Rogers Sugar Inc.: 4th Quarter 2015 Results

MONTREAL, QUEBEC--(Marketwired - Nov. 19, 2015) - Rogers Sugar Inc. (TSX:RSI)

Message to Shareholders: On behalf of the Board of Directors, I am pleased to present the highlights of the financial results of Rogers Sugar Inc. (the "Company") for the three months and year ended October 3, 2015.

It should be noted that fiscal 2015 had 53 weeks of operations, compared to 52 weeks in fiscal 2014. The additional week is included in the fourth quarter results of fiscal 2015. Results for the fourth quarter and fiscal years 2015 and 2014 are as follows:

		For the three months ended					For the years ended
(In thousands of dollars, except for volume and per share information)		October 3, 2015 (unaudited)			September 27, 2014 (unaudited)		October 3, 2015 (unaudited)			September 27, 2014 (unaudited)
Volume			192,912			170,767		658,812			646,376
Gross margin		$	23,675		$	15,077	$	76,295		$	82,939
Expenses:
	Administration and selling expenses		6,982			9,238		22,430			24,304
	Distribution		2,940			2,133		9,395			8,801
Results from operating activities ("EBIT")			13,753			3,706		44,470			49,834
Net finance costs			3,298			2,492		11,931			10,556
Income tax expense			2,654			340		8,506			10,049
Net earnings		$	7,801		$	874	$	24,033		$	29,229
Net earnings per share basic		$	0.08		$	0.01	$	0.26		$	0.31

Fourth quarter volume increased by approximately 22,100 metric tonnes versus last year's comparable quarter. Industrial volume was approximately 9,800 metric tonnes higher than the fourth quarter last year, of which, approximately 8,700 metric tonnes is explained by the additional week. The remainder of the increase is explained by timing of deliveries. Consumer volume was approximately 2,300 metric tonnes higher due to the additional week in fiscal 2015 and timing in customer promotions. Liquid volume was approximately 3,900 metric tonnes higher than the comparable period last year, of which, approximately 2,100 metric tonnes represents the impact of the additional week. The remainder of the increase is explained by solid demand from existing customers in the last quarter of the current year. Finally, the export segment was approximately 6,100 metric tonnes higher than last year due to a combination of additional volume to Mexico as well as U.S. export sales. The spread between #11 raw sugar prices and U.S. refined sugar prices, combined with a weaker Canadian dollar, provided an opportunity for Lantic to export additional volume to the U.S., while paying approximately US$360.00 per metric tonne of duties. Without taking into consideration the additional week of shipments in the fourth quarter of fiscal 2015, volume was approximately 9,100 metric tonnes higher than the last quarter of fiscal 2014 as a result of an improvement in volume in all segments. 

Compared to fiscal 2014, the Company's total sugar deliveries were higher by approximately 12,400 metric tonnes. If we eliminate the impact of the fifty-third week of fiscal 2015, total volume would have been comparable to the previous year. 

The industrial segment increased by approximately 8,100 metric tonnes, mostly due to the additional week of shipments in fiscal 2015, as compared to fiscal 2014. 

Total consumer volume was lower than last year by approximately 3,600 metric tonnes. The decrease year-over-year is mostly attributable to the timing of 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. The decrease was somewhat offset by the additional week of deliveries in fiscal 2015.

The liquid segment increased by approximately 1,500 metric tonnes. The second half of fiscal 2015 resulted in solid liquid demand, which almost totally offset the loss of volume in the first half of the year as a result of the completion of a one-year contract with a High Fructose Corn Syrup ("HFCS") substitutable account in Western Canada which ended in March 2014. Without the additional week in fiscal 2015, liquid volume would have been slightly lower than the comparable period last year.

The export segment was higher by approximately 6,400 metric tonnes when compared to fiscal 2014. The increase is due to a combination of additional volume to Mexico as well as U.S. export sales at high tier duties. The spread between #11 raw sugar prices and U.S. refined sugar prices, combined with a weaker Canadian dollar, provided an opportunity for Lantic to export additional volume to the U.S., while paying approximately US$360.00 per metric tonne of duties.

With the mark-to-market of all derivative financial instruments and embedded derivatives in non-financial instruments at the end of each reporting period, the Company's operating results could have large fluctuations. 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 Company during the reporting period, which are non-GAAP measures. This adjusted performance is comparable to the adjusted earnings reported in previous interim reports. In this press release we will discuss adjusted gross margin which reflect the operating income without the impact of the mark-to-market of derivative financial instruments and embedded derivatives in non-financial instruments.

