MONTREAL, QUEBEC--(Marketwire - Feb. 1, 2011) - Rogers Sugar Inc. (TSX:RSI)
Conversion of the Fund to Rogers Sugar Inc. Took Effect January 1, 2011. Higher Volume in Export, Consumer and Industrial Sales Segments
Message to Unitholders: On behalf of the Board of Trustees, I am pleased to present the unaudited consolidated financial results of Rogers Sugar Income Fund (the "Fund") for the three months ended December 31, 2010.
Volume for the first quarter was 159,697 metric tonnes, as opposed to 156,413 metric tonnes in the comparable quarter of last year, an increase of approximately 3,300 metric tonnes. Export volume was higher by 6,000 metric tonnes due mainly to sugar sold in the U.S. while paying U.S. Tier II duty. These sales completed commitments initiated last fiscal year in the U.S. under the Tier II duty program. Industrial volume was higher by approximately 3,400 metric tonnes due to timing of deliveries. Consumer volume was also higher by 2,300 metric tonnes as a result of additional business contracted earlier in calendar 2010. Liquid volume decreased by approximately 8,400 metric tonnes as the decline in this segment continued due to higher values of raw sugar versus lower priced high fructose corn syrup.
With the adoption of new accounting policies October 1, 2006 for derivative financial instruments, the Fund's operating results may now be subject to significant fluctuations. These fluctuations are due to the mark-to-market of all derivative financial instruments and embedded derivatives in non-financial instruments at the end of the reporting period. 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 Fund during the reporting period, which are comparable to the earnings reported in previous periods. All these non-GAAP adjustments are explained in detail in the Management's Discussion and Analysis prepared for the quarter ended December 31, 2010. We will therefore 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. At the end of the first quarter, a mark-to-market gain of $14.4 million before income taxes was recorded, thus increasing earnings before income taxes by that amount. Most of this gain is due to the higher price of raw sugar that currently prevails in the marketplace. These mark-to-market charges are non-cash amounts and have therefore no impact on distributable cash.
For the quarter, adjusted gross margin decreased by approximately $0.1 million, when compared to the same quarter of last year. On a per metric tonne basis, adjusted gross margin was $165.43 compared to $169.26 for the comparable quarter of last year. The decrease in the adjusted gross margin rate is due to raw sugar premiums incurred on approximately 35,000 metric tonnes of raw cane sugar purchased on a spot basis, during the quarter. This additional cost more than offset the positive benefits of a good sales mix and of higher values of raw sugar for Taber's domestic beet sugar sales.
Adjusted EBIT of $19.8 million was $0.1 million higher when compared to the same quarter last year in part due to lower distribution costs as a result of lower shipments from Vancouver to Taber.
For the quarter, adjusted distributable cash was $18.3 million, as compared to $18.8 million in fiscal 2010. The decrease was due mainly to a provision for current income taxes at the operating company level. During the first quarter, the Fund distributed $10.1 million.
The Taber beet sugar slicing campaign was completed on December 30, 2010. We are now estimating total sugar beet production at 86,000 metric tonnes, when the thick juice campaign is completed in the spring of 2011, some 22,000 metric tonnes higher than last year.
Currently, raw sugar supply is very tight due to a lower Brazilian crop in 2010 and lower than anticipated crops in Australia and Central America. As a result, raw sugar prices have increased drastically, and significant premiums to the # 11 raw sugar values are being charged for nearby raw sugar deliveries. For fiscal 2011, Lantic had over 75% if its raw sugar requirements already purchased at the start of the year. The remaining 25% was contracted in December 2010, but at premiums over the raw sugar values. Accordingly, the premiums will negatively impact the gross margins per metric tonne if Lantic is unable to increase its selling margins.
In Taber, approximately half of the remaining domestic volume to be sold has been pre-hedged at values close to 20 cents per pound. In the event that raw sugar prices remain firm for the balance of this fiscal year, Lantic would benefit from the higher value of raw sugar on approximately 10,000 tonnes being the remaining volume not yet priced by customers.
