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Edited Transcript of RSI.TO earnings conference call or presentation 1-Aug-19 9:30pm GMT

Q3 2019 Rogers Sugar Inc Earnings Call

VANCOUVER Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Rogers Sugar Inc earnings conference call or presentation Thursday, August 1, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Holliday

Rogers Sugar Inc. - President & CEO

* Manon Lacroix

Rogers Sugar Inc. - VP of Finance, CFO & Secretary

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Conference Call Participants

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* Endri Leno

National Bank Financial, Inc., Research Division - Associate

* Frederic Tremblay

Desjardins Securities Inc., Research Division - Analyst

* George Doumet

Scotiabank Global Banking and Markets, Research Division - Analyst

* Michael Van Aelst

TD Securities Equity Research - Research Analyst

* Stephen MacLeod

BMO Capital Markets Equity Research - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to Rogers Sugar's Third Quarter 2019 Results Conference Call. After the presentation, we will conduct a question-and-answer session, which will be open to financial analysts. Instructions will be given at that time. Please note that this call is being recorded today, August 1, 2019 at 5:30 PM Eastern Time.

I would now like to turn the meeting over to John Holliday, Chief Executive Officer. Please go ahead, Mr. Holliday.

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John Holliday, Rogers Sugar Inc. - President & CEO [2]

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Thank you, operator, and good afternoon, ladies and gentlemen. Joining me for today's conference call is our CFO, Manon Lacroix. Similar to our last call, I will use the call to take the time to provide a broader context of the business providing some insights on what is working, what are our challenges, and where we're going on the evolution of our business strategy.

I believe it is important to look at the quarter in a broader context of what the business has achieved over the last 5 years, which has been to increase our EBITDA from circa CAD 60 million to CAD 100 million, and perhaps more importantly, begin to transform our business from a sugar refiner to a natural sweetener supplier.

Although the results to-date on the Maple business have underperformed our expectations, it is fair to say the last 3 -- so it's fair to say that the last 3 fiscal years, the core Sugar business has been above trend line performance. Our overall objective in the diversification strategy is to deliver profitable growth for all segments. We believe it is important -- also important to recognize that diversification will reduce our exposure to a single sector -- to single sector challenges and help us to deliver business platform growth for the long-term future expansion -- and long-term future expansion.

Let's first talk about our core Sugar business. Results for the quarter reflect a good recovery from the Vancouver refinery challenges we faced in the second quarter. Volumes remain strong. In fact, on a year-to-date basis, we are exceeding last year's shipments in all domestic categories. Operating margins were within expected results and manufacturing costs were within our expectations. The Vancouver refinery made significant progress towards achieving the targeted refining and cost performance outcomes for the project. The focus is now directed towards process optimization and operating controls.

Montreal and Taber facilities each performed well in the quarter. The Taber Thick Juice campaign ended in mid-July and has shown very good yield. In fact, we expect the 2018 crop to exceed last year's record crop. We contracted 28,000 acres of sugar beets in 2019. The crop isn't developing well and we expect 2019 campaign to start in mid-September similar to our prior last -- to our prior year. The Taber emission project will be complete on-time and on-budget at the end of August, providing for an on-plan commissioning effort.

During the quarter, we saw the much-anticipated announcement of a new refining competitor. As we have shared in our prior calls, we will follow these developments closely. History has shown us that quality, security of supply and operational flexibility altogether, represent our value proposition to our customers. We will continue to invest in our efforts to deliver and compete on this basis.

As shared in the -- our last quarterly call, altogether in the last 5 years, our national volume has increased by roughly 100,000 metric tons. Conversion of liquid customers from high fructose corn syrup to sugar and increased exports volumes have driven this growth. Although we can see the growth trend decreasing, we do anticipate modest compound annual growth rate in the next 12 months, this of course, excluding any impact from the ratification of the new USMCA agreement.

As a result, the general market conditions for our Sugar business remain positive. As previously shared, we will return to our recent trend line core business capital spend of roughly CAD 20 million in FY 2020. ROI capital in 2020 will focus on plant automation, and process efficiency. These investments are helping us to a lower operational costs and expand our production capabilities and improve our overall network reliability to help service our increased sales demand.

