Good afternoon, ladies and gentlemen, and welcome to the Rogers Sugar Incorporated Analyst Call, August 8th conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, August 8th, 2024. I would now like to turn the call over to Mike Walton, President and CEO. Please go ahead.
Thank you, operator, and good afternoon, everyone. Thank you all for joining us today. Before we begin, 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-IFRS measures in our call. Please refer to the forward-looking disclaimers and non-IFRS 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.
I'll begin the call today with some highlights from our Q3 2024 results, and then provide some color on what we are seeing in the sugar and the maple business so far this year. Then I will update you on our LEAP project and our Rogers Refined framework before turning it over to JS for a review of our financial results. Then I'll conclude by discussing our outlook for the balance of fiscal 2024. To help you out and give you a better picture of our results this quarter, we have an investor presentation accompanying this call. This presentation is available on the investor section of our website. This part of the presentation begins on slide 5. We are running this business with a focus on profitability over the long term, and our results are evidence of that.
You hear me talking every quarter about the demand drivers of our sugar segment in particular, and this quarter is no different. The long-term demand for sugar-containing products in North America is healthy and growing. At Rogers, we are in great position to meet that demand today and in the future. Looking at the quarter, once again, we are reporting strong results for Q3. In fact, this was the most profitable third quarter in the history of the company. Our adjusted EBITDA for the quarter was CAD 34.5 million, an increase of more than CAD 10 million from last year's Q3. This was a result of the continuing favorable trends in the sugar market, combined with a persistent focus on driving consistent, sustainable, profitable growth in both our sugar and maple business segments.
Regarding volume, North American food and beverage processors experienced some softness in demand in the quarter, attributable to the external factors such as food inflation and high prices of other related commodities, such as cocoa. For our business, this translated into a decrease of approximately 3% or 5,600 metric tons compared to the same period last year. Our diversified customer portfolio allowed us to mitigate this impact by selling into the export market. We remain confident in the long-term demand for Canadian sugar, as various food processors have publicly announced large investments in the Ontario and Quebec markets, which will have production begin to come online in 2025. We continue to make progress on our LEAP expansion project. We are now at the stage where we are getting final bids for key elements of the project.
Some of these are coming in higher than we calculated two years ago when we began our detailed engineering work and arrived at the initial figure of CAD 200 million. As a result, we now estimate that costs will come in above our original estimates. The way these projects work, suppliers and contractors don't give final bids until just before work is set to be awarded. They want to wait as long as they can before committing to a price. There has been significant inflation in supply costs since we began to plan this project. What's more, we are competing with a great number of other recently announced construction projects in the Montreal area. As a result, we expect costs will be higher. However, we don't have a precise, updated number for the anticipated cost at this time.
I know some of you are going to ask me for more details. That will be something we can provide further down the road when we have more bids in hand and have looked at all options to mitigate costs. But you should also know we are making sure to do this project right. That means ordering proven equipment from the best manufacturers. That means ensuring that we make necessary upgrades to ensure worker safety. I would like to point out here that even with the higher capital costs, we believe that the business case for the refining and logistics expansion is still sound. It is supported by the strong sugar market dynamics that we have seen over the past several quarters, and by the announced investments made by many of our customers over the past two years.
Thus, we remain confident in the economic value of this investment in the long-term production growth. Finally, I would also like to mention that our financing plan for the project includes several options that we will be able to use to fund the incremental costs associated with the LEAP project. We will have an update for you on our next call. What I can say for certain is that LEAP remains the right step forward for our business. We are building for the long term, and the long-term sugar market dynamics remain strongly supportive. We are going to need the increased capacity to serve the growing demand from our customers. We need to invest not only to grow, but to ensure we continually modernize and improve, to be ready to serve our customers for the next century.
That is one of the pillars of Rogers Refined plan that we introduced to you last quarter. As a reminder, the four pillars are: modernizing and growing in our sugar business, driving profitability in maple, maintaining a strong balance sheet, and advancing our ESG program. We believe that these four pillars will make us a better company and a better investment. We are focusing our resources in these key areas and emphasizing execution. Our results this quarter offer further evidence that we are building a business to take advantage of the favorable market dynamics in front of us and deliver consistent, profitable, and sustainable growth. Now, I'll turn the call over to JS.
