Rogers Sugar Inc. (RSI) Earnings Call Transcript

Welcome to the Rogers Sugar Inc. Third Quarter Results Conference Call. [Operator Instructions] 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 measures 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 now turn the call over to Mike Walton, President and CEO of Rogers Sugar.

Thank you, operator, and good morning, everyone. Welcome to our third quarter call. Today, I'll take you through the key developments in both Sugar and Maple, share an update on the LEAP Project and the labor agreements we reached during the quarter, and then hand it to J.S., our Chief Financial Officer, for the detailed financials. After J.S., I'll return with our outlook for the balance of fiscal 2026 before we open the line for questions. Our investor presentation is posted on the Investors section of our website, if you would like to follow along. Let me start by stepping back for a moment. The operating environment we are navigating has not become simpler since we last spoke. Trade policy between Canada and the United States remains in flux. Global demand for some food products is softening, and cost pressures across our operations have not abated. We are not pretending otherwise. What we are also seeing, and what major North American grocery retailers have noted in recent weeks, is a more cautious consumer. Value-conscious shoppers, in particular, are pulling back on basket size and purchase frequency across prepared food categories. Food inflation is affecting purchasing behavior broadly. That is the environment our customers are navigating, and that is the environment we are managing through. More recently, we have seen some easing in input costs. Raw #11 sugar prices have moderated from the elevated levels of recent years, and cocoa prices have also retreated from their highs. For our industrial customers in the confectionery sector, this is a welcome development and one that may support a gradual improvement in demand over time. Within that macro and uncertain environment, our business is performing with the kind of stability that we have spent years building toward. Rogers Refined sets us up well for exactly this kind of setting. Sugar remains a fundamental ingredient in a wide range of food products. Domestic demand is steady. Our domestic franchise is intact. And on the operational side, this quarter delivered 2 milestones that matter well beyond fiscal 2026, which I'll speak to shortly. On to our results. For the third quarter of fiscal 2026, we reported adjusted net earnings of $16 million compared with $17 million in the same quarter last year. On a per share basis, adjusted net earnings were $0.13, consistent with the prior year. Consolidated adjusted EBITDA for the quarter was $36 million. For the first 9 months of the year, adjusted EBITDA was nearly $121 million compared with $111 million over the same period last year. That year-to-date improvement reflects the continued strength of our Sugar segment through a period that has required real discipline to navigate. In the Sugar segment, the underlying quarterly performance was essentially in line with last year, which, given the volume environment, is a result we are satisfied with. Sugar sales volume in the third quarter was approximately 188,000 metric tonnes, a decrease of approximately 3,000 metric tonnes compared to the same period last year. The largest driver was lower liquid volume, primarily related to the loss of a large customer that closed its facility in Western Canada. Industrial volume was modestly higher, reflecting improved demand from the confectionery sector. It is good to see this important segment of our business starting to show signs of recovery. Export volume was marginally positive, a slight recovery from the suppressed levels we saw in the first half of the year. In the Maple segment, performance was in line with the same period last year, but below our expectations. Global demand for maple syrup has softened in recent months, driven by the impact of food inflation on consumer spending. We have adjusted our full year volume expectations accordingly. As you know, we are managing Maple with commitment to cost discipline, and we aim to deliver top quality products and unparalleled customer service. The third quarter results reflect Rogers Refined is doing exactly what it is designed to do. The framework keeps us focused on the things we can control, providing excellent service to our customers, improving production efficiency and managing costs prudently. Volume will move around. What we are building is a business that delivers consistently across variable market conditions. Today's results demonstrate that. I want to spend a moment on 2 exciting developments from the quarter. On June 11, we reached a new 5-year collective labor agreement with the main union at our Montreal facility, running through May 2031. Reaching that agreement during an active construction program while the refinery was operating took real commitment from both sides, and I want to acknowledge that. It gives us the workforce stability we need through the LEAP commissioning period and into the years when the new capacity begins contributing. Also, on June 26, we extended the collective agreement at our Taber sugar beet factory through March 2032. Taken together with the Vancouver agreement reached in 2024, we now have labor certainty across our production network, and we will now sharpen our focus on ensuring our operating models are efficient and effective in supporting the market. That matters as we move into fiscal 2027 and beyond. Now let me update you on the LEAP Project. The project is moving into its final phase. Most major equipment is now installed at the Montreal plant, and we successfully tested the raw sugar melting process, one of the most significant operational steps we have taken to date. We have also advanced the deployment of logistics infrastructure, piping and electrical assets. The focus now shifts to operational readiness and further commissioning activities. Our teams are working methodically through that process with the same planning and safety discipline that has characterized this project from the start. LEAP remains within our expected total cost range of $280 million to $300 million, and we continue to anticipate the incremental refining capacity starting to come online in the first half of calendar 2027. That timeline is unchanged. I want to set appropriate expectations on what LEAP will deliver in the near term. When this capacity comes into service, it will add optionality, particularly in the Ontario market. The ramp-up will be gradual. The full commercial contribution will build over time as domestic demand increases. We are building for the long term and are confident of the sustainable underlying demand for this essential product. Now I'll hand it over to J.S. for a review of our financial performance.