	For the three months ended						For the years ended
Gains/(Loss) (In thousands of dollars)	October 3, 2015 (unaudited)			September 27, 2014 (unaudited)			October 3, 2015 (unaudited)			September 27, 2014 (unaudited)
Mark-to-market adjustment	$	158		$	(6,148	)	$	(7,350	)	$	(1,432	)
Cumulative timing differences		(537	)		(2,763	)		(2,237	)		2,436
Total adjustment to cost of sales	$	(379	)	$	(8,911	)	$	(9,587	)	$	1,004

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 $0.6 million was recorded on sugar futures contracts, versus a loss of $7.5 million for the comparable quarter of fiscal 2014, as world raw sugar values increased from the closing values of the previous quarter. Year-to-date, a mark-to-market loss of $2.3 million was recorded as compared to a loss of $5.3 million for fiscal 2014. For natural gas, a mark-to-market loss of $3.6 million and $11.9 million were recorded for the quarter and year-to-date, respectively versus a mark-to-market loss of $1.0 million and a gain of $0.5 million for last year's comparable periods. The mark-to-market loss in fiscal 2015 is explained by the decline in natural gas future values during the year. Foreign exchange forward contracts and embedded derivatives, on which foreign exchange movements have an impact, had a combined mark-to-market gain of $3.2 million for the quarter and a gain of $6.8 million for the year as a result of the movement of the Canadian dollar versus the U.S. dollar. In fiscal 2014, the Company recorded a gain of $2.3 million and a gain of $3.4 million for the quarter and for the year, respectively.

The cumulative timing differences are as a result of the fact that 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. In addition, the gains or losses on the sugar and related foreign exchange paper transactions are largely offset by corresponding gains or losses from the physical transactions being the sale and purchase contracts with customers and suppliers. The year-end adjustment is the total of all quarterly results. This adjustment is added to or deducted from the mark-to-market results to arrive at the total adjustment to cost of sales. For fiscal 2015, the total cost of sales adjustment is a loss of $9.6 million to be added to the consolidated operating results compared to a total cost of sales gain of $1.0 million to be deducted from the consolidated operating results in fiscal 2014 to arrive at the adjusted operating results of these two years.

The Company also recorded a mark-to-market loss of $0.6 million and $1.2 million for the quarter and for the year, respectively, for the mark-to-market of interest rate swaps under finance costs, as compared to a mark-to-market gain of $0.1 million and a mark-to-market loss of $0.4 million for the fourth quarter of 2014 and for fiscal 2014, respectively, as a result of the decrease in interest rate in the past two fiscal years.

The total adjustment for the net earnings before income taxes for the quarter was a loss of $1.0 million compared to a loss of $8.8 million for the comparative quarter in 2014. For the full year, the total adjustment to earnings before income taxes was a loss of $10.8 million for fiscal 2015 compared to a gain of $0.6 million in the previous year.

Adjusted consolidated financial information is as follows:

	For the three months ended						For the years ended
(In thousands of dollars, except for volume and per share information)	October 3, 2015 (unaudited)			September 27, 2014 (unaudited)			October 3, 2015 (unaudited)			September 27, 2014 (unaudited)
Gross margin as per above	$	23,675		$	15,077		$	76,295		$	82,939
Adjustment as per above		379			8,911			9,587			(1,004	)
Adjusted gross margin		24,054			23,988			85,882			81,935
EBIT as per above		13,753			3,706			44,470			49,834
Adjustment as per above		379			8,911			9,587			(1,004	)
Adjusted EBIT		14,132			12,617			54,057			48,830
Net earnings as per above		7,801			874			24,033			29,229
Adjustment to cost of sales as per above		379			8,911			9,587			(1,004	)
Adjustment for mark-to-market interest rate swap		582			(108	)		1,168			433
Deferred taxes on above		(269	)		(2,291	)		(3,030	)		113
Adjusted net earnings	$	8,493		$	7,386		$	31,758		$	28,771
Adjusted net earnings, per share basic	$	0.09		$	0.08		$	0.34		$	0.31

For the quarter, the adjusted gross margin rate was $124.69 per metric tonne as compared to $140.47 per metric tonne in fiscal 2014, a decrease of $15.78 per metric tonne. In the last quarter of fiscal 2014, the Company recorded a one-time profit of $1.9 million, triggered by the early receipt of a raw sugar vessel, in advance of our needs. This one-time profit accounted for $11.13 per metric tonne of the decrease to the adjusted gross margin rate. In addition, the Company suffered from operating inefficiencies at the Montreal refinery in the last quarter of the current year, following a refining equipment breakdown and incurred additional maintenance costs. Finally, partially offsetting some of the above negative variances, labour costs at the Montreal refinery were $0.4 million lower than last year as a result of the 2014 workforce reduction.

