Sucro Limited (SUGR) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Sucro Limited Second 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. Actual results could differ materially from those described in these forward-looking statements. In addition, this presentation refers to a number of non-IFRS financial measures. Reference should be made to our recent financial filings for the composition and calculation of these measures. Listeners should also note that all figures are in U.S. dollars. During our last call, we described the business in the U.S. sugar market as approaching an important inflection point. Although market conditions remained challenging during the second quarter, we believe the underlying trends are moving in the right direction despite continued pricing pressure. Our operations delivered another quarter of significant progress. Most notably, our refineries delivered nearly 100,000 metric tons of sugar, representing another quarterly record. Our new Hamilton refinery is performing well and is expected to generate record sales and profitability through 2026. We are managing through the expected early commissioning challenges at University Park and expect significant improvements through the second half of 2026, and free cash flow saw a strong recovery to bring us back to positive year-to-date. Our refinery volumes are not directly comparable year-over-year. Since beginning in 2026, we included deliveries from University Park and the related third-party Memphis operation within our refinery results. Even after considering that change in presentation, however, the underlying growth in our refining platform remains significant and reflects the additional capacity we have developed and from which we expect to realize significant gains moving forward. More broadly, Q2 demonstrated the strategic transformation taking place across Sucro. We are gradually shifting our business mix away from opportunistic lower-margin wholesale activity and toward higher-margin refining, specialty sugar, packaging, retail and Caribbean operations. That evolution may result in lower headline volumes or revenue during certain periods, but it should ultimately produce a more profitable and higher-value business. During the quarter, we also completed the acquisition of Tile World Corporation, a company engaged in the packaging, importing, marketing and sale of retail sugar products, which we expect will be a catalyst to expanding our position in retail sugar products. The integration is progressing as planned, and we expect this to be immediately accretive to earnings. At the same time, we are looking forward to the newer parts of Sucro's growing platform contributing to Sucro's growth and added profitability, including our joint venture in Belize and our new engineering services division. The Belize refinery is in the final stages of construction, positioning us to begin serving the Caribbean market from a strategically located regional asset. The market environment is not yet fully normalized, but the factors within our control, production volumes, product mix, procurement, logistics, cost containment, energy management and business diversification are showing meaningful progress. With that, I'll hand it over to Stefano to walk through the financial results. Stefano?

Thanks, Jonathan, and good morning, everyone. Let me begin with Q2 volumes and revenue. During the quarter, we delivered approximately 198,000 metric tons of sugar compared with approximately 287,000 metric tons in Q2 2025. This decrease was primarily driven by lower wholesale activity in Mexico and the United States. Those sales are typically more sporadic and opportunistic and can fluctuate significantly depending on market conditions and timing. The reduction was partially offset by higher refinery deliveries, which reached approximately 100,000 metric tons. Revenue was $130.6 million compared to $231.9 million in Q2 2025. In addition to lower volumes, the decrease reflected lower average sugar prices with the average delivery price falling to approximately $660 per metric ton from approximately $812 per metric ton in the prior year quarter. Turning to our adjusted operating results. Adjusted gross profit was $12.8 million compared with $13.3 million in Q2 2025. Although total adjusted gross profit was relatively consistent, the margin improved significantly. Adjusted gross profit margin increased to 9.8% from 5.8%. Adjusted gross profit per metric ton increased to approximately $64 from approximately $46 and adjusted EBITDA margin increased to 6.3% from 4.5%. Adjusted EBITDA was $8.3 million compared with $10.4 million in the prior year quarter. It is important to provide some context around the margin improvement. During Q2, we recognized $4.9 million of approved refunds relating to the IEEPA tariffs previously paid by the company in the U.S. Approximately $2 million of that amount was reflected in refinery results with the balance reflected in wholesale operations. Therefore, the year-over-year margin improvement does not come entirely from recurring operating performance. While tariff refunds were a meaningful contributor, it should also be highlighted these tariffs contributed to lower margins in 2025. However, even excluding that benefit, we saw positive underlying trends. Average sugar input costs declined significantly, logistic costs improved and increases in production, labor and overhead expenses remained well below the growth in refinery deliveries. This indicates that our facilities are beginning to generate the operating leverage expected from additional scale. Of the $4.9 million in approved tariff refunds, approximately $1 million have been received as of today. We expect to recover the remaining approved balance and continue to pursue refunds for the full approximately $6.2 million paid by the company in 2025. Turning to refinery performance. Continuing the trend from Q1, refinery deliveries increased to approximately 100,000 metric tons compared with approximately 59,000 metric tons in Q2 2025. As Jonathan mentioned, this comparison includes University Park and the related Memphis operation beginning in 2026, representing approximately 20,000 metric tons during the quarter and 41,000 metric tons for the 6 months. Prior year figures were not reported on the same basis. Refinery adjusted gross profit was $8.1 million compared with $6.8 million last year, while adjusted gross profit per refinery metric ton