Well, thank you, Mike, and good morning, everyone. I will now take you through the financial results of the third quarter and the first 9 months of fiscal 2026. For both periods, the Sugar segment has exceeded our expectations, supported by domestic demand and improved margin, while the Maple segment has delivered results below our expectations due to recent challenging market dynamics. Adjusted net earnings for the third quarter were $16 million or $0.13 per share compared to $17 million or $0.13 per share in the same period last year. For the first 9 months of 2026, adjusted net earnings were $60 million or $0.47 per share, an improvement of $7 million or $0.06 per share compared with the first 9 months of fiscal 2025. Consolidated adjusted EBITDA was $36 million for the quarter compared with $37 million last year for the same period. For the first 9 months of 2026, adjusted EBITDA at $121 million was $10 million higher than the same period last year. Revenues were $294 million for the quarter compared to $320 million in the same quarter last year, a decrease of 8%, primarily driven by lower average Raw #11 prices, which had limited impact on our profitability given our hedging program. Lower volumes in both business segments also contributed to the reduction in revenues for the quarter. Our free cash flow for the trailing 12 months came in at $90 million, a slight increase from the same period last year. That improvement was driven by higher adjusted EBITDA and lower capital expenditures in our ongoing operations, excluding the LEAP Project, partially offset by timing of income tax payments and higher interest costs. Free cash flow is how we contribute to the financing of LEAP, service our debt and fund our dividend. The recent trend is healthy and providing us with the expected flexibility. As I'm discussing our financial results, I would like to point out that our operations and related costs have not been materially impacted thus far by the current situation in the Middle East. Our proactive hedging strategy was successful in mitigating the potential impacts on energy costs, Raw #11 price variation and transportation and logistic cost increases. Going forward, we will continue to be proactive and prudent in our approach to manage the risk related to this evolving situation. I'm now turning to the individual business segments, starting with our Sugar segment, which drives almost 90% of our profitability thus far this year. For this segment, adjusted EBITDA was $32 million for the quarter compared with $33 million last year. Let me walk you through the main drivers. Adjusted gross margin for the quarter was $46 million, slightly down from the same period last year. Worth noting, this segment absorbed a $3 million nonrecurring noncash pension charge for past service costs related to the collective agreement we reached in Montreal a few weeks ago. Beyond that, higher production costs and the effect of lower sales volume contributed to the lower adjusted gross margin. Those unfavorable variances were largely offset by higher contribution from refining-related activities, reflecting a favorable pricing and mix of products sold and lower raw sugar procurement-related costs. On a per unit basis, adjusted gross margin was $245 per metric tonne in the third quarter compared with $243 per metric tonne in the same period last year, a modest improvement, reflecting the items previously discussed, including the nonrecurring pension adjustment of $3 million. For the first 9 months of fiscal 2026, Sugar adjusted gross margin was $146 million, an increase of $17 million compared to the same period last year. The improvement reflects higher refining contribution, lower sugar procurement costs and certain nonrecurring favorable items recognized in previous quarters, partially offset by lower volumes sold and the nonrecurring pension charge recorded in the third quarter. Distribution costs were slightly higher in the quarter, reflecting increased shipments from Western Canada to support Eastern market demand. Administration and selling expenses were lower in the third quarter by $0.5 million compared with the same period last year as prior year severance costs were partially offset by higher compensation expense related to long-term incentive, which are based on our share price. Now moving on to the Maple segment, where challenging market dynamics have negatively impacted financial results in 2026, especially in the third quarter as our results were below our expectations. Adjusted gross margin for the third quarter is a story of offsetting factors. Improved pricing, but lower syrup costs held adjusted gross margin essentially flat at $5.5 million despite lower volume and market-based increases in production costs. The adjusted gross margin percentage for the quarter was slightly higher than last year, but still below our expectations at 8.6%. Adjusted EBITDA in the Maple segment for the third quarter was slightly lower than last year at approximately $4 million. For the first 9 months of 2026, adjusted EBITDA was just below $17 million, a decrease of approximately $3 million from the same period last year, reflecting the challenging market conditions discussed previously. The focus for the remainder of fiscal 2026 is straightforward: continue to manage costs carefully, protect margin and market share and ensure we are well positioned to serve our customer and deliver quality products for both of our business segments. Turning to our balance sheet and related liquidity position. At the end of the third quarter, we had drawn $116 million on our revolving credit facility. The total face value of convertible debentures outstanding was $173 million following the January issuance of the 9 series debentures, the proceeds of which were used to reduce the revolver balance. We maintain a prudent and diversified funding platform of convertible debt, equity, internally generated cash flow and access to credit facilities. This strong financial position gives us the flexibility to complete the LEAP Project and execute on our strategic priorities of investing in our businesses and maintaining a consistent distribution to our shareholders. The LEAP financing plan is working as designed. The combination of equity raise, the IQ loans, our credit facility and the free cash flow this business generates gives us the funding to see this project through to completion. Thus far, we have spent $207 million on the LEAP Project. And as Mike mentioned previously, we are maintaining our cost forecast for the project, which is ranging between $280 million and $300 million. Regarding our liquidity, I'm glad to report that we have recently extended the term of our revolving credit facility from March 2030 to July 2031. Finally, the Board has declared a quarterly common share dividend of $0.09 per share at its meeting yesterday, payable on or before October 21. We have paid a quarterly dividend to our shareholders without interruption for over 16 years through commodity cycles, a global pandemic and now a period of significant trade uncertainty. That consistency is something we are proud of and committed to maintaining. With that, I will turn the call back over to Mike.

