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. (TSX:RSI) (the "Company") for the three months
and year ended September 29, 2012.
Results for the fourth quarter and fiscal years 2012 and 2011
are as follows:
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For the three months ended For the year ended
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September 29 October 1 September 29 October 1
2012 2011 2012 2011
(unaudited) (unaudited) (unaudited) (unaudited)
(In metric tonnes)
Volume 164,539 170,880 641,573 649,078
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(In thousands of
dollars)
Gross margin $ 18,077 $ 33,507 $ 77,861 $ 96,849
Expenses:
Administration and
selling 4,625 5,396 18,923 20,005
Distribution 2,380 2,432 8,334 7,960
Results from
operating
activities ("EBIT") 11,072 25,679 50,604 68,884
Net finance costs 2,451 3,385 9,695 15,361
Income tax expense 1,677 5,763 10,648 11,669
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Net earnings $ 6,944 $ 16,531 $ 30,261 $ 41,854
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Fourth quarter volume decreased by approximately 6,400 metric
tonnes compared to the same quarter of fiscal 2011. Both industrial
and consumer volumes were lower in the fourth quarter of fiscal
2012 by approximately 6,200 and 2,200 metric tonnes, respectively.
Industrial volume was lower due to the loss of a major contract at
the start of the calendar year and to the transfer of production of
some sugar containing products outside of Canada. The decrease in
consumer volume was due mainly to timing in deliveries. This was
partially offset with higher export sales of approximately 1,800
metric tonnes and to higher liquid volume of approximately 200
metric tonnes during the quarter, due to additional shipments to
existing customers.
For the year, total sales volume of 641,573 metric tonnes
represented a decrease of 1.2% over the previous year. The total
volume decrease of approximately 7,500 metric tonnes is due mainly
to lower industrial volume of approximately 34,600 metric tonnes
and lower consumer volume of approximately 3,700 metric tonnes,
partially offset by higher export volume of approximately 29,900
metric tonnes and higher liquid volume of approximately 800 metric
tonnes.
The increase in export sales volume of approximately 29,900
metric tonnes in fiscal 2012 was due mainly to a special refined
sugar quota of 136,078 metric tonnes opened, effective October 3,
2011 by the U.S. Department of Agriculture, of which 25,000 metric
tonnes was allocated directly to Canada and the balance of 111,078
metric tonnes to global suppliers on a first-come, first-served
basis. The Company through its cane refineries was able to enter
approximately 10,000 metric tonnes against the global quota by the
time it closed on October 25, 2011. An additional volume of
approximately 17,600 metric tonnes of beet sugar was entered
against the Canada specific quota by the date the quota closed on
November 30, 2011. In addition export sales volume to Mexico and
other destinations was slightly higher than the previous year.
The liquid volume increase of approximately 800 metric tonnes in
fiscal 2012 is due mainly to some recovery of HFCS substitutable
business. Industrial volume was lower by approximately 34,600
metric tonnes during the year due mainly to competitive activity in
that segment and to the transfer of production of sugar containing
products to non-Canadian plants by certain customers. Consumer
volume was lower by approximately 3,700 metric tonnes due in large
part to the decrease in retail volume by certain customers and
timing in customers' retail promotions.
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 margins which reflect the operating income without
the impact of the mark-to-market of derivative financial
instruments and embedded derivatives in non-financial
instruments.
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Gain / (Loss) For the three months ended For the year ended
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September 29 October 1 September 29 October 1
(In thousands of 2012 2011 2012 2011
dollars) (unaudited) (unaudited) (unaudited) (unaudited)
Mark-to-market
adjustment $ (3,776) $ 3,532 $ (14,243) $ 20,278
Cumulative timing
differences 157 4,489 (10,088) (7,104)
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Total adjustment
to cost of sales $ (3,619) $ 8,021 $ (24,331) $ 13,174
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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 loss of $1.9 million was
recorded on sugar futures, as world raw sugar values decreased
slightly from June 2012 levels. This resulted in a year-to-date
mark-to-market loss of $5.6 million. For natural gas, a
mark-to-market gain of $1.0 million was recorded for the quarter as
natural gas prices increased, however a mark-to-market loss of $3.6
million was recorded for the year as natural gas prices were mainly
lower during the year. Foreign exchange forward contracts and
embedded derivatives on which foreign exchange movements have an
impact had a combined mark-to-market loss of $2.9 million for the
quarter and of $5.0 million for the year as a result of the
movement of the Canadian dollar versus the U.S. dollar.