On November 1, 2010, the Canadian International Trade Tribunal (the "CITT") continued the anti-dumping duties against refined sugar import from the U.S., but removed such duties against imports from the E.U. We were greatly disappointed with the decision in regards to the E.U. After reviewing the statement of reasons of the CITT to remove such duties, on December 1, 2010, the Canadian Sugar Institute, on behalf of the Canadian refiners, appealed the decision of the CITT in regards to the E.U. We expect the decision on the appeal to take several months before being rendered.
On January 1, 2011, the Fund converted to a conventional corporation, Rogers Sugar Inc. Although we regret the Government's decision to change the tax treatment for Canadian Income Trusts, we concluded, after a careful review, that given the Government's October 2006 announced intention to tax income funds, commencing January 1, 2011, it would be in the best interest of Unitholders to take advantage of the transition rules, while they are available, without any negative tax implications for the Fund and its Unitholders. Each trust unit was converted on a one-for-one basis for share of the new corporation, Rogers Sugar Inc. The Board of Directors of Rogers Sugar Inc. intends to pay a quarterly dividend of 8.5 cents per share which, on an annual basis, is equivalent, on an after tax basis for taxable Canadian Unitholders, to the annual interest distribution paid by the Fund.
FOR THE BOARD OF TRUSTEES,
(s) Stuart Belkin
Stuart Belkin, Chairman
Calgary, Alberta – February 1, 2011
MANAGEMENTS' DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") should be read in conjunction with the unaudited financial statements and notes thereto in this quarterly report. The quarterly consolidated financial statements and any amounts shown in this MD&A were not reviewed or audited by our external auditors.
In analyzing our results, we supplement our use of financial measures that are calculated and presented in accordance with generally accepted accounting principles (GAAP), with a number of non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a company's historical performance, financial position or cash flow that excludes (includes) amounts, or is subject to adjustments that have the effect of excluding (including) amounts, that are included (excluded) in most directly comparable measures calculated and presented in accordance with GAAP. Non-GAAP financial measures are not standardized; therefore, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar businesses. We strongly encourage investors to review our consolidated financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.
We use these non-GAAP financial measures in addition to, and in conjunction with, results presented in accordance with GAAP. These non-GAAP financial measures reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, may provide a more complete understanding of factors and trends affecting our business.
In the MD&A, we discuss the non-GAAP financial measures, including the reasons that we believe that these measures provide useful information regarding our financial condition, results of operations, cash flows and financial position, as applicable and, to the extent material, the additional purposes, if any, for which these measures are used. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures are contained in the MD&A.
This report contains certain forward-looking statements, which reflect the current expectations of the Fund and Lantic Inc. ("the Fund" or "the Company") with respect to future events and performance. Wherever used, the words "may," "will," "anticipate," "intend," "expect," "plan," "believe," and similar expressions identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Although this is not an exhaustive list, the Fund cautions investors that statements concerning the following subjects are, or are likely to be, forward-looking statements: future prices of raw sugar, natural gas costs, the opening of special refined sugar quotas in the United States, beet production forecasts, the status of labour contracts and negotiations, the level of future distributions and the status of government regulations and investigations. Forward-looking statements are based on estimates and assumptions made by the Fund in light of their experience and perception of historical trends, current conditions and expected future developments, as well as other factors that the Fund believes are appropriate and reasonable in the circumstances, but there can be no assurance that such estimates and assumptions will prove to be correct. This could cause actual performance or results to differ materially from those reflected in the forward-looking statements, historical results or current expectations.
Additional information relating to the Fund and Lantic Inc., including the Annual Information Form, Quarterly and Annual reports and supplementary information is available on SEDAR at www.sedar.com.
This Management's Discussion and Analysis is dated February 1, 2011.
Internal disclosure controls
In accordance with Regulation 52-109 respecting certification of disclosure in issuers' interim filings, the Chief Executive Officer and Chief Financial Officer have designed or caused it to be designed under their supervision, disclosure controls and procedures.
In addition, the Chief Executive Officer and Chief Financial Officer have designed or caused it to be designed under their supervision internal controls over financial reporting ("ICFR") to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes.
The Chief Executive Officer and the Chief Financial Officer have evaluated whether or not there were any changes to its ICFR during the three month period ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company's ICFR. No such changes were identified through their evaluation.
