Rogers Sugar Income Fund

Rogers Sugar Income Fund

November 18, 2010 15:48 ET

Rogers Sugar Income Fund: Fourth Quarter 2010 Results

 MONTREAL, QUEBEC--(Marketwire - Nov. 18, 2010) - Rogers Sugar Income Fund (TSX:RSI.UN)




Message to Unitholders:

On behalf of the Board of Trustees, I am pleased to present the highlights of the financial results of Rogers Sugar Income Fund (the "Fund") for the three months and year ended September 30, 2010.

Results for the fourth quarter and year ended September 30, 2010 and 2009 as follows:

  For the three months ended September 30 For the year ended September 30  
  2010 (unaudited) 2009 (unaudited) 2010 (unaudited)   2009 (unaudited)  
(In metric tonnes) Volume 192,171 187,538 682,149   700,582  
(In thousands of dollars)            
Gross margin $ 53,237 $ 40,559 $ 87,639   $ 92,793  
  Administration and selling 6,088 5,244 20,056   20,044  
  Distribution 2,130 2,660 7,723   13,572  
  Depreciation and amortization 246 221 656   521  
Earnings before interest and provision for income taxes ("EBIT") 44,773 32,434 59,204   58,656  
Interest expense 3,358 3,088 14,214   16,740  
Provision for (recovery of) income taxes 7,705 5,342 (224 ) (621 )
Net earnings $ 33,710 $ 24,004 $ 45,214   $ 42,537  

It should be noted that the fourth quarter of fiscal 2009 had 14 weeks of operations as compared to 13 weeks in fiscal 2010, and that fiscal 2009 had 53 weeks of operation as compared to 52 weeks in fiscal 2010.

Fourth quarter volume increased by 4,600 metric tonnes from the comparable quarter in fiscal 2009 even with one less week of operation in fiscal 2010. This additional week represented approximately 13,000 metric tonnes of volume in fiscal 2009. If quarterly results were adjusted for the additional week of fiscal 2009, the fourth quarter volume would have been approximately 17,600 metric tonnes higher. The major reason for the increase is export volume which was 19,100 metric tonnes higher than the previous year's comparable quarter. This increase resulted from sales made to the U.S., while absorbing the Tier II duty of $360.00 per metric tonne. Approximately 20,000 metric tonnes were shipped against Tier II duty in the fourth quarter. Both industrial and consumer volume was lower in fiscal 2010 by 2,300 and 1,600 metric tonnes respectively. This was due to the additional week of operation in the fiscal 2009 fourth quarter, which would have represented approximately 7,800 and 2,200 metric tonnes respectively. The net increase in industrial volume is due mainly to timing in shipments.

For the quarter, liquid volume was lower by 10,500 metric tonnes due to the loss of HFCS-substitutable volume during the year as a result of the higher level of raw sugar values.

For the year, total sales volume of 682,149 metric tonnes represented a decrease of 2.6% over the previous year. When adjusted for the additional operating week in fiscal 2009, the year-over-year decrease would only be approximately 0.6%. The total volume decrease of approximately 18,400 metric tonnes is due mainly to lower liquid volume of approximately 25,600 metric tonnes, lower industrial volume of 6,200 metric tonnes, and lower consumer volume of 3,100 metric tonnes, partially offset by higher export volume of approximately 16,500 metric tonnes.

Export sales volume was up by 16,500 metric tonnes in fiscal 2010, even though no special U.S. quota was opened in fiscal 2010. This sale increase resulted from an unexpected market opportunity. High refined sugar prices in the U.S., due to a tight supply environment, combined with a sudden decline of world raw sugar values in the spring of 2010, created this export sale opportunity. As a result, the Company was able to sell and ship approximately 41,600 metric tonnes to the U.S. Even though the Company incurred Tier II duty costs of approximately $360.00 per metric tonne, the sale still generated a contribution to our financial results. In addition, approximately 8,000 metric tonnes were shipped to Mexico in fiscal 2010, while no shipments were made last year. In fiscal 2009 special U.S. quotas were opened during the first quarter of the fiscal year and Lantic was able to enter and sell approximately 34,000 metric tonnes against the Canada Specific and Global quotas.

The decrease of 6,200 metric tonnes in industrial volume for fiscal 2010 is due to the additional week of operations in fiscal 2009, which would represent approximately 7,500 metric tonnes.

Liquid volume was lower by 25,600 metric tonnes during the year due to the loss of a HFCS-substitutable account as a result of the higher price of world raw sugar.

Consumer volume was lower by approximately 3,100 metric tonnes due in large part to the additional week of operation in fiscal 2009, and to competitive activity in the marketplace.

Due to the adoption of new accounting policies, effective October 1, 2006, for derivative financial instruments, the Fund's operating results could have large fluctuations. These fluctuations are due to the mark-to-market of all derivative financial instruments and embedded derivatives in non-financial instruments at the end of the reporting period. This accounting income does not represent a complete understanding of factors and trends affecting the business. We therefore prepared adjusted gross margin and adjusted earnings results to reflect the performance of the Fund during the reporting period, which are non-GAAP measures. This adjusted performance is comparable to the earnings reported in previous interim reports. In this press release, we will discuss adjusted gross margins, which reflect the operating income without the impact of the mark-to-market of derivative financial instruments and embedded derivatives in non-financial instruments.