Well, thank you, Mike, and welcome everyone. This quarter marks another strong quarter of growth in revenues and profitability for both of our business segments. Consolidated revenues were CAD 309 million, an increase of nearly 18% over the same period last year, showing double-digit growth in both of our business segments, sugar and maple. Consolidated adjusted EBITDA for the third quarter was CAD 34.5 million, an increase of about 45% over the same period last year. Once again, reflecting the favorable market conditions and our focus on operational efficiencies in both segments. For the first time in our history, consolidated adjusted EBITDA was above CAD 100 million in the first nine months of the year.
As Mike will point out later on, we are anticipating 2024 to surpass 2023, despite the negative impact from the strike at our Vancouver facility in the first half of the year. Consolidated adjusted net earnings were just over CAD 16 million, or CAD 0.13 per share, as compared with CAD 9 million, or CAD 0.08 per share, for the same period last year. For the year to date, adjusted net earnings were CAD 48 million or CAD 0.42 per share, compared with CAD 33 million or CAD 0.32 per share in the first 9 months of 2023. I would like to highlight the fact that the EPS numbers for 2024 are considering the impact of the recent equity issue, which increased our number of shares by almost 23 million shares or 22%. Now, let's look at the individual business segments, starting with sugar.
Revenue in our sugar segment was CAD 253 million, an increase of 17% compared with the same period last year. This was driven mainly by higher margins on our refined related activities, partially offset by a small decline in domestic sales volume, as Mike mentioned earlier. Adjusted EBITDA for the sugar segment increased by 45% to CAD 30 million. Adjusted EBITDA for our sugar segment represent almost 90% of our consolidated adjusted EBITDA in the third quarter. This was largely driven by a higher sugar refining margin, partially offset by higher production costs from increased maintenance activities and inflation-based price increases, along with higher administrative expenses from market-based compensation increases and higher non-cash share-based compensation expense. Now, moving on to the maple segment, where we posted the fourth consecutive quarter of strong financial results.
Maple revenues of CAD 57 million in the quarter were 22% higher than the same period last year, due to higher volumes and improved selling prices. Adjusted EBITDA for the maple segment at CAD 4.4 million, increased by 44% compared with the same period last year, and reflects the benefit of higher selling prices, as well as the operational improvements implemented over the past year. As we mentioned earlier, we continue to move ahead with our investment in the future of the business, including our LEAP project and other investments that will position us to meet the current and future needs of our customers. Our estimate of CAD 28 million for normal capital expenditures this year, excluding the LEAP project, is in line with our earlier communications and in line with our spending levels of the last few years.
Spending on LEAP is currently estimated at CAD 48 million in fiscal 2024 and will be funded through a combination of debt, equity, and internally generated cash flow. For the twelve months ended June 2024, our free cash flow is just under CAD 75 million, an increase of more than 50% compared to the same period a year ago. Our robust operational cash generation gives us flexibility over the long term, while delivering strength to our balance sheet, which is one of the pillars of our Rogers Refined plan. Speaking of balance sheet, we are currently reviewing our options to address the upcoming maturities of our convertible debentures, including the maturity of the Sixth Series in December 2024. These options include conversion to common shares, payment at maturity from available cash, or refinancing.
Finally, we are happy to share that we are maintaining our quarterly distribution to our shareholders this quarter with a dividend of CAD 0.09 per share. With that, I will turn the call back over to Mike to provide a summary and outlook for the balance of the year.
Thank you, JS. Looking ahead, we are expecting another year of record financial results in fiscal 2024. We expect to finish the year with strong contributions from both our sugar and maple segments. We continue to focus on optimizing the business and delivering growth in adjusted EBITDA. The stability of our operations in both of our business segments, the enduring positive conditions in the sugar market, and the strong results we have reported to date, give us confidence that we are on track to deliver a third straight year of record profitability. We expect to report an increase in Adjusted EBITDA in the sugar segment, despite the unfavorable impacts of the labor disruption that ended in February and a slight decline in domestic sales line.