Looking now at the Maple business. Despite a difficult quarter, we remain resolute about the longer-term benefits of this business, and just as importantly, believe the diversification strategy is critical for long-term growth. Disappointing third quarter results and a reduction in our guidance sourced to 2 issues. One, which is well within our control to resolve, and one which will require more time and the benefit of prior experience with competitive market -- markets in our core Sugar business to work through.

The first issue I want to highlight is a lower-than-planned operating efficiency of the new plant configuration. The onboarding of transferred accounts in Degelis and Granby were first delayed by slower-than-expected customer approvals, which created a backlog of orders, which were then hurt by production inefficiencies that made it difficult to work through the backlog of orders. Temporary interim manufacturing solutions for both Degelis, Granby has been developed and will be in place before the end of the fourth quarter. Though we obviously see this as a temporary situation, the benefits from the footprint optimization will not be fully realized until the second quarter of fiscal 2020 once the move to the new Granby location is completed and the equipment is fully commissioned.

More impactful in the quarter was the competitive response to slower market growth and the entrance of a new competitor. Overall, we are now projecting that the global market for maple syrup growth to have slowed from 7% to 8% at the time of acquisition to 2% to 3%. This contraction coupled with a new market entrant has significantly intensified the competitive environment.

In the quarter, we experienced 1 volume loss in Europe, which was subsequently recovered at the end of the quarter due to a delivery failure by the new [bidder]. Margins on new contract renewals have been somewhat disappointing.

We faced this competitive environment in our core Sugar business in the past. In this environment, we will defend our market share where necessary and continue to invest to become the low-cost producer in the market. Our experience has shown over time, this approach has proven to be the most effective way to work through these marketplace challenges.

In our view, the growth in the Maple business comes from 3 areas; consumption in the traditional retail outlets, product use in non-traditional or alternative applications leading to higher per capita consumption, and thirdly, market penetration or new market penetration.

In view of the intensified competitive environment in the traditional retail space, we have taken a more defensive position in this channel. In contrast, we will strengthen our focus and investment in efforts to increase per capita consumption and find new markets to sell maple syrup. We have invested in this alternative channel, growth strategy from the onset. And despite a longer selling cycle, we will continue -- we continue to believe that this offers the best path to profitable growth.

Our long-term view of the overall business remains unchanged. We continue to monitor the market trends in order to gain a better perspective on new opportunities and threats in the natural sweetener space. As previously discussed -- pause for a second, in the natural sweetener space as previously discussed. Our portfolio -- our areas of interest remain the same, and at the right time and when integration on the Maple acquisition are closer to completion, we will review alternative natural sweetener opportunities.

Before handing the call over to Manon, to review a detailed sales and financial results, I want to emphasize that the business -- emphasize that we have got our core business back on track after a very difficult second quarter, and our outlook in this business remains positive.

Despite below expectation outcomes in the quarter on the Maple business, we remain confident in our long-term strategies and believe we can overcome the challenges we faced in the quarter and return to a position of continuous improvement and overall long-term trend of improved financial results.

With that, I will hand the call over to Manon.

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Manon Lacroix, Rogers Sugar Inc. - VP of Finance, CFO & Secretary [3]

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Thank you, John. I will now go over the third quarter result, starting with the Sugar segment. Looking at the volume for the current quarter in more detail, we are reporting an increase of approximately 3,100 metric ton for the consumer segment, mostly explained by additional deliveries to a national retailer following the acquisition of new regions at the beginning of the quarter. Also positive is the liquid segment, which continue to show a meaningful increase when compared to the third quarter of last year of approximately 6,200 metric ton. The increase for the quarter is mainly explained by strong demand from new and existing customers, as well as the recapture of high fructose corn syrup substitutable accounts.

Offsetting these 2 increases is a decrease in the Industrial segment of approximately 5,900 metric ton mainly due to timing in delivery, as well as sales to a competitor in the third quarter of last year that did not reoccur this current quarter.

Finally, the export segment was approximately 4,900 metric ton lower than last year due to a decrease in shipments to Mexico and timing of deliveries of other export contracts. Considering all of the above, the net overall volume for the third quarter decreased by approximately 1,500 metric tons.