Thank you, J.S. Let me close with some thoughts on the outlook. For fiscal 2026, we expect to deliver solid overall results. The Sugar segment has performed ahead of our expectations despite this trade environment, and we have modestly raised our full year volume forecast to 745,000 metric tonnes, reflecting a moderate recovery in industrial and export demand in recent months. That said, the expected full year volume is still below that of our fiscal 2025, with most of the reduction attributable to lower margin export sales and lower liquid volumes. On tariffs, our working assumption continues to be that current market dynamics will prevail through the end of fiscal 2026 and that there will be no significant adverse changes to CUSMA in the near term. The direct impact on our domestic business has been limited thus far. We are monitoring the situation closely, and we have the flexibility to adjust our commercial strategy if conditions shift. I also want to note that on July 2, the Canadian International Trade Tribunal initiated an expiry review of the 2021 trade measures on imported refined sugar. The review will determine whether continued protection is warranted, and a final decision is expected by May 2027. We are engaged in that process, and we'll keep you informed as it progresses. For the full year, in the Sugar segment, we anticipate that the Montreal refinery will continue to operate at full capacity, and we will continue to leverage our Western facilities to meet customer commitments. In Taber, the 2025 beet campaign produced approximately 103,000 metric tonnes, slightly above expectations. We have planted approximately 24,000 acres for the 2026 campaign, which is 1,500 acres more than last year. Production and maintenance costs are expected to increase modestly, driven by market-based cost increases and annual wage adjustments. Our multiyear energy hedging program continues to mitigate the impact of natural gas price variability. For Maple, we anticipate results in fiscal 2026 will be lower than fiscal 2025, reflecting the reduction in global demand and its impact on margins and business support costs. We are managing the business carefully, and we have the syrup and supply in place to meet customer demand. In closing, the third quarter delivered on what Rogers Refined is designed to produce, stable, margin-focused performance even in a challenging environment alongside meaningful operational progress, 2 long-term labor agreements, a LEAP Project entering commissioning on schedule, consistent free cash flow and a dividend we have maintained without interruption. These achievements mean we are well positioned to continue delivering steady financial performance over the quarters to come. Within this operating environment, we will increase our emphasis on the coming quarters on execution, sharpening our focus on opportunities to drive cost out of this business where possible without impacting customer experience. Before I hand back to the operator, I want to acknowledge our teams. Managing through a complex trade environment while simultaneously working on a major facility expansion takes real commitment at every level of the organization. I am proud of the work our people are doing and grateful for the continued trust of our customers and partners. With that, we are ready to take your questions.