Gain / (Loss) For the three months ended September 30   For the year ended September 30  
(In thousands of dollars) 2010 (unaudited) 2009 (unaudited)   2010 (unaudited)   2009 (unaudited)  
Mark-to-market adjustment $ 18,580 $ 9,782   $ 3,258   $ (9,777 )
Cumulative timing differences 11,559 (2,431 ) (1,979 ) 1,022  
Total adjustment to cost of sales $ 30,139 $ 7,351   $ 1,279   $ (8,755 )

Gains or losses on these instruments are only recognized by the Company when sugar contracts are delivered to the end user or when natural gas has been used in the operations.

During the quarter, a mark-to-market gain of $20.3 million was recorded on sugar futures, as world raw sugar values increased significantly since June 2010. This resulted in a year-to-date mark-to-market gain of $5.0 million. For natural gas, a substantial portion had been hedged in prior years and with the continued decline in natural gas values, a mark-to-market loss of $0.4 million was recorded for the quarter and a loss of $4.3 million was recorded for the year. Foreign exchange forward contracts and embedded derivatives on which foreign exchange movements have an impact had a combined mark-to-market loss of $1.3 million for the quarter and a mark-to-market gain of $2.6 million for the year.

The above mark-to-market adjustments are further adjusted by an accumulated timing impact in the recognition of liquidation gains or losses on sugar futures contracts, on natural gas contracts and on foreign exchange forwards, to arrive at the total adjustment to cost of sales.

In addition, the Fund recorded a minimal mark-to-market loss in fiscal 2010 (loss of $3.4 million for fiscal 2009) for the mark-to-market of an interest swap under short-term interest expense, as a result of movement in overall interest rates.

Therefore, the total adjustment to net earnings before income taxes and distributable cash for the quarter was a gain of $29.9 million, as compared to a gain of $7.6 million in fiscal 2009, and a gain of $1.2 million for the year as compared to a loss of $12.2 million in fiscal 2009.

Adjusted financial information is as follows:

  For the three months ended September 30   For the year ended September 30  
(In thousands of dollars) 2010 (unaudited)   2009 (unaudited)   2010 (unaudited)   2009 (unaudited)  
Gross margin as per above $ 53,237   $ 40,559   $ 87,639   $ 92,793  
Adjustment as per above (30,139 ) (7,351 ) (1,279 ) 8,755  
Adjusted gross margin 23,098   33,208   86,360   101,548  
EBIT as per above 44,773   32,434   59,204   58,656  
Adjustment as per above (30,139 ) (7,351 ) (1,279 ) 8,755  
Adjusted EBIT 14,634   25,083   57,925   67,411  
Net earnings as per above 33,710   24,004   45,214   42,537  
Adjustment to cost of sales as per above (30,139 ) (7,351 ) (1,279 ) 8,755  
Adjustment for mark-to-market interest swap 214   (237 ) 38   3,412  
Future taxes on above 8,351   2,222   738   (3,405 )
Adjusted net earnings $ 12,136   $ 18,638   $ 44,711   $ 51,299  

For the quarter, adjusted gross margin rate was $120.20 per metric tonne compared to $177.07 per metric tonne in fiscal 2009. The decrease was due mainly to:

  • Sales mix with U.S. volume against Tier II duty representing over 10% of total volume shipped;
  • Lower margin on U.S. shipments as Tier II duty of U.S. $360.00 per metric tonne was paid;
  • A higher per unit cost of Taber beet sugar as a result of poor quality of beets harvested following a severe frost which impaired the plant's performance.

The decrease in the year-to-date adjusted gross margin rate of $18.35 per metric tonne is due mainly to lower margins on export volume to the U.S. for which Tier II duty of U.S. $360.00 per metric tonne was paid on 41,600 metric tonnes of export volume and to Taber's higher per unit cost.

Taber had poor operational results in fiscal 2010 due to a severe frost that occurred during harvesting. Harvesting had to be halted prematurely, leaving approximately 30% of the sugar beets in the field. A large portion of the beets harvested, after the prolonged frost, were in poor condition and difficult to process. The plant's daily throughput was greatly diminished and Taber's per unit cost was increased significantly, hence the negative impact on gross margins.

Distribution costs were $0.5 million lower than the comparable quarter in fiscal 2009 due mainly to the higher level of transfers from Vancouver to Taber in the last quarter of fiscal 2009. For the year, costs were lower by $5.8 million, as less products had to be transferred from Vancouver to Taber and to the additional shipments to the U.S. following the opening of the U.S. special quotas in fiscal 2009. In fiscal 2010, shipments to the U.S. were done mainly on an FOB basis.

Administration costs were in line on a year-to-date basis, but higher by $0.8 million for the quarter due to timing in expenses.