Adjusted gross margin for the 3rd third quarter amounted to CAD 21.2 million compared to CAD 20.7 million for the same quarter last year, representing an increase of approximately CAD 0.5 million. As anticipated, the second quarter commissioning issues at the Vancouver refinery continue to have some impact in the current quarter, albeit to a much smaller extent and represented approximately CAD 0.6 million in one-time additional cost. Excluding the additional cost associated with the commissioning issues, adjusted gross margin for the quarter would have been CAD 1.1 million above last year, mainly due to the favorable sales mix with an increase in the consumer and liquid segments, combined with a decrease in industrial volume.

In addition, the increase in by-product revenues was also beneficial when compared to the same quarter last year. These 2 factors are also the main contributing factor for the increase in -- of approximately CAD 7 in adjusted gross margin per metric ton, and excluding the impact of the commissioning issues of approximately CAD 3 per metric ton.

Distribution costs and administration and selling expenses were both CAD 200,000 above last year's comparable quarter. Additional transfers between location explain the former, while the latter is mainly explained by timing. Overall adjusted EBITDA for the quarter amounted to CAD 15.5 million or CAD 16.1 million, when excluding the incremental commissioning costs of CAD 600,000, which would have been approximately CAD 0.5 million above last year.

Year-to-date volume ended at approximately 24,500 metric ton or approximately 5% above last year. All domestic segments were higher than the comparable period with industrial volume up approximately 8,400 metric tons, consumer volume of approximately 4,100 metric tons and liquid volume approximately up 13,800 metric tons. The increases in the liquid and consumer segments for the 9-month period are consistent with the reason explained earlier for the quarter. However, the strong demand experienced for the industrial segment In the first half of the year was somewhat tempered by the third quarter decrease.

As for the export segment, volume was approximately 1,800 metric ton lower due mainly to timing in deliveries. Year-to-date, the commissioning issues at the Vancouver refinery, excluding distribution variances added approximately CAD 4.6 million in one-time costs. These operational costs including -- included inefficiencies and refining such as over time, additional refining material, additional and inefficient gas consumption, recycling of sugar and lower sugar yield. The commissioning issues also led us to purchase refined sugar in the second quarter from competitors at a premium to a typical production cost, in order to supply our customers and minimize the disruption.

In addition, the natural gas supply in Western Canada was very tight during the winter months, in particular in February, where we saw natural gas transportation cost increase to unforeseen levels, which compounded the increase in natural gas cost for the second quarter.

On a per metric ton basis, these non-recurring costs reduced adjusted gross margin by approximately CAD 8 per metric ton. Therefore, excluding the commissioning issues and excluding a non-cash pension plan income of CAD 1.5 million recorded last year, adjusted gross margin for the 9 months period amounted to CAD 74.3 million versus CAD 72.4 million last year, which represents an increase of CAD 1.9 million year-over-year. The adjusted gross margin improvement is mainly explained by the increase in volume in the second half of the year, by the third quarter, adjusted gross margin improvement, as a result of a more favorable sales mix and a higher by-product revenue and somewhat offset by the impact on number #11 raw sugar values in the first quarter of the current year.

On a per metric ton basis and excluding the Vancouver commissioning issues, adjusted gross margins stood at approximately a CAD 136 per metric ton. This compares to approximately CAD 129 per metric ton last year, when excluding the non-cash pension plan income. The decrease is mainly explained by the impact of the lower #11 valued in the first quarter of this year.

For the current year, administration and selling costs were CAD 0.6 million higher than the comparable period last year, mainly explained by timing and a higher employee benefit. Distribution costs were CAD 1.8 million above last year, of which CAD 0.8 million of the increase relates to freight costs incurred, the transfer of refined sugar from the Montreal refinery, and Toronto distribution center to the western market to supply our western customers as a result of the Vancouver commissioning issues.

The remainder of the increase versus last year is mainly due to an increase in sales volumes and some transfers between locations unrelated to the Vancouver issue. Overall adjusted EBITDA for the Sugar segment was CAD 53.5 million versus CAD 59.8 million for the 9 months of fiscal 2018. Excluding non-recurring items for both fiscal year, adjusted EBITDA was CAD 58.9 million or CAD 600,000 above the comparable period last year.