Strengthened market demand and strong performance across all business functions are enabling us to deliver improved profitability and offset inflationary pressures on our production and maintenance costs. In our maple segment, we expect our financial results to benefit from a healthy maple crop and recently negotiated price increases, and to show continued positive impact from our investments in automation and process efficiencies. As a result, we estimate that our maple segment will continue to deliver strong financial results for the year. It has been a busy year for us here at Rogers Sugar, and I'm pleased to say that we are looking forward to the future with confidence.
I thank all of our employees for their hard work and dedication that has brought us to this point in our journey, and I extend my appreciation to our customers and business partners, and I look forward to our continued partnership in the years ahead. Thank you again for joining us on the call today and for your interest in Rogers Sugar. I'll now ask the operator to poll for questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star button followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star button followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please, for your first question. First question comes from Michael Van Aelst, TD Cowen. Please go ahead.
Hi, good afternoon. Strong results, very strong results. Can you talk a little bit more about that, sugar gross profit per metric ton and, you know, the level of sustainability of that over the next, you know, foreseeable future, I guess, especially as volumes have, you know, seemed to come under a little bit, or demand seems to be a little bit weaker.
Hi, Mike, it's JS here. It's a good question. I think we are, you know, we are still, we're quite happy with the margins right now. The margins have continued to increase. However, I think we're, we're kind of hitting a bit of more of a stability in the, in the near future, so we're not expecting the same type of increase in margin going forward as, as we've seen over the past, over the past few, few quarters. One thing to also keep in mind that there's some mix as well in type of product. If you look at what's coming in the fourth quarter, we are looking at, a bit more of the, industrial, type of sales that don't carry the same type of pricing or margin.
So usually our fourth quarter has more volume, and it's, you know, if you do the math here, you'll, you'll see it, that we're predicting approximately 213,000 metric ton in Q4 with our outlook. I think a lot of it will be more industrial, which doesn't carry the same type of margin than the, the some of the business we've seen, especially over the last two quarters.
Okay. So, I mean, we've seen a big increase, we saw a reasonable increase in Q1, but then a very big increase in Q2 and in Q3. You know, and it seems like there should still be a decent increase in Q4, because a lot of the products that you've taken price on, you'll still have that business in your mix. You just won't have it as favorable, given the industrial size.
Yeah, that's exactly... you know, the increase in margin, the margin is not going to increase as much as it used to, as we've seen in the past few quarters. But I think what we have as far as the type of margin or the margin we're seeing is, we believe, sustainable on most of our business segments. So what's going to make it move, really, and going forward is the mix between the different customer groups.
Okay. And so when you look out to next year, I know it's far, but if you look out to the next fiscal year, do you expect to be able to hold on to these margins, or is your mix shifting, like favorably or negatively?
I think we should when we look at next year, it is far, but it's not that far. We believe these margins are a good reflection on what we're going to see in the next year. If you normalize, you know, for the impact of the strikes and some of the mix. But I don't foresee market moving in the other direction and margin going down at that time.
Okay, great. And then it seems like you're, like you've given guidance for the full year for volumes for maple. You know, you've had good performance year to date, much better than what we've seen in the past. But Q4, it looks like the volumes are, you know, the volume growth is tailing off. Is that just because we're lapping a tougher comp, or is there competition picking up?
Yeah, Michael, it's Mike. What we're seeing, and we've talked about in previous quarters, is demand has slowed a little in maple because of price elasticity. It's, it's still seen as a luxury product versus a commodity. And so we've seen a little demand erosion in some of our foreign markets, and that's what we're seeing in the volume. Pricing is still holding. We've not seen any significant erosion from a competitive point of view. It is, it's just overall global demand has softened a little bit on maple.
Is there a reason why you might see it more in your Q4? Is it gift-giving? What is it?
Well, Mike, let me just have a comment here on that. I think, I think there's Q4. It sometimes depends on the size of the order, so we get sometimes big orders. So right now, we think we got some of those orders late in the third quarter. And therefore, that kind of impact, especially stuff going to Europe or some foreign countries, the orders are sometimes bigger. And so that's how we, we look at Q4. Is it possible that we deliver more volume based on, you know, the last few months, the last month, for example, the quarter? Yes, it's possible.
