Rogers Sugar Inc. (RSI) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Rogers Sugar First Quarter 2023 Results Conference Call. [Operator Instructions] Please note that this call is being recorded today, February 9, 2023, at 8:00 a.m. Eastern time. I would now like to turn the meeting over to Mike Walton, President and CEO. Please go ahead, Mr. Walton.

Thank you, operator, and good morning, everyone. Joining me for today's call is Jean-Sebastien Couillard, VP finance and CFO. During today's call, I will review the first quarter results of 2023 and trends in our industry. Please be reminded that today's call may include forward-looking statements regarding our future operations and expectations. Such statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied today. Please also note that we may refer to some non-GAAP measures in our call. Please refer to the forward-looking disclaimers and non-GAAP measure definitions included in our public filings with the Securities Commission for more information on these items. A replay of this call will be available later today. The replay numbers and passcodes have been provided in our press release, and an archived recording of this call will also be available on our website. Now turning to our first quarter results. We began fiscal 2023 with a strong quarter that saw the continuation of trends established in the second half of the last fiscal year. In the quarter, higher sales volume and improved pricing in our Sugar segment drove an overall strong performance in the business. The Sugar segment performance and the strength of the quarter showcases the continued strong demand for sugar and sugar containing products. We are very proud of the fact that our Q1 adjusted EBITDA performance was better than any previous quarter. In the current period, our Maple business began to see the evidence of some improved pricing with higher revenues. While the business continues to face high inflationary pressures and reduced global demand, we expect the impact of higher pricing to mitigate the impact of higher costs, especially as inflationary impacts recede. Now turning to the results in the quarter. In Sugar, volumes reached almost 193,000 metric tons in sales, which is an increase of over 7% from the previous year. During the quarter, we saw growth in all 3 of our domestic segments, including notable growth in industrial, which more than offset the planned decline in exports. Our Industrial segment increased by almost 12,000 metric tons compared to the same quarter last year, driven by continued strong demand for sugar containing products in the domestic market and the United States. Our Consumer business increased by 1,200 metric tons in the quarter from strong sales in Eastern Canada. Consumer demand appears to have largely returned to pre-COVID levels on an annualized basis. Adjusted gross margin in the quarter improved as a result of higher average pricing for refined sugar products and strong demand when compared to the same period last year. This was partly offset by inflationary pressures on operating costs, which is an area our team is very focused on and has been managing well. Turning now to our Taber beet crop, as I mentioned in last quarter, unfavorable weather conditions in the latter stage of the growing period have reduced the expected sugar content from the beets. As a result, we expect to produce approximately 105,000 metric tons of sugar for the 2022 campaign, below last year's production of 120,000 metric tons. While this is lower beet sugar production than we anticipated, Taber sugar production is within a good range for the business. It is important to remember that the Taber crop is not yet finished and next month is a key period for our beet processing. We will have a final number in the Taber crop by the end of February, which we will provide in our Q2 results. We have also updated our sugar sales guidance to reflect the favorable North American market dynamics. We increased fiscal 2023 volume expectations by 15,000 metric tons to our record volume of approximately 805,000 metric tons due to the continued strong demand in the Canadian domestic market. The majority of the additional volumes will be coming from our industrial segments. However, the full benefit of this growth will be partly offset by the lower contribution from beet sugar production. With anticipated beet sugar volumes down slightly, we will continue to leverage our unique operational flexibility to meet customer's needs by moving sugar east from our western operations and prioritizing domestic sales. In addition, over the holiday period, we upgraded operations at our Montreal plants, improving efficiency and streamlining processes, which has improved performance. Our Montreal plant is operating well and is expected to continue to run smoothly. Finally, we would like to share an update on our Montreal expansion project. We are advancing the design and planning aspects of the project and the detailed engineering study is expected to be completed during the third quarter. During this stage of the project, we are proactively engaging with major providers and stakeholders and we look forward to providing updates over the months ahead. Now turning to our Maple segment. In Maple, adjusted EBITDA lowered in the first quarter largely due to lower sales volumes from existing customers and increased operating costs. It is worth noting that the revenue increased in the quarter as the impact of an improvement in pricing more than offset lower volumes. Sales volume lowered in the first quarter driven by lower demand from existing retail customers, competitiveness in the market as well as the timing of shipments. We remain committed to the Maple business and are encouraged by the recovery in pricing we have begun to see. Our order book is healthy and we continue to focus on maintaining our share of the global market. Adjusted gross margin was slightly lower than the comparable period as we continue to be negatively impacted by lower volumes, less favorable customer mix and higher costs partially offset by improved average selling price. Before leaving Maple, I would like to briefly discuss maple pricing and the 2023 maple crop. This year, PPAQ set a price increase for the upcoming crop which comes into effect on March 1 of this year. While it is a fairly large increase, we are confident in our ability to recover the higher commodity price through customer pricing. All participants in the maple business are faced with similar cost pressures, and we expect most maple sellers to pass this increase through to their customers. In regards to the size of the maple crop itself, we don't have much visibility into the crop as of yet as it finishes in the end of April. We expect to be able to provide an update with our next quarter results. Additionally, we are undertaking automation projects with 2 of our maple plants. Both will come online during the second quarter and will help to streamline operations and reduce variable costs. We will continue to monitor our operations and pursue automation projects where we see opportunities for further improvement. Finally, I want to say thank you to our employees who have helped start the year off strongly. Their hard work and dedication are key to our success. We still have 3 quarters to go, but we are off to a great start to the year. Over to you J.S.