Now I'll turn to the Maple product segments, and start with the third quarter results. Revenues for the quarter were CAD 5.1 million lower than last year. As John mentioned, competitive activities led us to lose a significant account in the quarter, but was regained by the end of the quarter. Nonetheless, the loss of this account during the quarter, mainly explain the reduction in revenues quarter-over-quarter.

In addition, a footprint optimization project resulted in short-term capacity constraints, which are being addressed, but impeded production and caused certain delivery delays. Adjusted gross margins for the quarter decreased by CAD 1.9 million when compared to the last year and ended at CAD 11.2 million of revenues versus 13.9% last year. The adjusted gross margin reduction is mainly explained by margin contraction, as a result of an increased competitive landscape, as well as lower volume. Operational inefficiencies also had somewhat of a negative impact on adjusted gross margin.

As a result of lower revenues and lower adjusted gross margin, adjusted EBITDA for the third quarter amounted to CAD 3.3 million versus CAD 4.7 million last year.

Now turning to the year-to-date results, revenues amounted to CAD 150.3 million, representing a decrease of CAD 0.2 million versus the same period last year. The positive impact from the full quarter [Decacer] in fiscal 2019 was more than offset by a decrease in revenues for the past 2 quarters. Adjusted gross margin ended at CAD 17.9 million, a decrease of CAD 1.8 billion. The decrease here is consistent with the current quarter's result, namely a decrease in volume, margin contraction and some inefficiencies, as a result of the operational footprint optimization for the past 2 quarters.

In addition, the benefits from a full quarter at Decacer in fiscal 2019 were offset by an increase in the cost of syrup in the second quarter for purchases out of the maple syrup reserve from the (inaudible) at a premium price as opposed to a discount last year. The lack of certain grades of syrup also added production challenges in the second quarter and increased overall syrup cost.

Adjusted EBITDA for the first 9 months of the current year was CAD 12.1 million compared to CAD 13.9 million last year. On a consolidated basis, adjusted EBITDA for the quarter was CAD 18.8 million or CAD 1.5 million lower than last year. Year-to-date adjusted EBITDA was CAD 65.6 million or CAD 7 million lower than the first 9 months of last year. Consistent with the past quarters, we have modified our free cash flow table to present the trailing 12 months free cash flow as opposed to a quarterly cash flow. We believe that this trailing 12 months is more indicative of the company's performance and reduces the timing effect within the free cash flow.

Therefore, for the current trailing 12 months, free cash flow amounted to CAD 34.1 million or CAD 9.9 million lower than -- compared to the previous trailing 12 months. The decrease is mostly explained by the higher interest and income taxes paid, as well as higher capital spending as our operational excellence CapEx.

We are pleased to confirm that the corporation declared a dividend of CAD 0.09 per share to shareholders of record on September 28, 2019 and payable on or about October 21, 2019. The total payout is estimated at CAD 9.5 million.

I will now turn to the outlook for the remainder of fiscal 2019. Once again, I will start with the Sugar segment. Our volume expectations for the remainder of the year remain unchanged, with an increase of approximately 25,000 metric ton versus fiscal 2018. Therefore, we expect that our total volume for the last quarter of the year should be comparable to last year. We should continue to see an increase in the liquids segment as a result of new accounts contracted in the first quarter, as well as some additional conversion from high fructose corn syrup to liquid sucrose. We anticipate an overall increase versus fiscal 2018 of approximately 17,000 metric ton. We expect that the consumer volume should increase by approximately 6,000 metric ton, as a result of incremental volume gain from the addition of new region with an existing customer.

For the full year, the industrial segment should increase slightly, while we anticipate the export deliveries should be slightly lower. The change in government in Alberta has also brought some changes to the Carbon Tax regime for the province. The Carbon Tax was the polished on June 1, and as a reaction to this, the federal government announced it will impose a Carbon Tax to Alberta should the government remain without a Carbon Tax regime. A lot of recent uncertainties remain with regards to Carbon Tax, but we expect that no tax should be paid until December 31, 2019. And as a result, we expect approximately CAD 1 million in savings for the first quarter of fiscal 2020.