decreased to approximately $81 from approximately $116. The lower unit margin reflected tariffs and duties inter-facility freight during commissioning and the timing of raw sugar inputs. In Canada, we also continued to operate both our new Hamilton refinery and the legacy Hamilton facility during the 6-month transition. We expect production and overhead costs per metric ton to improve once operations are fully consolidated into the new facility during Q3. University Park remained below its initial operating plan during Q2 due to commissioning delays and temporary processing interruptions. We expect its contribution to increase as operations ramp up during the second half. Turning to our IFRS results. Net income increased to $8.1 million from $2 million in the prior year quarter. This figure stands at $13.5 million for the first half of the year compared to $14 million in the first half of 2025. The improvement in reported Q2 earnings was primarily driven by unrealized mark-to-market gains on inventory. Inventory generated approximately $21.7 million of unrealized gains during the quarter, partially offset by approximately $12.1 million of unrealized losses on forward contracts. As a reminder, unrealized results can vary materially between periods, and they do not necessarily reflect the underlying operating performance or cash generation of our physical sugar operations. For that reason, we continue to focus primarily on adjusted gross profit and adjusted EBITDA when evaluating operating performance. Turning to SG&A and interest expense. For the quarter, SG&A was $7.9 million compared with $6.7 million in Q2 2025. The increase was primarily attributable to approximately $1 million of bad debt write-offs relating to our Mexican and world market operations. We view these items as nonrecurring and as part of our continued effort to address legacy balances and strengthen the quality of the balance sheet. Excluding those write-offs, administrative expenses remained broadly consistent year-over-year despite operating 2 new refineries and managing a transition from our legacy Hamilton facility. Interest expense increased by approximately $1.4 million to $6.6 million. This reflected 2 principal factors: higher short-term borrowings used to finance working capital and interest on long-term project debt that is now being expensed rather than capitalized as the new facilities become operational. Turning to cash flow, liquidity and leverage. Free cash flow recovered strongly during the quarter to $7.7 million compared to $6.1 million in Q2 2025. This reversed the negative free cash flow reported in Q1 and brought free cash flow for the first 6 months of 2026 to approximately $4.6 million. Cash flow from operations for the first half was negative $3.8 million, primarily due to increases in accounts receivable, prepaid expenses and other working capital balances. Working capital was $90.6 million at June 30 compared with $96.3 million at year-end. Part of this decline was attributable to the reclassification of $12.7 million of long-term debt as current because of its April 2027 maturity. As part of our normal treasury activities, we are currently refinancing approximately $17.5 million of term debt maturing within the next 12 months and expect to complete the process before year-end. Our liquidity and leverage metrics remain an area of close management focus. Quarter end, adjusted net debt to capitalization was 35.1% compared with 33.6% at year-end, and adjusted leverage increased to 5.5x from 3.8x. The increase reflects both higher adjusted net debt and the reduction in trailing adjusted EBITDA, together with the completion and commissioning of our major capital projects. We remain in compliance with all financial covenants. Our total liabilities to tangible net worth ratio was 2.18x compared with a maximum covenant of 4x. We also ended the quarter with approximately $135 million of unused credit capacity, including committed, uncommitted and inventory repurchase facility. That figure should be considered together with the nature of parts of our financing structure, which are based on borrowing base availability. Following quarter end, we renewed our syndicate borrowing base facility through December 2027. The new renewed facility provides maximum borrowings of up to $285 million, subject to borrowing base availability and includes a lower applicable margin on the uncommitted tranche that applies to most of the working capital loans of the company. We also established during Q2 a new $30 million transactional trade finance facility supporting Caribbean operations and dedicated acquisition facilities for Tile World, consisting of a $5 million working capital revolver and a $1 million term loan. Our priority for the second half is to convert the additional refinery capacity into higher earnings and cash flow while reducing leverage and maintaining adequate liquidity. Turning to capital expenditures. We have revised our estimated 2026 capital expenditures for the Canadian and U.S. refinery projects from approximately $10 million to approximately $20 million. The revision reflects additional labor and materials required during the final development and commissioning stages at Hamilton and University Park as well as the construction of a new raw sugar warehouse at our Lackawanna refinery. We expect to fund these expenses with a combination of debt financing, operating cash flows and cash on hand. In addition, Sucro had invested approximately $5.1 million in the Belize joint venture as of June 30, with the project now in its final stages of completion. Although that refinery construction has not yet been finalized, we have seen significant margin improvement and volume growth in our current Caribbean operation as a result of our ability to negotiate more favorable contract terms with further gains expected following the completion of the refinery by our JV partners in the Belize. With the major construction program substantially complete, our focus is shifting from building capacity to commissioning, operating and optimizing those assets. Overall, Q2 showed another record quarter for refinery production, improved adjusted margins, although partially supported by tariff refunds, positive free cash flow and continued progress across our strategic projects. At the same time, leverage, liquidity and the pace of the University Park ramp-up remain key areas of focus. With that, I'll pass it back to Jonathan.

