Sucro Limited ($SUGR)

Good morning, everyone, and welcome to Sucro Limited's First Quarter 2026 Earnings Conference Call. Today's call is being recorded. Joining us are Jonathan Taylor, Chief Executive Officer; and Stefano D'Aniello, Chief Financial Officer. At this time, I'll turn the call over to Jonathan Taylor. Jonathan, please go ahead.

Thanks, operator, and good morning, everyone. Before we begin, I'd like to remind listeners that management's comments today may include forward-looking statements. Please refer to our filings for a full discussion of the associated risks and uncertainties. In addition, listeners should note that all figures are in U.S. dollars. Q1 2026 continued to reflect many of the same market conditions we experienced throughout 2025, particularly in the United States sugar market. Margins remained under pressure across both conventional and organic sugar markets, primarily due to tariffs, logistics costs and additional operational expenses associated with ramping up our new refining capacity. Importantly, these costs were largely not passed through to customers due to prevailing market conditions. At the same time, the quarter also demonstrated the operational progress we have made as a business, most notably, refinery volumes more than doubled year-over-year to record levels. Both Hamilton and University Park continued ramping commercial production and our integrated supply chain continued to perform effectively despite difficult market dynamics. While adjusted profitability remained below our expectations, we believe Q1 represents the late stages of a transitional period for the industry and for the company. In particular, recent developments in the U.S. sugar market are encouraging. Last week, USDA published its first projections for the 2026/2027 crop year. Based on those projections, we believe the U.S. market may finally begin moving away from the excess inventory conditions that have pressured pricing and margins over the last several quarters, the report projects, lower U.S. beet production, lower cane production, no high-tier raw sugar imports and importantly, approximately 1 million metric tons of Mexican sugar exports into the U.S. market. Given our strategic relationship with Beta San Miguel, we believe Sucro is uniquely positioned to benefit from this environment. While we remain cautious about near-term market conditions, we believe these developments support our view that the industry is approaching an inflection point. With that, I'll hand it over to Stefano to walk through the financials. Stefano?

Thanks, Jonathan, and good morning, everyone. Let me begin with a brief overview of Q1 performance. For the first quarter of 2026, total customer deliveries remained broadly consistent year-over-year, while refinery volumes increased by more than 100%, reaching record quarterly levels. The increase in refinery activity reflects the successful ramp-up of our new facilities and the continued expansion of our integrated refining platform. However, despite strong operational execution, profitability remained pressured by challenging market conditions in the United States. Adjusted gross profit for Q1 2026 was $9.8 million compared to $13.9 million in the prior year, while adjusted EBITDA declined to $5.2 million from $10 million in Q1 2025. This decline was primarily driven by margin compression in the U.S. market. More specifically, logistics costs increased materially, including interfacility freight associated with the ramp-up of our refining network. Duties and tariffs continued impacting costs and energy costs remained volatile during the quarter. Importantly, most of these additional costs were not reflected in customer pricing due to prevailing market conditions. Refining margins, therefore, declined significantly year-over-year despite the substantial increase in production volumes. That said, there are several important positive underlying trends worth highlighting. First, sugar costs themselves actually declined year-over-year as a percentage of overall sales prices, reflecting effective procurement and merchandising execution. Second, following quarter end, we completely completed additional energy hedging activities that we expect will reduce volatility in production costs going forward. Third, we expect to recover a substantial portion of the IEEPA-related tariffs previously paid by the company. Following the recent U.S. Supreme Court decision, we have taken the necessary steps to preserve our refund rights for approximately $6.2 million of tariff payments. We currently expect the accounting impact of these refunds to begin appearing during Q2 and Q3. On an unrealized basis, results continue to be supported by forward contract bookings, particularly in organic sugar. However, unrealized gains were lower year-over-year due primarily to lower mark-to-market gains in forward contracts compared to exceptionally strong prior year period. SG&A increased year-over-year, primarily due to timing differences relating to bonus accrual reversals. As disclosed in the MD&A, approximately $1 million of expense reversals are expected to occur in Q2. One of the strongest aspects of the quarter continued to be balance sheet management. Interest expense declined by approximately $1.5 million year-over-year due to significantly lower utilization of our revolving credit facilities. Working capital remained lean at approximately $94 million, while our cash conversion cycle remained highly efficient. Free cash flow for the quarter was negative $3.1 million, primarily reflecting lower operating profitability and the fact that substantial working capital reductions achieved during 2025 were not repeated in Q1 2026. Adjusted leverage increased to 4.4x during the quarter, reflecting lower adjusted EBITDA and the timing of capital expenditures associated with our newly completed refinery projects. Importantly, we continue to remain fully compliant with all covenant requirements and maintain strong liquidity, including over $150 million of unused credit capacity. Capital expenditures totaled approximately $8.8 million during Q1, primarily associated with commissioning activities at Hamilton and University Park. Overall, Q1 reflected strong operational execution, record refinery volumes, disciplined working capital management, but continued short-term management pressure driven by market conditions and temporary ramp-up costs. As Jonathan mentioned earlier, we believe the broader market fundamentals are beginning to improve, and we expect additional volumes and operational efficiencies to support better performance as the year progresses. With that, I'll pass it back to Jonathan.

Thanks, Stefano. From an operational perspective, we remain very encouraged by the progress of our expanding refining platform. Hamilton and University Park are both ramping production steadily, and we expect additional volume growth throughout the balance of the year. Likewise, we continue progressing on our Belize refinery project, which remains on track for initial operations during the second half of 2026. While U.S. market conditions during Q1 remain difficult, we believe several important industry dynamics are beginning to improve. Most importantly, the recent USDA projections suggest that the prolonged oversupply conditions in the U.S. sugar market are anticipated to finally begin normalizing beginning with the new crop year beginning October 1. As a result, projected lower domestic production, combined with meaningful Mexican exports into the U.S. market should help improve overall supply-demand balance going forward. Given our integrated supply chain, we believe Sucro is exceptionally well positioned to benefit from these developments. Accordingly, while we continue to expect near-term volatility, we remain positive on the outlook for the second half of 2026 and beyond. Before we close, I'd like to thank our employees, customers, suppliers and shareholders for their continued support. With that, we'll conclude today's remarks. There will be no Q&A session. Please reach out to our IR team with any follow-up questions. Operator, you may now end the conference.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.