Thank you, Mike. And good morning everyone. In the first quarter of 2023, our adjusted EBITDA was $33.5 million, an increase of $7.4 million from the same quarter last year. As Mike mentioned, we saw a continuation of the trends experienced in fiscal 2022 and our higher adjusted EBITDA in the quarter was again driven by the strong performance of our Sugar segment, which was partially offset by softer result in our Maple segment. We anticipate the Sugar segment will continue to perform well in 2023 as demand remains strong for sugar containing products. Overall, we expect to continue to deliver strong and stable financial results in 2023, despite inflationary pressures across both of our business segments, challenging market dynamics in our Maple segment, and lower expected beet sugar volumes produced at our Taber facility. Let's start by remarks with a review of the Sugar segment. Adjusted EBITDA in the Sugar segment was $30.7 million in the first quarter, up 36% from the same quarter last year. A combination of increased volumes largely from our industrial segment, and improved average pricing drove higher adjusted gross margin. Sugar pricing increases were largely driven by continued strong demand in the Canadian domestic sugar market, in particular from industrial customers producing sugar containing products. On average, the pricing increases more than offset the market based inflationary pressures on costs seen over the last few months. Adjusted gross margin increased in the quarter by $6.3 million or 17% from the same quarter last year. On a per unit basis, adjusted gross margin increased by $21 to $195 per metric ton. Distribution costs increased slightly in the first quarter due to higher freight costs and additional logistical costs incurred to support our supply chain as we continue to move sugar produced in the West to Eastern Canada to meet customer demand. We anticipate this trend is likely to continue throughout 2023 and 2024. We hope to address permanently the challenges of moving sugar from the West to the East with our proposed expansion project. Administration and selling expenditures decreased by $2.5 million from the prior year quarter, mainly because of lower share-based compensation expenditure. Our outlook for the Sugar segment remains positive as we move through fiscal 2023. Underlying North American demand remains strong across all our customer segments, and we expect our increased pricing to continue to support our financial results and largely mitigate the ongoing inflationary pressures. As Mike mentioned, sales volume in 2023 are now expected to reach 805,000 metric tons, an increase of 10,000 metric tons over our fiscal 2022 volume. This is an improvement from our original forecast for 2023, driven mainly by the strength of our key industrial segment. Overall, we anticipate that the domestic market demand will increase by more than 3% in 2023 as compared to 2022. Conversely, and as expected, export volume should decrease by approximately 15% as we continue to focus our sales efforts on meeting the growing domestic demand and capturing the strong economics available in the Canadian market. I will now move to our Maple segment. Similar to the conditions we saw in fiscal 2022, our overall Maple results were weaker than the same quarter last year as inflationary pressures continue to negatively impact our business. As a result, adjusted EBITDA in the first quarter was down $0.6 million as lower sales volume and higher costs more than offset the benefit of recent pricing increases. In the first quarter, the benefit of recently negotiated contract and higher pricing began to flow to our results, leading to an increase in revenue of $1.3 million despite volume decreasing by 0.5 million pounds. However, inflationary pressures continue to affect our operating costs, particularly as it relates to packaging, energy and labor. As a result, adjusted gross margin was 7.7% in the quarter, slightly lower than last year's figure of 8.2%. Moving forward, we continue to expect our Maple segment to show improvement as we progress through fiscal 2023. Building on the increases in revenue and average selling price this quarter, we believe the unfavorable financial and operating pressures will begin to improve likely in the second half of the year. As the year progresses, we expect Maple to recover and to deliver slightly improved financial performance over 2022, driven by the receiving inflationary pressures and price increases on recently negotiated agreements. Before closing, I would like to highlight a few other related financial items. Our adjusted net earnings for the fourth quarter were $15.3 million or $0.15 per share compared to $11 million or $0.11 per share for the comparable period last year. Free cash flow for the last 12 months was $58 million, an increase of $16.9 million compared to the same period last year. The increase was mainly due to higher adjusted EBITDA, excluding noncash impact. Our capital expenditures for fiscal 2023 are expected to be similar to last year, with spending mainly related to improvement of our current facilities and development of improved business processes to increase efficiency. For 2023, we expect our capital expenditures to be approximately $25 million on various capital projects in sugar and $1 million to $2 million in maple. This estimate does not include our Montreal capacity expansion project. As Mike mentioned, this exciting growth opportunity is progressing as expected, and we will provide future updates when it is appropriate. Today, we are also announcing that the Board of Directors approved a payment of a $0.09 per share dividend in relation to the results of the first quarter and consistent with the dividend paid in previous quarters for the last several years. Overall, the first quarter of 2023 has continued with the same trends we saw in 2022. Ongoing strength in our sugar business is continuing to drive a strong and stable financial performance. A firm need for sugar-containing products across North America is providing strong demand for our sugar products and providing us with resilience to manage the prevailing high inflationary pressure. We are committed to our Maple segment, and we will continue to manage this business closely, including the challenging market dynamics. As inflationary pressures begin to recede, hopefully, in the second half of the year, we expect to see some improvement in our results. With that, I would like to turn the call back over to the operator for questions.