Results of operations
Consolidated Results | For the three months ended December 31 | |||
(In thousands of dollars, except for volume and per trust unit information) | 2010 (Unaudited) | 2009 (Unaudited) | ||
Volume (metric tonnes) | 159,697 | 156,413 | ||
Revenues | $ | 151,438 | $ | 143,456 |
Gross margin | 39,892 | 28,463 | ||
Administration and selling | 4,769 | 4,746 | ||
Distribution | 1,655 | 1,867 | ||
Depreciation | 188 | 143 | ||
Earnings before interest and provision for income taxes (EBIT) | $ | 33,280 | $ | 21,707 |
Interest, net of interest income and other charges | 2,103 | 2,779 | ||
Provision for income taxes | 5,158 | 2,376 | ||
Net earnings | $ | 26,019 | $ | 16,552 |
Net earnings per trust unit – basic | $ | 0.30 | $ | 0.19 |
In the normal course of business, the Fund uses derivative financial instruments consisting of sugar futures, foreign exchange forward contracts, natural gas futures and interest rate swaps. The Fund's operating company sells refined sugar to some clients in US dollars. These sales contracts are viewed as having an embedded derivative if the functional currency of the customer is not US dollars, the embedded derivative being the source currency of the transaction, U.S. dollars. Derivative financial instruments and embedded derivatives are marked-to-market at each reporting date, with the unrealized gains/losses charged to the consolidated statement of operations with a corresponding offsetting amount charged to the balance sheet.
Management believes that the Fund's financial results are more meaningful to management, investors, analysts and any other interested parties when financial results are adjusted by the gains/losses from financial derivative instruments and from embedded derivatives for which adjusted financial results provide a more complete understanding of factors and trends affecting our business. This measurement is a non-GAAP measurement.
Management uses the non-GAAP adjusted results of the operating company to measure and to evaluate the performance of the business through its adjusted gross margin, adjusted EBIT and adjusted net earnings. In addition, management believes that these measures are important to our investors and parties evaluating our performance and comparing such performances to our past results. Management also uses adjusted gross margin, adjusted EBIT and adjusted net earnings when discussing results with the operating Board of Directors, the Fund's Board of Trustees, analysts, investors, banks and other interested parties.
The results of operations would therefore need to be adjusted by the following:
Income (loss) | For the three months ended December 31 | |||||
(In thousands) | 2010 (Unaudited) | 2009 (Unaudited) | ||||
Mark-to-market adjustment (excluding interest swap) | $ | 18,182 | $ | 5,354 | ||
Cumulative timing differences | (4,708 | ) | (3,365 | ) | ||
Total adjustment to cost of sales | $ | 13,474 | $ | 1,989 |
A large part of the above mark-to-market adjustment relates to the movement in the price of raw sugar, which increased significantly during the quarter. As a result, a $15.6 million gain was recorded as compared to a $5.0 million gain in the comparable quarter of last year. With increasing energy prices a mark-to-market gain of $3.2 million on natural gas forward contracts was recorded in the first quarter of this year, versus a minimal loss in the comparable quarter of last year. Foreign exchange forward contracts and embedded derivatives on which foreign exchange movements have an impact, had a combined mark-to-market loss of ($0.7) million for the quarter as compared to a mark-to-market gain of $0.4 million in that comparable quarter last year. The total net adjustment to cost of sales was a gain of $13.5 million, as opposed to a gain of $2.0 million in the comparable quarter last year.
In addition, the Fund recorded a mark-to-market gain of $1.0 million for the quarter, as compared to a gain of $0.4 million last year, on the mark-to-market of an interest swap under short-term interest expense, as a result of movement in overall interest rates.