The cumulative timing differences are as a result of
mark-to-market gains or losses which are recognized by the Company
only when sugar is sold to a customer and when natural gas is used.
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 the
mark-to-market results to arrive at the total adjustment to cost of
sales. For fiscal 2012 the consolidated operating results will
increase by the total cost of sales adjustment loss of $24.3
million, while fiscal 2011 consolidated operating results will
decrease by the cost of sales adjustment gain of $13.2 million to
arrive at the adjusted operating results of these two years.
The Company also recorded a mark-to-market gain of $0.2 million
for the quarter as compared to a loss of $0.5 million in fiscal
2011 for an interest swap. For the year a gain of $2.1 million was
recorded as opposed to a gain of $0.9 million for fiscal 2011 as
interest rates continued to decline during the year. In addition,
under IFRS, the conversion feature in the convertible debentures,
while the Company was operating under the income trust structure
for the period of October 1, 2010 to December 31, 2010, is an
embedded derivative. This derivative was fair valued at the opening
and the closing of that reporting period and the net change in the
fair value between each reporting period of $3.8 million was
recorded as an expense in fiscal 2011.
Total adjustment to net earnings before income taxes and free
cash flow for the quarter was a loss of $3.4 million compared to a
gain of $7.6 million in fiscal 2011 and a loss of $22.2 million for
the year compared to a gain of $10.2 million in fiscal 2011.
Adjusted financial information is as follows:
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For the three months ended For the year ended
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September 29 October 1 September 29 October 1
(In thousands of 2012 2011 2012 2011
dollars) (unaudited) (unaudited) (unaudited) (unaudited)
Gross margin as per
above $ 18,077 $ 33,507 $ 77,861 $ 96,849
Adjustment as per
above 3,619 (8,021) 24,331 (13,174)
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Adjusted gross
margin 21,696 25,486 102,192 83,675
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EBIT as per above 11,072 25,679 50,604 68,884
Adjustment as per
above 3,619 (8,021) 24,331 (13,174)
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Adjusted EBIT 14,691 17,658 74,935 55,710
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Net earnings as per
above 6,944 16,531 30,261 41,854
Adjustment to cost
of sales as per
above 3,619 (8,021) 24,331 (13,174)
Adjustment for mark-
to-market interest
rate swap (211) 467 (2,119) (855)
Adjustment for IFRS
transition on
option of
convertible
debentures - - - 3,782
Deferred taxes on
above (570) 1,943 (5,448) 3,595
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Adjusted net
earnings $ 9,782 $ 10,920 $ 47,025 $ 35,202
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For the quarter adjusted gross margin decreased by $3.8 million.
The adjusted gross margin rate was $131.86 per metric tonne as
compared to $149.15 per metric tonne in fiscal 2011. The decrease
of $17.29 per metric tonne was due mainly to an adjustment of
approximately $2.6 million, or approximately $15.20 per metric
tonne, recorded in the last quarter of fiscal 2011, as a reduction
to depreciation expense, following a review of all property, plant
and equipment which resulted in the extension of their useful
lives. Without this adjustment the adjusted gross margin rate would
have been approximately $2.09 lower due mainly to the lower
consumer volume, which has a negative impact on the overall
adjusted gross margin rate.