Thanks, Stefano. Looking ahead, we continue to see encouraging developments in the U.S. sugar market. The latest available USDA outlook continues to project an ending stocks-to-use ratio of approximately 13.5% for the 2026/2027 crop year. USDA also currently forecast that Mexico could supply more than 1.1 million metric tons of sugar to the United States during that period. These projections remain subject to the operation of the U.S.-Mexico suspension agreements and future determinations of U.S. needs. This is important for Sucro for 2 reasons. First, U.S. sugar prices have begun to strengthen gradually as the market anticipates a tighter supply and demand balance. Although pricing has not yet returned to historical levels, the direction is encouraging. Second, our strategic relationship with Beta San Miguel places us in a strong position to participate in Mexico's export program. Under our existing commercial arrangements with BSM, Sucro has rights relating to sugar exported by BSM. Subject to final U.S. need determinations, Mexican allocations and commercial execution, we believe this could provide Sucro with access to a meaningful volume of duty-free Mexican sugar for our U.S. refining and wholesale operations. That combination, improving U.S. prices, competitive Mexican supply and significantly greater refining capacity could become an important driver of improved margins and profitability. As we have previously shared, the USDA no longer provides a larger specialty sugar quota that previously allowed for the import of duty-free organic refined sugar. Instead, imported refined organic sugar, which comprises approximately 90% of the domestic market is now subject to high tier duty rates and added tariffs from recent Section 301 announcements concerning Brazil and forced labor. When combined or stacked, these tariffs are expected to materially raise prices for organic sugar in the U.S. market. However, Sucro is very well positioned to manage and indeed benefit from these changes. We are the only stand-alone certified organic refiner in the United States and Canada with all 3 of Sucro's North American cane sugar refineries certified organic. This provides industry-leading supply capabilities, including cost leadership, supply assurance for customers and exceptional product quality, all of which we fully expect to leverage into a stronger market leadership position in organic sugar, resulting in both increased sales and higher profitability through the remainder of 2026 and into 2027. We are also very excited about another growth opportunity we announced late last year regarding our new Engineering Services division. Sucro is now utilizing our industry-leading management experience and expertise gained from its recent unprecedented construction of 3 new cane sugar refineries over the past 5 years. We believe Sucro is unique in offering the combined services and expertise of refinery design, engineering, sourcing of materials and equipment and perhaps most importantly, the actual post-construction operations of these new refineries. Initial response has been extremely positive, and we have already engaged in several projects across multiple continents. We expect our Engineering Services division to be an immediate contributor to Sucro's results and look forward to sharing more details later in the year. Operationally, our priorities for the second half are clear: ramped University Park toward planned production levels, consolidate Canadian operations into our new Hamilton refinery, bring Belize into commercial operation, achieve initial project engagements within our Engineering Services division, continue integrating Tile World, convert operating improvements into stronger cash flow and begin reducing leverage. There are still risk and execution challenges ahead, and we are not yet seeing the full economic benefit of the investments we have made. However, the platform is now largely built. The market fundamentals are becoming more constructive and the focus of the organization has shifted firmly from construction to execution. We believe Sucro is now very well positioned to leverage these investments and successfully execute across multiple business platforms, and we look forward to sharing these results in the coming quarters. I would also like to say a few words regarding our recently announced strategic review. We do not believe Sucro's current share price adequately reflects the value of our business and prospects, and we have engaged advisers to explore potential opportunities. Sucro has built 3 new refineries in the past 5 years, established North American market leadership in the premium organic sugar segment, established new partnerships in the CARICOM region that we believe will unlock significant value, develop significant market synergies and leadership between our wholesale distribution and refinery assets businesses and launched a new engineering services division that we expect will monetize our market-leading experience and expertise developed in this very specialized field. We expect these initiatives to be valuable contributors to Sucro, and we will evaluate opportunities within our strategic review that may unlock shareholder value. We will provide further updates as and when this initiative develops. Before we close, I'd like to thank our employees, customers, suppliers, lenders 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 Investor Relations contact with any follow-up questions. Operator, you may now end the conference.

Thank you. Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation. You may now disconnect your lines.