Now turning to the Maple product segment. John has discussed the issues we have encountered for the integration of the maple syrup business, mainly regarding an increase in competitive activities. We have also experienced some challenges with the footprint optimization that will delay its benefit. We are putting some measures in place to increase capacity until the Granby plant has moved to its new location and equipment are fully commission.

Production movement between locations has started and will continue, but will only be optimal once the new Granby location is fully up and running. As a result, our fiscal 2019's expectation for adjusted EBITDA were decreased to approximately CAD 16 million. Capital spending for the Sugar segment will increase this year due to the execution of the air emission project in Taber, whereby a range of CAD 6.5 million to CAD 7 million should be spent in the current year. The remaining spend on capital projects should be comparable to the prior period -- prior year. The air emission project started in April and is expected to be completed by the end of the fiscal year. In addition, the Maple product segment is expected to spend approximately CAD 4.5 million in fiscal 2019 in Granby and individually for the footprint optimization project, with an additional CAD 2.5 million to be spent in fiscal 2020.

With that, I would like to turn the call back over to the operator for the question session.

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Questions and Answers

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Operator [1]

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Absolutely. (Operator Instructions) Your first question will come from the line of George Doumet of Scotiabank.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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On the Maple business, can you maybe talk a little bit about what product categories or maybe what end-markets were impacted by this new entrant?

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John Holliday, Rogers Sugar Inc. - President & CEO [3]

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New entrants is competing in the retail -- traditional retail space in North America and in Europe. So does that answer your question?

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [4]

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Yes, I'm just wondering, I mean, given that the production issues [weren't]done over there, is your expectation that they continue to compete and potentially impact our market share?

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John Holliday, Rogers Sugar Inc. - President & CEO [5]

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I think our view on this kind of new market entrant and it's hard to give you anything definitive, kind of use the -- I'd use the old adage that low prices saw low prices and they are competing today. Our response to that is that we're going to defend our business. That's our first response. Our second response is we're going to finish the work we started on becoming more competitive or the low-cost producer. And our third response is to continue the efforts we've made to find opportunities for growth in new markets that haven't been opened or by developing new product opportunities that have not been pursued in the past.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [6]

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Okay. And should we expect the previous CAD 19 million of EBITDA guidance you guys gave for this year? Do we -- should we start it to be obtained on a run rate basis starting in the second quarter of fiscal '20 or should that be higher, given that we should by then have all the plan -- new plan or the efficiency sorted out?

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Manon Lacroix, Rogers Sugar Inc. - VP of Finance, CFO & Secretary [7]

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Well the -- all the investment that we've done in Granby individually, we've said before, it's ROI projects. So you would have your typical 4 to 5-year payback period. So that's definitely going to start as of mid-year next year, but the unknown is the competitive environment. That is something that we'll monitor and as John said, we'll aggressively compete and keep our market share.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [8]

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Okay. And maybe shifting gears to the Sugar business, a lot of transitory issues this year. Looking to next year in terms of the --- should we expect adjusted gross margins to be kind of in the CAD 135 to CAD 140 per metric ton range roughly?

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Manon Lacroix, Rogers Sugar Inc. - VP of Finance, CFO & Secretary [9]

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Well, there should be an improvement next year because the -- well, the mix will be --

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John Holliday, Rogers Sugar Inc. - President & CEO [10]

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Mix is good.

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Manon Lacroix, Rogers Sugar Inc. - VP of Finance, CFO & Secretary [11]

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Slightly more favorable. We said that we were -- we have additional consumer business, so that will -- that started mid-year and we'll continue forward the year after. So that will be positive on an adjusted gross margin.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [12]

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Okay, great. Just one last one on the CapEx number for next year. I think, John, you mentioned it was CAD 20 million, is that accurate?

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John Holliday, Rogers Sugar Inc. - President & CEO [13]

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That's correct. That's a range -- we're going to go back to the range that we were operating in the prior year. This year was an exception, and we noted why. 2 activities needed to be done and we've got those completed. So if there is a little bit of say bleed over which Manon talked about, it would be that, but essentially we will budget -- from a budgeting basis on a -- similar to the prior year.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [14]

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So, CAD 20 million and CAD 23 million, all in for both segments?