Year-to-date the adjusted gross margin rate of $159.28 is $30.37
higher than the previous year. The increase is due mainly to the
sales mix with higher margin export sales and lower industrial
sales volume at a lower margin. In addition in fiscal 2011 large
premiums were paid for some of the raw sugar supply bought during
the year which had a negative impact on adjusted gross margin.
Normally, most raw cane sugar requirements are sourced in advance
under long term contracts but in fiscal 2011 some of these long
term contracts were ending and therefore some volume had to be
sourced on a prompt basis, in a period when raw sugar supply was
very tight. As a result, significant premiums were paid on
approximately 20% of the raw sugar purchased in fiscal 2011.
The significant increase in the adjusted gross margin resulted
in a record EBIT for the year of $74.9 million, $19.2 million more
than fiscal 2011.
Distribution costs were comparable to the last quarter of fiscal
2011, but higher by approximately $0.4 million year-to-date due to
additional shipments to the U.S. Administration costs were lower by
approximately $0.8 million compared to the same quarter in fiscal
2011 due mainly to lower legal, doubtful accounts and incentive
provision expenses. Year-to-date administration expenses were lower
by approximately $1.1 million due mainly to lower pension expenses
and to lower legal and consultant fees for the year.
Finance costs for the quarter were $0.9 million lower than the
comparable quarter of fiscal 2011, due to a decrease of $0.2
million as a result of lower borrowings and to a swing of $0.7
million in the mark-to-market of the interest swap which had an
income of $0.2 million in fiscal 2012 versus a loss of $0.5 million
in fiscal 2011. Year-to-date finance costs are lower by $5.7
million due mainly to lower interest on convertible debentures of
approximately $0.9 million, to a mark-to-market gain of
approximately $2.1 million versus $0.9 million in fiscal 2011 for
the interest swap and to a loss, in fiscal 2011, of $3.8 million on
the option of the convertible debentures partially offset with
costs incurred on the write-off of deferred financing cost of
approximately $0.8 million.
The reduction in interest costs on the convertible debentures is
due to the redemption of the third series 5.9% convertible
debentures of $77.1 million in the first quarter of the year,
replaced with the fifth series 5.75% convertible debentures of
$60.0 million. The lower value of the convertible debentures and
lower interest rate reduced total convertible debentures finance
costs for the year. With the redemption of the third series,
unamortized deferred financing costs of approximately $0.8 million
were expensed in fiscal 2012.
Year-to-date a mark-to-market unrealized gain on the swap of
$2.1 million was recorded in fiscal 2012 as opposed to a gain of
$0.9 million in fiscal 2011, the increase due mainly to the passage
of time of the interest swap which expires in June 2013.
Under IFRS, the conversion feature in the convertible
debentures, while we were operating under the income trust
structure for the period of October 1, 2010 to December 31, 2010,
is an embedded derivative. This derivative was fair valued at the
opening and the closing of that reporting period and the net change
in the fair value between each reporting period of $3.8 million was
recorded as an expense in the first quarter of fiscal 2011.
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 amount, 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 GAAP. 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:
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(In thousands of
dollars) For the three months ended For the year ended
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September 29 October 1 September 29 October 1
2012 2011 2012 2011
(unaudited) (unaudited) (unaudited) (unaudited)
Operating
activities:
Cash flow from
operating
activities $ 22,747 $ 42,389 $ 47,793 $ 22,915
Adjustments:
Changes in non-
cash working
capital (11,596) (23,550) (14,417) 35,697
Changes in non-
cash income taxes
payable (389) (2,658) 5,113 (8,689)
Changes in non-
cash interest
payable (1,566) (2,204) 315 350
Mark-to-market and
derivative timing
adjustments 3,408 (7,554) 22,212 (10,247)
Financial
instruments non-
cash amount 170 5,075 1,699 5,636
Capital
expenditures (4,699) (4,317) (9,183) (8,128)
Investment capital
expenditures 372 15 694 175
Net issue (buy
back) of
securities 90 - 352 275
Deferred financing
charges - - (2,716) -
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Free cash flow $ 8,537 $ 7,196 $ 51,862 $ 37,984
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Declared
dividends/cash
distributions $ 8,469 $ 7,551 $ 32,915 $ 32,714
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Free cash flow for the quarter was $1.3 million higher than the
comparable quarter in fiscal 2011, due mainly to the timing of cash
pension contributions versus last year. Year-to-date free cash flow
was $13.9 million higher than the previous year. The increase is
due mainly to the increase in adjusted results from operating
activities of $19.2 million. This was partially offset with the
payment of deferred financing charges of $2.7 million on the
issuance of the fifth series debentures, the higher pension cash
contributions and capital investments made during the year.