For the full year, adjusted gross margin was $85.9 million, $3.9 million higher than last year. On a per metric tonne basis, adjusted gross margin, at $130.36 per metric tonne, was $3.60 per metric tonne higher than the comparable period last year. 

The favourable variance in adjusted gross margin and adjusted gross margin per metric tonne versus last year is mainly explained by a reduction in labour and energy costs. Following the 2014 workforce reduction at the Montreal refinery, Lantic was able to reduce its labour costs by approximately $4.5 million. In addition, the Company benefitted from energy cost savings of approximately $2.6 million 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. 

Somewhat offsetting the above positive variances was an increase in operating costs at the Taber beet factory as a result of severe beet deterioration at the end of the slicing campaign as well as operating inefficiencies at the Montreal refinery in the last quarter of the current year, following a refining equipment breakdown. Finally, as mentioned above, in fiscal 2014, the Company recorded a $1.9 million one-time profit triggered by the receipt of a raw sugar vessel in advance of our needs, in order to capitalize from favourable spreads in the #11 world raw sugar futures. This profit did not re-occur in fiscal 2015 and therefore reduced the above positive variances. 

Administration and selling expenses were approximately $2.3 million and $1.9 million lower than the fourth quarter of fiscal 2014 and 2014 year-to-date, respectively. During the last quarter of fiscal 2014 and for the full year in fiscal 2014, the Company incurred $2.5 million and $2.8 million, respectively, in consulting fees and severance costs following the process improvement review of the Montreal refinery. In addition, in fiscal 2014, a decision was made to terminate the only remaining salaried defined benefit pension plan ("Salaried Plan"), for which years of service had been frozen since 2008. The termination occurred as at December 31, 2014 and the Company is currently in the last stages of the settlement process. As a direct result of the decision to terminate, the Company recorded a non-cash expense of $0.8 million in the fourth quarter of fiscal 2015 compared to an expense of $1.2 million in the comparable period last year. Year-to-date, the non-cash expense amounted to $0.8 million for fiscal 2015 as opposed to $2.2 million in fiscal 2014. These above reduction in administrative and selling expenses were somewhat offset by an increase in consulting fees, marketing expenses, allowance for doubtful accounts and employee benefit costs.

Distribution expenses for the quarter were $0.8 million higher than the comparable period last year and $0.6 million higher than fiscal 2014. The increase in distribution expenses was explained by incremental transfer costs between our various locations as a result of low inventory levels at the Taber factory at the end of the current fiscal year and production inefficiencies at the Montreal refinery, compounded by strong sales demand in the last quarter of the year. 

Net finance costs for the quarter were $0.1 million higher than the fourth quarter of fiscal 2014, when we exclude the mark-to-market gain and loss on the interest rate swaps. For the year, the Company recorded a mark-to-market loss of $1.2 million compared to a mark-to-market loss of $0.4 million. When we exclude the mark-to-market variation, interest expense for fiscal 2015 was $0.6 million higher than fiscal 2014 due to a higher level of borrowings throughout the year mainly as a result of higher level of raw sugar inventories during the year.

On October 30, 2015, the Canadian International Trade Tribunal ("CITT") issued its decision to continue its 1995 finding against dumped and subsidized sugar from the United States ("U.S.") and European Union ("EU"). Antidumping and countervailing duties will, therefore, continue to be applied to imports of such sugar.

The duties on imports of U.S. and EU refined sugar are important to Lantic and to the Canadian refined sugar industry in general because they protect the market from the adverse effect of unfairly traded imports from these sources. As a result of the CITT decision, these duties will be continued for a further five years.

In order to provide additional information, the Company measures free cash flow that is generated from operations. 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 amounts, funds received or paid from the issue or purchase of shares and investment capital expenditures. Free cash flow is not intended to be representative of cash flows or results of operations determined in accordance with IFRS. It may also not be comparable to similar measures used by other companies.