[Operator Instructions] Your first question comes from George Doumet from Scotiabank.

Congrats on the results. I just want to talk a little bit about the sustainability of the strong gross margins at sugar kind of as we go through the year. Any comment there, maybe any one-timers that we should maybe be cognizant of this quarter?

It's JS here. Well, the margin was strong. I think over recent quarters, as contracts are being negotiated, I think we have seen some improvement in pricing. I think we don't see this as changing anytime soon as we move forward, though there's always a bit of seasonality. The first quarter is usually a quarter where we have some of the product mix is favorizing a bit of a greater margin.

And I just wanted to -- I know we're fully hedged, but I just want to talk about maybe any implications we're seeing at all to our business maybe from the higher global sugar prices. Do you want to call out?

Yes. I mean we -- our hedging program is fairly cumbersome. So we haven't -- for us, we don't believe it's going to have an impact on our financial results. Price have been difficult to predict at times. And if you look through a long, long period of time, they've been going up and down. We haven't seen any impact on customer demand right now. It's been -- it's actually been the opposite, demand for sugar in Canada is actually very healthy. And so we don't expect having any impact of significance because of the high price of sugar right now.

And George, if I can add to that. As you know, most of our pricing is a flow-through agreement, and that's what makes Canada so attractive is the ability to use the #11. So the volatility and #11s have virtually no impact to our EBITDA.

And just one last one on maple. Can you quantify the price increases that you expect for this year?

Yes, that would be hard to put a number to that, George. The PPAQ price is out and some of those pricing changes will come over time as contracts come up for renewal. But the PPAQ price is to all buyers, all bottlers of maple syrup and so everybody's got the same price increase to deal with, and I don't think there's any choice, but for it to be passed through to the customers.