Quarterly dividends were increased to 9 cents per share
effective May 2, 2012. For the first two quarters of fiscal 2012
and the last three quarters of fiscal 2011, quarterly dividends of
8.5 cents per share were paid. For the first quarter of fiscal
2011, a quarterly distribution of 11.5 cents per unit was paid
under the income trust structure.
OUTLOOK
In fiscal 2012, approximately 30,000 metric tonnes of industrial
and liquid volume was lost following the negotiation of key
customer contracts in December 2011 and to the transfer of sugar
containing products to non-Canadian plants by certain customers. As
most large customers' contract negotiations were concluded by the
time the Company was notified of this loss, such volume could not
be replaced in fiscal 2012. However, the Company has already
contracted additional volume with existing and new accounts for
fiscal 2013, as winning back domestic volume remains a high
priority.
With the current U.S. and Mexico crop outlooks it would appear
that no special U.S. quotas will open in fiscal 2013 and therefore
export sales could be significantly lower in fiscal 2013. However,
to provide additional and more stable export sales, the Company
will continue to investigate other export opportunities similar to
those developed several years ago in Mexico.
While the total sweetener market decreased slightly this past
year, we believe this trend will not continue over the next number
of years as the market should revert to a small percentage
increase, in-line with the population increase. The reduction in
fiscal 2012 was more a reflection of some manufacturing of sugar
related products moving out of Canada. In addition the price of
corn has reached new highs in the last number of months. This could
have a positive impact as some HFCS substitutable business may
switch to liquid sucrose if high corn prices prevail and if raw
sugar values continue to decrease.
The harvest and beet slicing campaign in Taber began in the
second half of September. Early indications are favourable as the
yield per acre harvested and the extraction rate achieved to date
are above forecast. Taber's beet crop acreage, currently being
harvested, is approximately 30,500 acres. If current harvesting
conditions continue, we should derive approximately 105,000 tonnes
of beet sugar for fiscal 2013. This volume will be higher than the
combined sales forecast for the domestic market normally supplied
from Taber and for the export sales under the U.S. Canada specific
quota and to Mexico. If other export or domestic opportunities do
not occur, Taber will have to warehouse some beet sugar until next
year. This would increase total distribution costs.
Less than half of fiscal 2013's natural gas requirements have
been hedged at average prices comparable to those realized in
fiscal 2012. Any un-hedged volume should benefit from the current
low prices of natural gas and therefore increase the adjusted gross
margin rate. In addition, futures positions for fiscal 2014 to 2015
have been taken. Some of these positions are at prices higher than
the current market values, but are at the same or better levels
than those achieved in fiscal 2012. We will continue to monitor
natural gas market dynamics with the objective of minimizing
natural gas costs.
In the current financial environment, return on pension plan
assets may vary from historical plan performance. This, combined
with the discount rate used in assessing the plan liabilities, may
impact pension plan expenses in future years. Pension cash
contributions were increased following this year's actuarial
valuations and may increase in the future, as and when new
actuarial valuations are done.
FOR THE BOARD OF DIRECTORS,
Signed
A. Stuart Belkin
Vancouver, British Columbia - November 21, 2012
Contacts: Mr. Dan Lafrance SVP Finance, CFO and Secretary (514)
940-4350 (514) 527-1610 (FAX) www.lantic.ca
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