Good morning, and welcome to the Rogers Sugar 3rd quarter 2022 results conference call. After the speaker's presentation, there will be a question and answer session. To ask a question, you'll need to press star one on your telephone. To reach an operator at any time, please press star zero. As a reminder, this conference call is being recorded. I'd now like to turn the call 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-Sébastien Couillard, VP of Finance and CFO. During today's call, I will review the 3rd quarter results of 2022 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 archive recording of this call will also be available on our website. Before I discuss the 3rd quarter results, I want to bring your attention to the outcome of the operational review. Today, we are announcing our intention to expand our Montreal refining facility. This expansion will add approximately 100,000 metric tons of new capacity to the refinery and align our operations with the growing demand we see in Eastern Canada. It will also eliminate the need for transporting bulk sugar from our Vancouver facility, thus reducing costs and making that capacity available for other sales opportunities. The project is expected to cost approximately CAD 160 million and take 24 months to complete.
It will be built utilizing existing buildings adjacent to our existing refinery and can be constructed without disturbing our current operations. As part of the project, we will also be significantly upgrading our rail loading, railcar management operations in Montreal and at our distribution center in Toronto. Majority of this additional capacity will be shipped by rail to our Toronto distribution center for furtherance to customers in the Greater Toronto Area. Upgrading both of these areas is key to the project's success. This project is an exciting growth opportunity for Rogers Sugar that will help ensure the viability of the growing domestic food processing industry while also improving efficiency with our operations. Now turning to our 3rd quarter results. The 3rd quarter was another strong quarter for Rogers and our second consecutive quarter of record sales volume and record EBITDA, again driven by the strength of our sugar business.
Sugar demand remains firm, in particular in our industrial and liquid segments, where we are seeing increased demand for sugar-containing products across North America. In maple, we continue to experience delays between inflationary increases in our operating costs and recovery through higher pricing. While we expect these financial pressures to continue for the remainder of the fiscal year, we are beginning to see improvements in the supply chain. With COVID-19 volatility and supply chain-driven pressures abating, freight availability and rates are starting to improve. As logistics continue to improve, we expect timing delays will lessen volatility on volumes. As we finish up the last quarter of the fiscal year, underlying demand for sugar remains strong. As a result, we have increased our volume forecast for 2022 by 10,000 metric tons to 785,000 metric tons.
This increase is an addition to the 5,000 metric tons increase from last quarter. Given that over 85% of our adjusted EBITDA is driven from sugar, we continue to expect that the strong demand and improved margin in our sugar segment will more than offset lower demand and higher costs in the maple segment and result in improved financial performance over the last fiscal year. Now let's turn to our 3rd quarter results. As I mentioned, it was a record 3rd quarter for Rogers, driven by higher sugar adjusted gross margin and partly offset by higher costs in maple. Our sugar volumes reached over 203,000 metric tons in sales, an improvement of nearly 13,000 metric tons or 6.7% over last year. During the quarter, we saw growth across all segments, with industrial contributing the largest increase.
Our industrial segment increased by over 10,000 metric tons compared to the same quarter last year. This was due to increased orders, bulk orders in the segment as a result of higher demand from existing customers. We attribute some of this to a temporary supply disruption at one of our competitors, and therefore, we expect part of this growth to be more of a timing issue as some volume was pulled forward from Q4. In liquid, the business grew by 1,200 metric tons from the same period last year, mainly due to higher demand from existing customers. Our consumer business was largely in line with the same quarter last year as demand normalizes to pre-COVID levels. Trends experienced in the 2nd quarter continued into the 3rd quarter, with adjusted gross margin improving as a result of strong sugar demand and improved pricing.
This was partly offset by the inflationary environment which affected our operating costs. For the most part, we've been successful in passing higher costs on to our customers, and margins have improved alongside growing volumes. Improved production volumes and higher quality beets from our Taber beet crop this year also helped drive improved results in the 3rd quarter. As you may have seen in our press release, we are pleased to announce a multi-year supply partnership with Raízen to source certified non-GMO raw sugar for our Eastern Canada operations. Raízen is the largest individual sugar exporter on the international market based in Brazil. To ensure quality and traceability, the company has created a segregated, fully traceable raw sugar supply chain from planting to processing and transportation.
This non-GMO raw sugar will be refined at Lantic's Montreal facility and offered into both Canadian and export markets as part of our commitment to sustainability. Now turning to our Maple segment. In our Maple segment, adjusted EBITDA increased by CAD 200,000 in the 3rd quarter. This was largely due to higher consumer demand and improved pricing, partially offset by higher costs. Sales volumes increased in the 3rd quarter, driven mainly by timing of retail demand. As I mentioned, we are seeing global shipping issues and export carrier shortages slowly beginning to improve, leading to increased availability of freight and improvements in rates. As we are able to secure transportation for our product, we anticipate timing issues will begin to abate, leading to less volatility in volumes.