Interest expense for the quarter, before mark-to-market adjustment, was lower by $0.3 million due to lower borrowings. Without the mark-to-market adjustment, interest expense for the year was $0.8 million higher due to the write-off of deferred financing costs following the early redemption of the Second series convertible debentures. For the quarter, a mark-to-market expense of $0.2 million was recorded as opposed to a gain of $0.2 million for the comparable quarter of fiscal 2009. For the year, there was a minimal interest expense for the mark-to-market adjustment as compared to an expense of $3.4 million in fiscal 2009.

The Fund measures distributable cash. Distributable cash is not intended to be representative of cash flows or results of operations determined in accordance with GAAP. It may also not be comparable to similar measures used by other companies or income trusts. Distributable cash is meant to show to the Unitholders the ability of the Fund to pay distributions based on the operating performance of the Fund and its operating subsidiary during the specified period.

(In thousands of dollars) For the three months ended September 30   For the year ended September 30  
  2010 (unaudited)   2009 (unaudited)   2009 (unaudited)   2009 (unaudited)  
Operating activities:                
Cash flow from operating activities $ 69,056   $ 39,256   $ 83,203   $ 69,791  
Capital expenditures (3,702 ) (2,130 ) (8,079 ) (6,285 )
Standardized distributable cash 65,354   37,126   75,124   63,506  
  Changes in non-cash working capital (23,991 ) (5,161 ) (20,337 ) 3,360  
  Mark-to-market and derivative timing adjustments (29,925 ) (7,588 ) (1,241 ) 12,167  
  Financial instruments non-cash amount (1,189 ) (1,856 ) (3,151 ) (18,421 )
  Investment capital expenditures 1,686   182   1,713   221  
  Net issuance (buy-back) of trust units 531   -   808   (690 )
  Deferred financing charges   -   (2,365 )  
Adjusted distributable cash $ 12,466   $ 22,703   $ 50,551   $ 60,143  
Declared distributions $ 10,056   $ 10,035   $ 40,186   $ 40,206  

Adjusted distributable cash for the quarter was $10.2 million lower than the comparable quarter in fiscal 2009 mainly due to the lower adjusted EBIT of $10.4 million and higher cash pension contribution against expense incurred.

In fiscal 2010, the Fund distributed $40.2 million, or $0.46 per unit, the same as fiscal 2009. Adjusted distributable cash for fiscal 2010 was $50.6 million compared to $60.1 million in fiscal 2009. The decrease of $9.5 million was due mainly to a lower adjusted EBIT of $9.5 million. The distribution ratio for the year was 79.5% as compared to 66.9% in fiscal 2009.

The decision, on November 1, 2010, of the CITT to remove the anti-dumping and countervailing duties on refined sugar shipments from the European Union countries was disappointing, as it allows subsidized sugar from the European Union to enter Canada at the minimal tariff of approximately $30.00 per metric tonne. We will closely monitor imports of refined sugar from the European Union countries, and we will return to the CITT if and when the financial impact of such imports becomes material within the meaning of Canada's trade remedy laws.

The total sweetener market increased slightly in fiscal 2010, and we believe this trend might continue over the next number of years. A number of U.S. food manufacturers have changed their product formulation from HFCS to liquid sucrose in the last few years. We believe that in the future this trend might also impact the type of sweetener used by Canadian food processors in their product formulation. Lantic is well positioned with its available liquid sugar production capabilities to meet additional liquid sucrose demand, should it materialize.

Currently, U.S. refined sugar prices have decreased with the arrival of this fall's U.S. beet crop. We anticipate that as the beet crop sells outs, the market may again be subject to tightness especially if the anticipated new cane refinery capacity in Louisiana is delayed. Circumstances may support a repeat of the benefit the Fund experienced in fiscal 2010, when over 41,000 metric tonnes of refined sugar was shipped to the U.S., while paying the U.S. Tier II duty and still generating a contribution to the Fund.

In fiscal 2010, the Fund resumed shipments to Mexico and was able to contract additional volume for fiscal 2011 of approximately 15,000 metric tonnes. The Fund will continue to investigate this and other export opportunities.

The higher world raw sugar prices that currently exist will positively impact the adjusted gross margin of all domestic beet sugar sales, except for HFCS substitutable sales. Taber's beet crop acreage, currently being harvested, is 30,000 acres and if current harvesting conditions continue, we should derive approximately 80,000 to 90,000 tonnes of beet sugar for fiscal 2011. The total output is slightly lower than originally expected due mainly to cooler growing conditions which reduced the yield per acre of the beet crop, but is significantly higher than the 64,000 metric tonnes produced in fiscal 2010.

Over half of fiscal 2011's natural gas requirements have been hedged at average prices comparable to those realized last year. Any un-hedged volume should benefit from the current low prices of natural gas and therefore increase adjusted gross margin rate. In addition, futures positions for fiscal 2012 to 2014 have been taken. Some of these positions are at prices higher than the current market values, but are at the same or better levels than what was achieved in fiscal 2010. We will continue to monitor natural gas market dynamics with the objective of minimizing natural gas costs.



A. Stuart Belkin

Vancouver, British Columbia

November 18, 2010

Contact Information

  • Mr. Dan Lafrance
    SVP Finance, CFO and Secretary
    514-527-1610 (FAX)