Free cash flow is as follows for the quarter and year-to-date:

		For the three months ended						For the year ended
(In thousands of dollars)		October 3, 2015 (unaudited)			September 27, 2014 (unaudited)			October 3, 2015 (unaudited)			September 27, 2014 (unaudited)
Operating activities:
Cash flow from operating activities		$	41,878		$	11,419		$	55,485		$	31,965
Adjustments:
	Changes in non-cash working capital		(30,551	)		(7,825	)		(11,407	)		2,984
	Changes in non-cash income taxes payable		676			(433	)		28			760
	Changes in non-cash interest payable		239			(1,582	)		93			(33	)
	Mark-to-market and derivative timing adjustments		961			8,803			10,755			(571	)
	Financial instruments non-cash amount		(1	)		1,916			(6,414	)		4,621
	Capital expenditures		(4,382	)		(5,688	)		(11,439	)		(11,569	)
	Investment capital expenditures		269			2,017			772			2,869
	(Buyback) issue of securities		(122	)		-			(14	)		(372	)
	Deferred financing charges		-			-			(90	)		(90	)
Free cash flow		$	8,967		$	8,627		$	37,769		$	30,564
Declared dividends		$	8,463		$	8,463		$	33,856		$	33,858

Free cash flow for the quarter was $0.3 million higher than the comparable quarter of fiscal 2014. Free cash flow for 2015 was $7.2 million higher than the previous year. The increase is due mainly to a higher adjusted gross margin of $3.9 million, lower incomes taxes paid of $2.5 million, lower pension plan contributions of $3.1 million and a lower cash outflow of $0.4 million for share buyback. These positive variances were somewhat offset by higher capital expenditures, net of operational excellence capital, of $2.0 million and higher interest paid of $0.8 million.

OUTLOOK 

As mentioned previously, fiscal 2015 consisted of an additional operating week. In fiscal 2016, the industrial and consumer segments are expected to be comparable to fiscal 2015, when adjusted for the 53^rd week.

In the last quarter of fiscal 2015, Lantic benefitted from strong sales demand in the liquid segment. Even though the trend in this segment was positive, the Company has taken a cautious view and is projecting a slight decrease in liquid volume in fiscal 2016. 

It is estimated that export volume will decrease by approximately 5,000 metric tonnes in fiscal 2016 due mainly to lower volume of sales to Mexico and to the U.S. under high tier duties currently contracted. The Company will continue to investigate other export opportunities similar to those developed several years ago in Mexico, and other markets in order to secure additional export sales. 

Overall, total sales volume is expected to be comparable to fiscal 2015, without taking into consideration the additional week of operations.

In August 2015, the Company obtained confirmation from its natural gas provider that a long-term firm gas supply contract was accepted by La Régie de l'énergie du Québec to expire in November 2019. 

Approximately 90% of fiscal 2016's natural gas requirements have been hedged at average prices comparable to those realized in fiscal 2015. Any un-hedged volume should benefit from the current low prices of nearby natural gas. In addition, some futures positions for fiscal 2017 to 2019 have also been taken. Some of these positions are at prices higher than current market value, but are at the same or better levels than those achieved in fiscal 2015. We will continue to monitor natural gas market dynamics with the objective of maintaining competitive costs and minimizing natural gas cost variances.

The settlement of the Salaried Plan is expected to occur in the first quarter of fiscal 2016. A deficit of $1.2 million was estimated as of October 3, 2015. However, the pension expense and pension contribution may differ once the settlement is concluded. In fiscal 2016, defined benefit cash contributions are expected to amount to $5.8 million, which is approximately $1.5 million higher than fiscal 2015. 

Capital expenditures for fiscal 2016 are expected to be higher than fiscal 2015. The anticipated increased spend is attributable to a higher fiscal 2015 carryover of projects and a commitment to update targeted plant control systems in our Western plants, on a phase-out basis. The Company will continue to aggressively pursue operational excellence capital investment in order to reduce costs and improve manufacturing efficiencies.

The harvest and beet slicing campaign in Taber started at the beginning of October. Early indications are favourable as the yield per acre harvested and the extraction rate achieved to date are better than forecast. Taber's beet crop, currently being harvested, is approximately 22,000 acres and if current harvesting conditions continue, we expect to produce approximately 85,000 tonnes of beet sugar in fiscal 2016. Lantic is not anticipating a recurrence of the negative operational variance associated with the processing of the 2014 crop.

FOR THE BOARD OF DIRECTORS,

Stuart Belkin, Chairman

Vancouver, British Columbia - November 19, 2015