In the quarter, adjusted gross margin was impacted by a delay between the increase in operating costs and the price increases from our updated pricing strategy. The expected improvement in pricing to recover these unanticipated cost increases is not occurring as fast as initially anticipated. Price increases were delayed, largely a result of greater competition in the syrup market due to a slowing of global demand and a bumper maple crop for 2022, adding extra syrup to the market. Additionally, the timing of pricing negotiations on large contracts as they come up for renewal has also contributed to the delay in price increases. Over the next few quarters, we will focus on volume and securing all opportunities available to sell our syrup and maintain our share of the global market.
Over the past few months, a strong crop made possible by favorable weather conditions and the addition of millions of new taps has begun to replenish the strategic maple reserve. Although previously heavily depleted from poor weather conditions and two years of higher than expected demand, the excellent yields we have seen this season will start rebuilding reserve inventories and supply global demand. Turning to the tight labor market in Quebec, the wage increases that we previously implemented have stabilized, and we are seeing a positive impact in terms of employee retention.
Additionally, last quarter, I mentioned an immigrant labor plan to support production in Maple. Integration plans are underway for these recruits, and we will welcome new employees from Tunisia in the new fiscal year. The additional labor will help support the great work our employees are doing in Maple. To those who work for us across all of our operations, I want to say thank you for your care, your dedication throughout the volatility of the past few years. It has been greatly appreciated. Now I will turn the call over to J.S., who will provide additional information on the quarterly results.
Thank you, Mike, and good morning, everyone. In the 3rd quarter of 2022, our adjusted EBITDA was CAD 23.1 million, an increase of CAD 5.9 million from the same quarter last year. Higher adjusted EBITDA in the quarter was largely driven by higher adjusted gross margin in the sugar segment, partially offset by weaker results in our Maple segment. For the first nine months of 2022, adjusted EBITDA was CAD 73.2 million, up CAD 7 million from the same period last year, largely as a result of the strong performance of our sugar segment in the second and 3rd quarters. As Mike mentioned, this is the record EBITDA result for our 3rd quarter for our overall business.
We expect our strong results to continue for the remainder of 2022, driven by the strength of our sugar business segment, which represents over 85% of our activity. This will more than offset the current challenges we are experiencing in our Maple business, which are more exposed to the current volatility in the global economy. Let's start with a review of the strong results of our sugar business segment. adjusted EBITDA in the sugar segment was CAD 20 million in the 3rd quarter, up 40% over the same quarter last year. Our strong improvement was driven by continued firm demand for sugar and our ability to pass through market-driven cost increases to our customers. adjusted gross margin increased in the quarter, up CAD 6.5 million from the same quarter last year.
This improvement was driven by higher sales volume, improved customer pricing, and increased byproduct net contribution, partially offset by higher production costs due to inflationary pressures. As Mike mentioned, the bulk of the volume increase came from our industrial segment, and price improvement reflected price increases put through over the past few quarters. Production costs increased in the quarter, mainly attributable to higher volumes produced, along with market-based labor and energy cost increases. On a per unit basis, adjusted gross margin increased by almost CAD 25 per metric ton to CAD 139 per metric ton in the 3rd quarter of 2022. Adjusted gross margin per unit improved due to favorable customer pricing, higher volume, and strong operational performance delivered out of our three plants, including improved production delivered from our beet sugar plant in Taber, Alberta.
To this latest point, I would like to state that the beet quality this year was good, and it was not impacted by the unfavorable weather conditions that affected the last two years. As such, we were able to deliver just over 120,000 metric tons of sugar, which is aligned with our initial expectation. Distribution costs increased by CAD 1.3 million in the 3rd quarter due to higher freight costs and additional logistical costs incurred to support our supply chain as we transported sugar from west to east to meet higher than expected customer demand in Eastern Canada. As Mike mentioned previously, a portion of the 3rd quarter demand was attributable to issues encountered by one of our competitors and is therefore not recurring in nature.
Administration and selling expenditures remained largely unchanged from the prior year as a reduction in COVID-19 costs was offset by an increase in share-based compensation consistent with the last two quarters. Our outlook for the sugar segment remains strong for 2022. For the 2nd quarter in a row, given the strong customer demand we are anticipating, we are increasing our sales volume forecast for 2022. We are increasing our expectation by an additional 10,000 metric tons to 785,000 metric tons. The combination of higher volumes and margin increases from recent customer negotiations, along with the stability of our operations, are expected to drive improved profitability and stronger financial performance over the prior year. Let's now move to our maple segment. Our maple results were largely unchanged in the quarter from the same quarter last year.