Okay. And just finally, I know you don't want to give numbers or can't give numbers yet on the increase in CapEx costs for LEAP, but are the numbers that you're seeing now something that you expect to be able to fund internally through cash flows, or do you feel you need to raise more capital?
That, that's a good question, Mike. We feel that, well, the first thing is the business has generated more internal cash than what we had initially anticipated when we started to do the business case. So we're gonna use some of the internal generated cash flow for that. The equity issue is a bit larger than we had initially anticipated, so we're gonna use some of that. And we have flexibility with our revolving credit facility. And also we have some refinancing coming on the convert. That could be some tools we use. But we believe that we don't have to make any big, bold move from a financing standpoint to be able to cover the extra costs that we are facing.
Okay, great. Thank you, and congratulations on a great quarter.
Thanks, Mike.
Thanks, Mike.
Next question comes from Zachary Evershed of National Bank Financial. Please go ahead.
Hello, everyone. Congrats on the quarter. This is actually Nate calling in for Zach today.
Hi, Nate.
My first question relates to the expansion project. I know no numbers until fall, but I noticed in the commentary you mentioned safety regulations and new designs. So I wanted to ask about what your sense of risk was with respect to the timeline of the startup.
Yeah, we haven't seen a lot of drift yet in the timeline, Zach. You know, we'll have a better view of that in the coming months, but we're still looking at calendar Q1 2026 to start this new plant up. And you know, if there's some drift, I at this phase of looking at it, it would be minor.
Okay, great color. And with respect to sugar, can you dive into how mix perhaps played into sugar margins this quarter as well? Because I noticed that in the commentary, North American volumes are slightly down, while you also diversified into export margins, which I believe are, tend to garner a lower margin versus domestic volumes.
Yeah, that, Nate, that's a good observation. So we've, you know, when we saw some of the softening in the market, we kind of revert back to some exports. Exports carry a bit less margin than some of the rest of our customers, and that will explain some of the mix. But we still feel very strong with our industrial and our consumer sales, retail sales, where the margins are still very healthy. And we expect the volume to go back to normal in the near future. That should take care of the slight variance that we have in this quarter.
Excellent. You did mention volumes, normalizing in the future. I also noticed that there was a comment on timing. Could you give more color on that? Was it, do you expect a catch-up in the next quarter, in the next two quarters, for example?
Yeah, Nate, it's Mike. And some of it is timing, for certain, as you know, the growth that we've seen in the North American sugar demand is not a straight line, and we've seen some erosion, North America-wide, actually, on the manufactured volumes due to pricing and cocoa costs, which is a, you know, a big consumer of sugar. So some of that is coming, cycling through the market and, you know, given the size of our volume, it's, it, you know, it doesn't take much for a mix to, you know, for us to talk about mix and doesn't take much of a change. So nothing material.
I would say, you know, the business on a North American scale, which is how we measure ourselves, should get back into cruise control on a volume basis as consumer confidence rebounds. We've also seen No. 11 prices, you know, dip quite a bit from the beginning of the year. So, you know, those buyers that are able to use the No. 11 s to their advantage will also be able to lock in at lower costs as well.
Nate, it's JS here. Maybe just on a normalized basis, one of the things that, because of the strike this year, so the outlook we have for volume is around 760,000, around that. We've got about just under 24,000 of strike impact there. So when we look at our normalized volume, we're around 785. That's kind of the, you know, I would say, the benchmark, which is still about 15 shy of what we had initially anticipated. And we believe this, this is mainly timing. I don't think it-- We believe it's, it shows a little bit of a slowdown in North America, on the market, but we don't believe this is something that's gonna linger for that long.
Gotcha. And then one last one. So next year will be the second year of the two-year beet sugar agreement. Are you guys expecting any bumps in the road or any sore points to call out in anticipation of the negotiations?
Nate, it's Mike. It goes through the negotiations with all of our suppliers, and this, in this case, beet growers being one of them. It goes through its normal course, and, you know, we're the growers and ourselves are ready, getting ready to harvest this year's crop, and we'll turn our attention to the negotiations through the fall and into the winter, as we always do. I don't expect anything irregular to come out of that.
Thank you. I'll turn it over.
Thank you, Nate.
Thanks, Nate.
Next question comes from Frédéric Tremblay of Desjardins. Please go ahead.