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John Holliday, Rogers Sugar Inc. - President & CEO [15]

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All-in for both is a good range. Yeah. I think just on the other point on margins, the other thing that we won't have a repeat on is, we obviously had a bit of a hiccup on our Sugar business relative to Vancouver. So that in itself is a material change -- will be a material change in margin between 1 year and the next.

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Operator [16]

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Your next question will come from the line of Stephen MacLeod of BMO Capital Markets.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [17]

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I just wanted to follow up on Maple business, just in terms of the competitive environment. Can you just talk a little bit about when you saw competitive activities begin to sort of peak and have they abated at all?

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John Holliday, Rogers Sugar Inc. - President & CEO [18]

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Where they became most evident, we were aware that it was a new entrant coming into the market probably 12 to maybe 16 months ago, that there were some indication. We were made aware for what knowledge we had that they were going to participate in maple business, potentially honey, agave, a whole portfolio of different syrups. Their presence in terms of kind of having any impact competitively where we started to recognize more clearly what they were going to do and how they were going to compete, did not occur until June of this year or May. So that sort of time frame is when we started to see the behaviors that they were having in terms of trying to participate in this market.

And I can't answer. This is temporary or longer term. We can't really judge that. It would impossible for us to say. What we can say is, what we've said already. We are going to defend our position, that's for sure. And we're going to get lower in our operating costs, that's for sure. And we're investing in new places where we can grow or where we don't have to rely on that traditional retail space for growth or margin improvement.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [19]

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Right, okay. And it sounded as though, if I understood correctly, some of the impact in the quarter was due to a specific customer loss, and then you regained that customer, is that the way you interpret that?

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John Holliday, Rogers Sugar Inc. - President & CEO [20]

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That's absolutely correct.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [21]

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Okay, that's helpful. And then, I guess maybe just looking to the following year, are you able to -- are you in any position just to talk about how you expect the EBITDA to evolve in the Maple side when you get into fiscal 2020?

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Manon Lacroix, Rogers Sugar Inc. - VP of Finance, CFO & Secretary [22]

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Yes, no, at this point, we can't elaborate. We could tell you that the -- there will be an improvement, because of the savings we've mentioned. And once we're fully up to speed on the operational footprint optimization, but other than that, we can't elaborate on the forecast for next year.

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John Holliday, Rogers Sugar Inc. - President & CEO [23]

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Yes. So I mean, at the end of the day, we're going to go through a competitive environment. It's a long-term game to sort of deal with this and kind of bring the business back to the growth levels and profitability that we want.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [24]

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Okay, that's great. And then just on the Sugar business, the industrial market specifically, I mean I know you didn't change your guidance or your expectation for volumes, but it looks like there was a bit of give and take on the mix. And I was just curious what happened -- what caused the industrial volume expectation to go from -- expectation to be up 7,000 metric tons to now, up slightly?

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Manon Lacroix, Rogers Sugar Inc. - VP of Finance, CFO & Secretary [25]

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Yes. Well the second quarter was lower than I anticipated. There were some timings that were not forecasted metric. And I've mentioned versus last year, we had sold to our competitor that did not [reoccur] it. So that we knew about it, but it's really because of timing and we don't think that we're going to recover it in the next quarter.

But like I said, it's like -- overall it's going to be up slightly for the industrial segment.

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Operator [26]

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And your next question will come from the line of Michael Van Aelst of TD Securities.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [27]

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Can you clarify the last comment on the timing for the industrial business, because if you are recovering it in Q4, what exactly do you mean by timing?

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Manon Lacroix, Rogers Sugar Inc. - VP of Finance, CFO & Secretary [28]

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Well, we have some big accounts that were lower than the previous year. It's account that we share with our competitor. So it could be some timing, but like we didn't foresee it. Like at the end of the day last quarter, we had said the industrial segment was going to be about [6000, 7000] higher. It's going to be slightly above last year overall in this new forecast, but the difference is minute, like it's really like less than --

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John Holliday, Rogers Sugar Inc. - President & CEO [29]

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Not material enough. Scope of the size of that segment is not really material.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [30]

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The retail customer that you won or the like the extra regions, how much of that will flow into next year, how much additional retail volumes?