[Operator Instructions] Your first question comes from Derek Lessard with TD Cowen.

It's Evan in for Derek. I had a few questions. So I guess, first on the Sugar business. Your gross margin was quite a bit better than what I was expecting, particularly considering that it included the $3 million noncash charge. It looks like volume mix had a lot to do with it. But I was wondering what was behind the $1.3 million of lower raw sugar procurement costs and if there was anything else in there besides mix that helped during the quarter.

Evan, it's J.S. here. The variance in raw sugar procurement is really -- we were able to secure some delivery from our raw sugar, which is cheaper than last year. And so that explains -- we had a couple of vessels in the quarter that came in and were cheaper for us. So that's not something that is going to be recurring. And also, a lot of the -- when we look through the year, there was a timing of maintenance activity. So if you look at our quarter, I think we mentioned that we signed a new labor agreement. So as we were approaching -- when we were during negotiation, we didn't do as much maintenance. We did some in the previous quarter, and then we got to do some in the fourth quarter.

And then you also mentioned increased demand from the confectionery sector. Is this from existing customers? And should we be expecting industrial volumes to trend higher over the next 3 quarters because of that?

Evan, it's Mike. We are pleased with what we're seeing as some of the turnaround in that important sector in our business. The demand increase we've seen is from existing customers. And some of them are publicly traded. You can follow them as well, and they're reporting growth for the first time in a few years in that sector. And we hope that that continues. Given lower cocoa prices and lower #11 values, the combination of both makes it a little easier on the consumers at retail.

And then just one on Maple. So the gross margin was lower than the 10.7% you had in Q2 and was lower than what I was expecting. Can you talk a bit about what drove the drop versus Q2? I know you mentioned higher production costs year-over-year. So maybe you can explain what was driving that and if we should see similar pressure in Q4?

Evan, J.S. again. We had a few unexpected. We did a bit more maintenance in the quarter, which had an impact on our margin. We're still targeting to end the year at around 10%. I think that's where we've been maintaining and that's the target we've had in the last few years. Now it is becoming a very, very competitive market. As Mike mentioned during the call, we've seen demand going down a little bit. I'll talk going forward, I think we'll see a little bit of recovery. And that impacts the competitiveness and the ability to get pricing out of customers. And so that would explain a little bit of the reduction in margin. We are still looking at our customer portfolio, aiming at a 10% for the year.

Your next question comes from Nevan Yochim with BMO Capital Markets.

Hoping you could provide a bit more detail just on the improvement you're seeing in the export volume outlook. Is this related to underlying customer demand? And then how does ongoing CUSMA renegotiations and tariff changes play into this dynamic?

Yes. Thanks for the question. The export demand is, as you know, for us, it's always just an opportunistic volume sale for us. And it's been lumpy, to put it mildly, for the last 12 months with the tariffs on Brazil and off on Brazil and sometimes on again. And as you know, Montreal is a large Brazilian supplied refinery, although we do have other origins from time to time that allows us to take advantage of lower duty to send refined sugar into the U.S. I want to remind folks that the refined sugar sales directly into the U.S. is a very, very small portion of our business. It's a low-margin return for us. It's less than 5% to 10% of that business on an annual basis. And so we get a little bit of opportunity, we take advantage of it if it makes sense for us economically. And then when it doesn't, it doesn't. But it's going to be lumpy through the rest of this trade environment that we're in. And as far as CUSMA goes, we'll wait and see. As we said all along, we'll focus on what we control. It's good to see folks apparently back at the table again. But until something is sorted out, we're not going to speculate on what impact it could or may not have on our business. So far, as you know, it has had very minimal impact on the sugar business directly at all, and we're optimistic that we'll continue to navigate positively through this chaotic environment. All food manufacturers in Canada are facing the same challenges. So we're all in the same basket.