Hi, good afternoon.
Hi, Fred.
Wanted to ask about the potential rail strike, you know, the impact of that on your ability to supply sugar to customers. Any sort of contingency plan that you can point to or thoughts on potential impact from the strike we may see?
Yeah, Fred, it's unfortunate that all of us as manufacturers in Canada continue to see this cycle coming around. We've been through a few of these in the last little while. As far as running our business, we're maximizing inventories at all locations in anticipation of a disruption. So inventory levels are high at all sites in all key markets, and we've put contingencies around on moving goods with the lack of rail service, should that happen. You know, but there's... You can't do everything. There will be disruption to Canadian manufacturing and all goods, it won't just be sugar. You know, we hope that the responsible parties will do the right thing for the industry in Canada.
Okay. And then, switching to maple, we've seen a couple of acquisition announcements in the space in the past few months. Wondering what your thoughts are in terms of, like, the impact of that on competitive intensity, promotional activity? I mean, generally, do you think, you think market consolidation is a good thing in maple or, or not?
Yeah, we've seen some activity and, you know, my first reaction is, it's good to see others are interested in this segment, and they're, they tend to be a bigger, more sophisticated players that are coming to the table. And I think that, that's, that'll augur well for investments and sustainability in the industry going into the long term. I don't see it changing our business course whatsoever, and I think it's good for the industry.
Great. That's all I had. Thanks for taking the questions.
Thanks, Fred.
Next question comes from Stephen MacLeod of BMO Capital Markets. Please go ahead.
Thank you. Good evening, guys.
Hi, Steve.
Hi. Another, apologize if you already addressed this. I had to jump on the call late. But just another strong quarter of adjusted gross margin per metric ton for the sugar business. So you know, I'm just curious if you can give a little bit of guidance or outlook around sort of where you see that number settling in, whether it's on a current year basis or a next year basis. You know, we've seen it obviously very strong for two quarters in a row now, and just wondering if there's any expectation for what we should expect over the longer term for that number?
Yeah, Steve, it's, it's JS here. I think, you know, the last two quarters were quite strong, especially if you compare it to prior year. I think I'd like to look at it on a, sometime on a trailing twelve months and average, because you need to reflect seasonality sometime in sugar and the type of orders we have. So, to say that we would have the same type of margin in the fourth quarter, well, that it usually depends on the mix. And looking at what we usually sell in the fourth quarter, a lot of it is industrial, which carries a bit of a lower margin, because it's big bulk sales. And so, I think overall, we believe that the pricing level we have with customers is at a level that will continue.
I think what's gonna make it vary between quarters is more around the type of mix we're gonna sell to the different type of customers. But we see the market as continuing to be strong, and that's part of the reason why we've been able to deliver strong quarters since the beginning of the year.
Right. Okay. No, that's, that's great, JS. And then similarly, on the, on the maple business, we've seen seen it improve kind of a couple quarters in a row here as well. You know, do you... is kind of a 10% gross margin level for the maple business, you know, a new run rate going forward?
I think that's a fair assumption. When we looked at it, we've been able to achieve that through the year. I think it's done two ways. I think we've been able to adjust our pricing over the last year and a half to reflect some of the inflationary pressures, but also internally, I would say we kind of right-sized the business from an operational standpoint and looking at efficiency, making some investments with short-term payback. I would definitely see 10% as something that is sustainable in the near future, considering the current market conditions.
Yeah, Stephen, if I can add to that.
Mm-hmm.
What you're seeing across both business segments is overall improved business performance. As we reflect on our Rogers Refined program that we talked about last quarter, it's about execution and delivering consistent, profitable growth in the business, and that's our focus and our track record. Now, if you look back, you know, we'll soon be hopefully, optimistically reporting our third record year in a row, as we said. So the track record's solid. It's not from a single dimension. It's from the overall performance of all the, all the segments of the business.
Yeah, that's great. Okay, appreciate it. Thanks, guys.
Thanks, Steven.
There are no further questions at this time. I'd now like to turn the call back over, to Mike Walton, President and CEO. Go ahead.
Thank you, everybody. Thanks for joining us today, and we look forward to updating you at the end of the year. Thanks a lot.
Thanks, everyone.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.