Adjusted EBITDA in the 3rd quarter was up CAD 200 thousand as the benefit of increased revenue was largely offset by higher costs. Revenue increased by CAD 4.7 million as a result of higher volume and increased prices. Inflationary pressures continued to affect operating costs, particularly in higher packaging, freight, and energy costs, and resulted in adjusted gross margin of 8.2%, a reduction of 30 basis points from the same quarter last year. As Mike mentioned, some delays in passing through increased costs to customers are weighing on our margins, and the expected improvement in pricing and margin is not occurring as fast as initially anticipated due to the current volatile market conditions and the competitive dynamics of the maple business.
We expect inflationary pressures and market volatility to continue to unfavorably impact our maple business segment for the remainder of 2022, or until the impact of higher interest costs begins to put a damper on the economy. We are closely monitoring the impact of the current inflation pressures on the purchasing habits of customers as they relate to maple syrup. We believe this could negatively impact demand in the short term. In the meantime, we continue to manage our costs closely and focus on securing volume. At this time, I would like to add to the comment made by Mike earlier regarding the announcement we made today about our intention to proceed with an extension of our Montreal sugar refining facility and our related distribution network in Eastern Canada.
Over the past few months, we have performed a detailed review of the project and analyzed the expected financial return associated with our business assumptions, which are supported by the strong demand of the Canadian refined sugar market. Our conclusion is that extending our Montreal facility by up to 100,000 metric tons and our related eastern logistics network will allow us to continue to yield a strong financial return for our shareholders while supporting the growing Canadian food industry. We are considering different options to finance this exciting project. We are currently estimating the project will take about two years to complete at a total cost of approximately CAD 160 million. The project is using proven sugar refining technology and will be built in parallel to the current refining capacity of the Montreal plant.
We are working with different stakeholders, including financial institutions, business partners, and government authorities to finalize our financing. We intend to provide regular updates on the overall progress of our project periodically. In closing, I would like to highlight a few other related financial items. Our Adjusted Net Earnings for the 3rd quarter were CAD 8.4 million or CAD 0.08 per share, compared to CAD 4.2 million or CAD 0.04 per share for the comparable period last year. For the first nine months of 2022, Adjusted Net Earnings were CAD 28.5 million or CAD 0.27 per share, up from CAD 24.2 million or CAD 0.23 per share last year. Free Cash Flow for the last twelve months was CAD 49.5 million, an increase of CAD 7.4 million compared to the same period last year.
The increase was mainly due to higher adjusted EBITDA, excluding non-cash items, lower interest and capital expenditures, excluding value-added projects, and partially offset by higher income tax paid. Our capital expenditures for the first nine months amounted to CAD 9.7 million and were lower than prior-year equivalent of CAD 7.8 million. The variance is due to timing and execution delays caused by events outside of our control. We are targeting to spend up to CAD 20 million in 2022 on various capital projects. Today, we are also announcing that the board of directors approved a payment of CAD 0.09 per share dividend in relation with the results of the 3rd quarter, consistent with the dividend paid in previous quarters for the last several years.
In summary, we are reporting today strong 3rd quarter results driven by our sugar business, our largest business segment. We are closely monitoring the challenges of our Maple segment and are focused on maintaining market shares and improving margin over the next few quarters. We believe the overall strong financial results achieved thus far in 2022 will continue, allowing us to deliver stronger financial performance for 2022 as compared to 2021. We are committed to maintain the historical return provided to our shareholder and to support the Canadian food industry by providing high quality product to our customer. With that, I would like to turn the call back over to the operator for questions.
Thank you. If you'd like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. We'll pause for just a moment to compile the Q&A roster. Our first question comes from George Doumet from Scotiabank. Please go ahead. Your line is open.
Yeah. Hi, guys. Good morning. Maybe just getting started on the Montreal project. I know it's capacity related, but can you maybe talk to the payback either in IRR or EBITDA perspective you expect from the project? Maybe the extent of any potential disruptions you may see while transitioning production.
Good question. When we look at the project, we're expecting this is gonna yield a Return on Assets that is similar to our current business. The new production is aimed at increasing capacity for industrial customers, mainly in Ontario and also in Quebec. From a project standpoint, it's gonna be ran in parallel. It's almost like building another plant within our facility in Montreal, George. We're not expecting any potential big disruption. I mean, what we will do is some items are interconnected, but we will be doing those in our normal shutdown period that we have throughout the year. We do not expect that this will disrupt our current capacity in Montreal.
Okay. It looks like the project is gonna increase our leverage, well into the fours. Will this be internally funded? Maybe how should we think of the dividend, going forward?