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Manon Lacroix, Rogers Sugar Inc. - VP of Finance, CFO & Secretary [31]

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Our volume increase this year is mainly attributable to this new -- the new regions and we have it for half the year. [So double about it].

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John Holliday, Rogers Sugar Inc. - President & CEO [32]

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Next year, we should be maybe plus an additional [4] if the category was totally flat.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [33]

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Okay. And then the Maple bottling competitor, where are they located?

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John Holliday, Rogers Sugar Inc. - President & CEO [34]

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Thetford Mines in Quebec.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [35]

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So did they buy their quota from someone else then?

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John Holliday, Rogers Sugar Inc. - President & CEO [36]

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They have -- I don't -- I can't be speculative for me to tell you exactly how they will get their supply, but that's where they are located. They were previously a customer of the industry, and today they are now a competitor of the industry. So they were buying and now they've turned their efforts to actually bottling for themselves in the province of Quebec.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [37]

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Okay. So did they lose their -- like did they just -- the lost business that you're talking about, is that because they just took their own in-house and you were supplying them before, or is it completely different?

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John Holliday, Rogers Sugar Inc. - President & CEO [38]

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Well, I didn't say us, but said the industry was -- they were being supplied by the industry and now they're being self-supplied out of their own facility. So, that's their base business.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [39]

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Okay. So, in a supply-managed environment, how are these guys taking volume away from others? Like don't they have to get the quota?

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John Holliday, Rogers Sugar Inc. - President & CEO [40]

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They have to get the quota. They have 3 pass, they can get the quota, or they can get supply directly from the producers. They could get supply through an agent or they could get supply on a allocated basis through the strategic reserve. Those are the 3 sources of supply that they have available to them.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [41]

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Okay. And when you talk about the CAD 16 million in guidance for this year and for Maple adjusted EBITDA, does that include or exclude that CAD 1.1 million of non-recurring?

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Manon Lacroix, Rogers Sugar Inc. - VP of Finance, CFO & Secretary [42]

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It excludes it. It's not [EBIT].

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [43]

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All right. And I don't know if you're willing to tell me this, but if you hadn't lost that customer temporarily, how much -- what would the difference have been in your EBITDA this quarter?

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Manon Lacroix, Rogers Sugar Inc. - VP of Finance, CFO & Secretary [44]

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Well, if you say -- like most of the decrease in revenues for the quarter were because of this customer. I would say, call it CAD 4 million. So if you're applying like roughly the margin that we have, that would be the impact for the quarter for that customer.

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Operator [45]

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Your next question will come from the line of Endri Leno of National Bank.

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Endri Leno, National Bank Financial, Inc., Research Division - Associate [46]

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A couple for me. On the Maple side, the customer that you had lost and regained, was that under the same margin when you regained them or was it the margin to match the competitor?

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John Holliday, Rogers Sugar Inc. - President & CEO [47]

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Very similar margin that we had prior. Yeah.

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Endri Leno, National Bank Financial, Inc., Research Division - Associate [48]

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And next question on Maple, on the operational efficiencies that you're planning, that you're investing on and planning, what do you expect on the margin, do you think it will have for the next year in terms of basis points like incremental business?

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John Holliday, Rogers Sugar Inc. - President & CEO [49]

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I think you might have to do the math on that. Again, we talked a couple of times around the investment of around CAD 6 million. We've talked about the ROI which will drive -- you will be able to calculate it, and the benefit that we will achieve on an annualized basis, when I was pointed out that we're late, err than we want it to be, so probably end of second quarter, we get the full sort of run rate of that. So if you use half the year with the full run rate and something less than that in the first half of the year, you can probably add those things together and sort of get a number, an answer. Those are the inputs you need. I don't really want to try and calculate it on the call.

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Endri Leno, National Bank Financial, Inc., Research Division - Associate [50]

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I'll do that. And the last one on the Sugar side of business, what kind of impact, if any, do you expect from that competitor in Hamilton?