The following is a table showing the adjusted consolidated results (non-GAAP) without the above mark-to-market results:
Consolidated Results | For the three months ended December 31 | |||||
2010 (Unaudited) | 2009 (Unaudited) | |||||
Gross margin as per financial statements | $ | 39,892 | $ | 28,463 | ||
Adjustment as per above | (13,474 | ) | (1,989 | ) | ||
Adjusted gross margin | 26,418 | 26,474 | ||||
EBIT as per financial statements | 33,280 | 21,707 | ||||
Adjustment as per above | (13,474 | ) | (1,989 | ) | ||
Adjusted EBIT | 19,806 | 19,718 | ||||
Net earnings as per financial statements | 26,019 | 16,552 | ||||
Adjustment to cost of sales as per above | (13,474 | ) | (1,989 | ) | ||
Adjustment for mark-to-market of interest swap | (961 | ) | (397 | ) | ||
Future taxes on above adjustments | 3,712 | 710 | ||||
Adjusted net earnings | $ | 15,296 | $ | 14,876 | ||
Net earnings per trust unit basic, as per financial statements | $ | 0.30 | $ | 0.19 | ||
Adjustment for the above | (0.13 | ) | (0.02 | ) | ||
Adjusted net earnings per trust unit basic | $ | 0.17 | $ | 0.17 |
For the quarter, total volume increased by approximately 3,300 metric tonnes from the comparable quarter of fiscal 2010. Industrial volume increased by approximately 3,400 metric tonnes due to timing in deliveries. Consumer volume increased by approximately 2,300 metric tonnes due to the contracting of a major account in April of 2010. Export volume increased by approximately 6,000 metric tonnes due to sales to the U.S. against the Tier II duty program, completing sales commitments that were initiated last fiscal year against such program. Liquid volume decreased by approximately 8,400 metric tonnes as volume in that segment continues to decline in an environment of higher raw sugar values against high fructose corn syrup.
Revenues for the quarter were $8.0 million higher than the previous year's comparable quarter, due to the higher price of world raw sugar in fiscal 2011 than in the comparable quarter of fiscal 2010. The price of world raw sugar reached a high of over 34 cents per pound in December 2010.
As previously mentioned, gross margin of $39.9 million for the quarter does not reflect the economic margin of the Fund, as it includes a gain of $13.5 million for the mark-to-market of derivative financial instruments explained earlier. We will therefore comment on adjusted gross margin results.
For the quarter, adjusted gross margin decreased by $0.1 million, when compared to the same quarter of last year. On a per metric tonne basis, adjusted gross margins were $165.43 compared to $169.26 for the comparable quarter of last year, a decrease of $3.83 per metric tonne. The decrease in gross margin is due mainly to large premiums paid for some of our raw sugar supply bought on the spot market during the quarter, which nullified the benefits from a better sales mix and from a higher raw sugar value for Taber's domestic beet sugar sales. Most of the raw sugar is purchased in advance under long term contracts, but some volume is not committed due to the uncertainty of the total sales volume and of the Taber beet crop. In the fall of 2010, the raw sugar supply was tight and large premiums were charged over the normal values of the # 11 raw sugar prices for spot cargoes. During the quarter, the Fund incurred costs in excess of $2.0 million for such raw sugar premiums, representing approximately $12.50 per metric tonne of sugar sold during the quarter.
Administration and selling costs were in line with the comparable quarter of fiscal 2010. Lower distribution costs of $0.2 million in fiscal 2011, are due mainly to timing of shipments from Vancouver to Taber.
Interest expense for the quarter includes a mark-to-market gain of $1.0 million as compared to a gain of $0.4 million in fiscal 2010, for the 5-year, $70.0 million interest swap entered into in July 2008. Without this mark-to-market adjustment, interest expense for the quarter was lower by approximately $0.1 million as a result of lower borrowings during the quarter.
Statement of quarterly results
The following is a summary of selected financial information of the consolidated financial statements and non-GAAP measures of the Fund for the last eight quarters.