Good question. First thing, just on the dividend side right now, we don't expect this will impact our ability to continue to pay a CAD 0.09 per quarter dividend. From a financing perspective, there are several options for us on the table. We're looking at options that are not gonna overly stress our leverage in the long term from a balance sheet standpoint. We're gonna take advantage of some of our existing tools, but we also have discussions that are well advanced with other different stakeholders in order to finalize a package that will achieve the objective, as I mentioned earlier, to not overly stress our balance sheet in the long term and move forward.
Okay. Maybe one last one on the Maple. I'm just wondering in general why it's taking longer than expected for pricing. Presumably, the extra costs are being felt by our competitors as well, I guess, south of the border. Can you maybe talk to that a little bit, please?
Yeah, sure, George. Good morning, George. It's Mike. The Maple business, the cost pressures were pretty immediate, as you can appreciate, with the inflation and freight and the things everybody in the food processing industry is facing. Some of the contracts that we have with our Maple supply, you know, largely private label, largely export-based business are more longer term contracts, and so in renewals, we bring in pricing where we can. The bottom line is it's still a very competitive space and, you know, you can get the pricing that the market will allow, and we continue to work at getting all the pricing we can.
All right. Thanks for the answers, guys.
Thanks, George.
Thanks, George.
As a reminder to ask a question, please press star followed by the number one. Our next question comes from Michael Van Aelst from TD Cowen. Please go ahead. Your line is open.
Hi, guys. It's Evan in for Mike.
Right.
I guess just starting on the capacity expansion in Montreal, just following up on what George asked, how many years of growth do you expect that it will take to fill up that capacity? Is there a certain level of volume or utilization that it'll take before it starts to contribute to EPS?
Well, I can speak to the volume and when we expect it to be consumed. It would be consumed, we expect, fairly soon after the capacity starts. It'd be a quick ramp up. We've seen in the news some other customers of ours, the existing customers that are bringing new production and new capacity to Canada as well. So that's been factored in. This is an analysis on volume we started back in 2020 to look and see where the Canadian market was going and what the influencers are. So we've lined this 100,000 tons up that we expect to be largely utilized early in its development.
Yeah. Maybe just a quick comment here from my side. Jean-Sébastien Couillard here. You know, when we looked at the demand that we have, part of it as well that we're gonna be able to use is the fact that we are moving sugar from the west to the east to serve our customers. That's gonna be one of the first thing that's gonna go in the project. The way the project is built, the way the assets are being built, the capacity will come online. There's not a long, like, ramp-up period from a capacity standpoint. The 100,000 metric ton will be available fairly quickly. Our salespeople have had several discussions with customers and most of the volume is pretty much committed, as we are right now, to different customers. We expect that it's gonna be increasing our financial EBITDA fairly quickly after the construction is completed.
Great, thanks. For your multiyear agreement with Raízen, are you expecting that volume to go to existing customers who wanna switch, or does it open up any new incremental business?
Yeah, this will be all for existing customers 'cause we'll be 100% on the sugar supply in Eastern Canada on the non-GMO cane basis.
Great, thanks. Just turning to admin and selling expenses on the sugar side, they came in a little lower than what I would've expected given the inflation. You know, even accounting for the lower COVID costs year-over-year. Was there anything else that was notable in that line item?
No, I think, I mean, if you, I think it's fairly consistent with what we were anticipating. Looking at the big impact this year is the Share-Based Compensation that is in comparison to last year, but there is nothing, you know. From an inflation standpoint, a large portion of those costs are payroll costs for our support team and administrative function, like sales, and all the business administrative functions. It's mainly payroll related, so it's not as impacted by inflation as other costs.
Okay, thanks. Last question, and you may have addressed this a little bit earlier, but I missed part of it. Can you just talk a bit about, you know, the competitive environment in maple and how you see that progressing over the next quarter or so?
Yeah, thanks, Evan. The competitive environment in maple hasn't changed. It's a very competitive space. The dynamics in that market are fluid, I would say. You know, now we're into an inflationary period where maybe consumers are more worried about the core staples in their basket than premium items like syrup. We're anticipating a slight softening in the volume overall, and we'll continue. You know, it's a surplus crop. A lot of syrup in the market this year, so we'll continue to support our appetite to maintain our global market share and compete as we need to in the market. It will always remain a competitive space.
Okay. I guess that kind of implies, like, could we expect volume growth in the 4th quarter?
No, I would not look for volume growth in the 4th quarter. You know, our volumes are stable. You know, a little softer than last quarter, but they're stable, and we don't expect any big changes in volume at this time.
Okay, great. That's it for me. Thank you.
We have no further questions in queue. I'd like to turn the call back over to Mike Walton for closing remarks.
Thank you, operator. We'll look forward to speaking to everybody in the coming months, and as more updates come available. Have a good day.
This concludes today's conference call. Thank you for your participation. You may now disconnect.