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John Holliday, Rogers Sugar Inc. - President & CEO [51]

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I think, as I said, we're going to do what I have said, we're going to compete on the value proposition we think is important, and I think we've heard it loud and clear from our customers that security supply is absolutely critical, flexibility is absolutely critical, quality is absolutely critical. So, if that's our value proposition and we stick to that and we deliver on it, I think will be -- we'll do okay.

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Operator [52]

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And your next question will come from the line of Frederic Tremblay of Desjardins.

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [53]

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First question on the Maple market. John, I believe you mentioned that the margin growth slowed to 2% to 3% from 7.8% from -- when you acquired the businesses. Any idea why such a large decline and you think it's permanent, then we reached sort of a mature state in the industry?

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John Holliday, Rogers Sugar Inc. - President & CEO [54]

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I tried to provide you our insights to where we think growth comes from. We think the growth comes from kind of, I guess, the traditional retail, which is just regular people consuming. So maybe the population grows, you get a little bit of growth out of that through just normal distribution. We think growth comes from people using the product differently than the traditional use. So that's another growth factor that is either people using in marinades or it being used in maybe industrial applications versus retail. And then I think the other growth aspect comes from funding new markets, distribution in China, distribution in a retailer that didn't actually carry the product in the previous quarter. That's the -- that's the third leg. So our -- and again, these are all are -- we can't prove the implications of any one of those 3 components that drive growth. But I don't think the retail side of it has really changed. But it is possible that you're not seeing as much conversion and people using it for different applications or those application opportunities have not yet been developed. And you could speculate that maybe the growth that they were -- we've seen in the past, where people are going from Canada to South Korea to Indonesia to a different country in Europe, those opportunities are maybe a little less available because some of those activities have already been done. So that is I think also one

of the areas where we might have seen their growth top off a little bit.

But anyways, as you said -- as we said in our call, we are investing in trying to find new opportunities for growth. So we're going to continue to push on those on the latter 2 of the impact areas. Anyways, as you said, as we said in our call, we are investing and trying to find new opportunities for growth. So we are going to continue to push on those on the latter 2 of the impact areas.

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [55]

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Okay. And in the Maple segment still, have you seen any customer losses, specifically related to your temporary capacity constraints and delivery delays or have you seen any impact on that?

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John Holliday, Rogers Sugar Inc. - President & CEO [56]

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No. Negative to that.

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [57]

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Okay. And last question for me. On the balance sheet, maybe Manon, your thoughts on deleveraging going forward, especially given the lower CapEx next year.

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Manon Lacroix, Rogers Sugar Inc. - VP of Finance, CFO & Secretary [58]

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Yes. The deleveraging will definitely -- are our next priority for next year.

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Operator [59]

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We have an additional question from Stephen MacLeod of BMO Capital.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [60]

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Just sort of a follow-up question. Just with respect to the Maple contract loss, it size-wise seemed somewhat material. So it was a CAD 4 million impact. And I'm just curious, can you talk a little bit about like how did you -- when you lost that, how did you gain it back? If it wasn't margin dilutive, presumably you gain it back on something other than price and I'm just curious.

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John Holliday, Rogers Sugar Inc. - President & CEO [61]

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They called us because their supply chain that they developed with this alternative supplier did not materialize. It was not -- it didn't deliver on the promise.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [62]

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Okay. So it sounds as though the new competitor maybe --

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John Holliday, Rogers Sugar Inc. - President & CEO [63]

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It wasn't -- where it was -- to be more clear, it wasn't a competitor in Canada, it was somebody in Europe who had taken the -- they felt that they could buy the bulk syrup here, packet and supply at a lower cost than our supply chain. It didn't turn out to be true.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [64]

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Oh, I see. So it wasn't necessarily the -- it wasn't the new entrant that you're referring to?

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John Holliday, Rogers Sugar Inc. - President & CEO [65]

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Correct.

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Operator [66]

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We have no further questions at this time, I will now turn the call back over to the presenters.

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John Holliday, Rogers Sugar Inc. - President & CEO [67]

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Thank you everybody for your questions, we will catch up to you at the end of the fourth quarter. Have a good evening.

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Manon Lacroix, Rogers Sugar Inc. - VP of Finance, CFO & Secretary [68]

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Thanks everyone.

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Operator [69]

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This concludes today's conference call. You may now disconnect