QUARTERS | |||||||||||
2011 (Unaudited) | 2010 (Unaudited) | 2009 (Unaudited) | |||||||||
(In thousands of dollars, except for volume, margin rate and per trust unit information) | 1-Q | 4-Q | 3-Q | 2-Q | 1-Q | 4-Q | 3-Q | 2-Q | |||
Volume (MT) | 159,697 | 192,171 | 180,462 | 153,103 | 156,413 | 187,538 | 167,612 | 159,700 | |||
Revenues | 151,438 | 163,264 | 156,302 | 143,851 | 143,456 | 154,596 | 128,478 | 121,849 | |||
Gross margin (loss) | 39,892 | 53,237 | 17,335 | (11,396 | ) | 28,463 | 40,559 | 28,236 | 9,329 | ||
EBIT (loss) | 33,280 | 44,773 | 10,362 | (17,638 | ) | 21,707 | 32,434 | 20,447 | (116 | ) | |
Net earnings (loss) | 26,019 | 33,710 | 7,088 | (12,136 | ) | 16,552 | 24,004 | 16,952 | 727 | ||
Gross margin rate per MT | 249.80 | 277.03 | 96.06 | (74.43 | ) | 181.97 | 216.27 | 168.46 | 58.42 | ||
Per trust unit | |||||||||||
Net earnings (loss) | |||||||||||
Basic | 0.30 | 0.39 | 0.08 | (0.14 | ) | 0.19 | 0.27 | 0.19 | 0.01 | ||
Diluted | 0.25 | 0.32 | 0.08 | (0.14 | ) | 0.17 | 0.23 | 0.17 | 0.01 | ||
Non-GAAP Measures | |||||||||||
Adjusted gross margin | 26,418 | 23,098 | 21,215 | 15,573 | 26,474 | 33,208 | 24,320 | 15,985 | |||
Adjusted EBIT | 19,806 | 14,634 | 14,242 | 9,331 | 19,718 | 25,083 | 16,531 | 6,540 | |||
Adjusted net earnings | 15,296 | 12,136 | 11,151 | 6,548 | 14,876 | 18,638 | 12,578 | 5,732 | |||
Adjusted gross margin rate per MT | 165.43 | 120.20 | 117.56 | 101.72 | 169.26 | 177.07 | 145.10 | 100.09 | |||
Adjusted net earnings per trust unit | |||||||||||
Basic | 0.17 | 0.14 | 0.13 | 0.08 | 0.17 | 0.21 | 0.14 | 0.07 | |||
Diluted | 0.16 | 0.13 | 0.12 | 0.08 | 0.15 | 0.18 | 0.13 | 0.07 |
Historically the first quarter (October to December) of the fiscal year is the best quarter for adjusted gross margins and adjusted net earnings due to the favourable sales mix of products sold. This is due to the increased sales of baked goods during that period of the year. At the same time, the second quarter (January to March) is historically the lowest volume quarter, resulting in lower revenues, adjusted gross margins and adjusted net earnings.
Liquidity
The distributable cash generated by the operating company, Lantic, is paid to the Fund by way of dividends and return of capital on the common shares of Lantic, and by the payment of interest on the subordinated notes of Lantic held by the Fund, after having taken reasonable reserve for capital expenditures and working capital. The cash received by the Fund is used to pay distributions to its Unitholders.
Standardized Distributable Cash, as per the Interpretive Release issued in July 2007 by the Canadian Institute of Chartered Accountants ("CICA") is defined as the GAAP measure of cash from operating activities after adjusting for capital expenditures, restrictions on distributions arising from compliance with financial covenants, restrictive at the time of reporting, and minority interests.
Standardized Distributable Cash is as follows:
For the three months ended December 31 |
Cumulative amounts for last 5 fiscal years, ended September 30 | ||||||||
(In thousands) | 2010 (Unaudited) | 2009 (Unaudited) | 2010 (Unaudited) | ||||||
Cash flow from operating activities | $ | (8,224 | ) | $ | 659 | $ | 295,806 | ||
Capital expenditures | (1,445 | ) | (1,312 | ) | (37,937 | ) | |||
Financing restrictions | - | - | - | ||||||
Standardized Distributable Cash | $ | (9,669 | ) | $ | (653 | ) | $ | 257,869 |
There were no restrictions on distributions arising from the compliance of financial covenants for the periods shown above.
Cash flow from operations was negative $8.2 million in the first quarter of 2011, as opposed to $0.7 million in the comparable quarter of fiscal 2010. In the first quarter of each year, all sugar beets are harvested and delivered for processing in Taber, which significantly increases inventory volume at the end of the first quarter. In addition, price of raw sugar closed at over 32 cents at the end of the quarter, and as a result, inventory value increased by $49.6 million in the first quarter of fiscal 2011 as opposed to $29.7 million in the comparable quarter of last year. The increase from last year is due mainly to the larger crop of sugar beets and higher price of raw sugar. This is somewhat offset by a larger reduction in accounts receivable as significant volume of export sales, against Tier II volume, occurred in September 2010 and such receivables were collected during the first quarter of this year.
