therefore do not constitute available cash for distribution.

The combined impact of the mark-to-market and financial instruments non-cash amount of $3.0 million for the quarter and of $3.4 million year-to-date does not represent cash items as these contracts will be settled when the physical transactions occur and is therefore adjusted to free cash flow.

Capital expenditures, net of investment capital, were lower than last year by approximately $0.8 million for the quarter but higher by approximately $1.5 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 operational savings to be realized when these projects are completed.

During the second quarter of fiscal 2015, an amount of $0.1 million was received following the exercise of share options by an executive of the Company. In the second quarter of fiscal 2014, Rogers repurchased 85,400 shares under the Normal course issuer bid ("NCIB") for a total cash consideration of $0.4 million.

During the current quarter, Lantic 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, 2020. As a result, the Company paid $0.1 million in deferred financing costs during the current quarter. Year-to-date is comparable as Lantic had exercised its option to extend its revolving credit facility in the second quarter of fiscal 2014.

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.

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 June 27, 2015, the operating company had commitments to purchase a total of 818,000 metric tonnes of raw sugar, of which 149,995 metric tonnes had been priced for a total dollar commitment of $56.6 million.

In May 2015, The Company reached a four-year agreement with the Alberta Sugar Beet Growers Association. This new agreement will ensure the continuity and stability of beet sugar production in Taber over the next four years.

Capital resources

Lantic has $150.0 million as an authorized line of credit available to finance its operation. As discussed above, this line of credit expires in June 2020 following the recent extension of the maturity by one year. During the quarter, the Company entered into a two-year forward start interest rate swap agreement for an amount of $30.0 million at a rate of 1.959%, effective for the period of June 28, 2018 to June 29, 2020. In the third quarter of fiscal 2014, the Company entered into a $10.0 million five-year interest rate swap agreement at a rate of 2.09%, effective June 30, 2014. At quarter-end, $115.0 million had been drawn from the working capital line of credit and $10.5 million in cash 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

On May 21, 2015, a total of 850,000 options were granted to an executive at an exercise price of $4.59 under the share option plan.

During the second quarter of the current year, 30,000 common shares were issued following the exercise of share options by an executive under the share option plan. As at July 30, 2015, there were 94,058,860 common shares outstanding.

During the second quarter of 2014, the Company purchased 85,400 common shares under the NCIB in place at the time, for a total cash consideration of $0.4 million. All shares purchased were cancelled.

In November 2014, the Company received approval from the Toronto Stock Exchange to proceed with a NCIB whereby 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 IFRS 15, Revenue from contracts with customers 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 segment is expected to be slightly below last year.

Year-to-date consumer volume has been disappointing. The volume is approximately 5,900 metric tonnes lower year-to-date versus the comparable period last year. We forecast that consumer volume will remain weaker than last year due mainly to strong competition at the retail level.

The 2013 one-year contract for an HFCS substitutable business was not renewed in fiscal 2014. However, despite the additional volume gained with existing customers, we expect liquid volume to be slightly lower than last year.

Total export volume is expected to be slightly higher than fiscal 2014 as the Company contracted 5,000 metric tonnes of export volume to Mexico despite current sugar surpluses in that country. In addition, due to the spread between U.S. refined sugar prices and world sugar values, Lantic contracted some volume in the U.S. at high-tier duties of approximately $360.00 per metric tonne while nonetheless generating a positive contribution to fixed costs. This additional volume, as well as the Mexican volume, is expected to more than offset reductions in the Canada-specific quota and the U.S. global quota. In fiscal 2015, the Canada-specific quota was reduced from 12,050 metric tonnes to 10,300 metric tonnes. 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 than in fiscal 2014 as our share of that quota returned to a more historical level. The Company will continue to pursue any additional export opportunities.

Overall, total sales volume is expected to be slightly lower in fiscal 2015 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.

These labour savings, as well as the year-to-date energy savings, are expected to be generally offset by a reduction in adjusted gross margin as a result of lower sales volume.

A significant portion of fiscal 2015's natural gas requirements and related foreign currency have been hedged at average prices comparable to those realized in fiscal 2014. 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.

Administration and selling expenses for fiscal 2015 are expected to decrease due to one-time events that occurred in fiscal 2014. The process improvement analysis at the Montreal refinery resulted in incremental consulting fees and severance costs and additional non-cash pension expense was recorded in fiscal 2014 as a result of the termination of a defined benefit pension plan.

Following the agreement reached with the Alberta Sugar Beet Growers Association, approximately 22,000 acres were contracted and planted, which should derive, under normal growing conditions, approximately 80,000 metric tonnes of refined sugar.

The complete financial statements are available at the following address: http://media3.marketwire.com/docs/Rogers_Sugar_Inc_FS_e.pdf

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