Your next question comes from Michael Van Aelst from TD Securities.

Congrats on the solid results. I just want to start on the -- continue on the maple and then we'll go back to the sugar. But can you just remind me the size of the PPAQ increase and the timing and when it kicks in?

The PPAQ increase was announced publicly, it's $0.20 a pound, and it takes place in April, I believe, April 1.

So what's the, I guess, the process for you to get that passed on. And when does it start and grocers usually require 3 months on a lot of their increases. Is it different in your case, if it's a commodity-based passthrough?

That's a great observation, Michael. It is a commodity-based passthrough in most of the agreements. And it starts with the new crop. So most packers and especially ourselves, as we said, we bought a lot of syrup off the field last year. So we're holding syrup from last year's crop. So we'll have that time to be able to transition to new cost of PPAQ as contracts come up for renewal with our customers.

So we shouldn't really -- it sounds like you have some inventory to get you through a quarter or so before you can pass through the price. Is that a good summary?

Yes, Michael, we held the inventory for the contracts we have in place until they come up for renewal mostly. It's never a perfect match up, of course, but that is our strategy, it always has been to get us through when we commit pricing to have a syrup on hand to manage those costs.

And when do those contracts -- most of those contracts come up for renewal?

Just like any other business, staggered, based on customer needs and timings to the market. But a lot of them will come up after the crop is finished, which most retailers like to wait until the crop is done and see what the size of the crop is because it influences availability. So through April to September we'll see -- we'll manage most of those new agreements.

And then once you get through passing on the cost and catching up to some of these inflationary pressures, do you still see an environment where you can get back to double-digit gross margins maybe by the second half of the year?

Hello, Michael, it's J.S. here. I think double-digit gross margin is obviously our long-term goal. I think there's a lot of things right now including inflation and pressure on cost that will dictate that. I think that would be probably a bit of a stretch in the short-term this year. But I think when we look more into a 2 to 5 years extended period, that's definitely where we believe this business is going to go.

And then just finally on maple, I cannot recall if I saw a volume guidance for the year. But I think you were expecting volumes to increase for the year. Is that still the case? And, yes, you talk about protecting your global market share, but the volumes are down year-over-year. So are you losing share because you're being more strict on passing through your cost increases than maybe some of your peers? Or is that -- or is it just low -- weak demand in general?

Yes, Michael, we're seeing a weakening in demand because of food inflation globally. Maples tends to be seen as a luxury product. So we've mentioned that in previous discussions that we expected some erosion in global demand. We've seen that in some large markets, United States and Europe early in the year. And those realities were looked at in our -- when we put our business plans together for 2023, and they were envisioned and reflected in how we're running the business.

So back to the volume growth expectations, should we expect it should be -- to be down then for the year?

Yes, I think the reasonable expectation when we looked at it, it's not because we're losing market share. It's really more because of global demand that is a bit softer than what we could have -- that's what we had last year for the reason Mike just explained. I think it's a fair assumption, Mike.

Okay. And then on to the sugar side, it was a very impressive gross margin number. How did mix come into play there because exports can be both high and low margin? I just assume that the product that you're -- the volume reduction in export is likely due to the lower volume business being pulled back or whatever. But the liquid and industrial were also stronger than consumer. So how do you -- how much was mix a factor and where else -- and is the rest simply just passing on cost inflation?

Well, I mean, I think there's a few things here and you hit on a few. There are obviously inflation that were passed through in some of our costs. But I think the main driver of our gross margin is demand. Demand is strong, and it's been for, I think, for 3 or 4 quarters in a row. I think starting second quarter last year, we saw a significant increase in demand. And I think we've been navigating this in a very positive way. If you look at the economics of sugar are still favoring Canada. And if you look at the sugar-containing products is coming from our industrial sector, the demand has been very, very strong. And so it puts us in a position where the demand is strong in the market, then obviously there's impact on pricing. So I think that's where I think that we would attribute this -- the increase in gross margin.