Total capital expenditures were higher than the previous year, due mainly to timing in projects when compared to fiscal 2010.
Standardized Distributable Cash does not constitute available cash for distribution due mainly to timing factors in the movement of non-cash working capital items, to mark-to-market derivative timing adjustment, to non-cash financial instruments, and to other financing items.
In order to provide additional information that the Fund's administrators believe is appropriate for the determination of levels of cash distribution, the Interpretive Release also allows a measure that includes additional items beyond those included in Standardized Distributable Cash. These additional measures may affect the Fund's distributions and are therefore forming a basis for the actual amount of cash available for distribution. All of these additional measures are separately identified and explained and result in Adjusted Distributable Cash.
Adjusted distributable cash is as follows:
For the three months ended December 31 |
Cumulative amounts for last 5 fiscal years, ended September 30 | ||||||||||
(In thousands of dollars) | 2010 (Unaudited) | 2009 (Unaudited) | 2010 (Unaudited) | ||||||||
Standardized Distributable Cash as per above | $ | (9,669 | ) | $ | (653 | ) | $ | 257,869 | |||
Adjustments: | |||||||||||
Changes in non-cash working capital | 38,658 | 21,198 | 19,172 | ||||||||
Mark-to-market and derivative timing adjustment | (14,435 | ) | (2,386 | ) | $ | 7,545 | |||||
Financial instruments non-cash amount | 3,672 | 656 | (21,307 | ) | |||||||
Investment capital projects | 45 | - | 6,299 | ||||||||
Net repurchase of trust units | - | - | (5,312 | ) | |||||||
Interest expense on equity portion of convertible unsecured debentures | - | - | (2,983 | ) | |||||||
Deferred financing charges | - | - | (7,188 | ) | |||||||
Adjusted distributable cash | $ | 18,271 | $ | 18,815 | $ | 254,095 | |||||
Declared distributions | $ | 10,066 | $ | 10,042 | $ | 194,071 |
Adjusted distributable cash was $0.5 million lower than the comparable quarter in fiscal 2010. This was mainly due to the provision for current income taxes at Lantic's level, which should reverse in the following quarters.
Changes in non-cash operating working capital represents quarter-over-quarter movement in current assets such as accounts receivables and inventories, and current liabilities like accounts payable. Movements in these accounts are due mainly to timing in the collection of receivables, receipts of raw sugar and payment of liabilities. Increases or decreases in such accounts do not therefore constitute available cash for distribution. Such increases or decreases are financed from available cash or from the Company's available credit facilities of $200.0 million. Increases or decreases in short-term bank indebtedness are also due to timing issues from the above, and therefore do not constitute available cash for distribution.
Mark-to-market and financial instruments adjustments are due mainly to unrealized gains or losses on financial derivative instruments and are therefore non-cash amounts except for margin calls on net sugar positions and natural gas contracts.
The amount spent on investment capital projects is related to the completion of the Taber beet pulp press and for the Montreal heat recovery system project undertaken last year.
Excess cash flow and net income on distributions paid
The following table presents excess cash flows from operating activities and net income over distributions paid for the last three years ended September 30, and for the first quarters ended December 31, 2010 and 2009:
For the three months ended December 31 | Years ended September 30 | ||||||||||||
(In thousands of dollars) | 2010 (Unaudited) | 2009 (Unaudited) | 2010 (Audited) | 2009 (Audited) | 2008 (Audited) | ||||||||
Cash flow (deficiency) from operating activities | $ | (8,224 | ) | $ | 659 | $ | 83,203 | $ | 69,791 | $ | 23,372 | ||
Net earnings | 26,019 | 16,552 | 45,214 | 42,537 | 48,134 | ||||||||
Distributions paid | 10,066 | 10,042 | 40,186 | 40,206 | 40,082 | ||||||||
(Shortfall) excess of cash flows from operating activities over cash distributions paid | (18,290 | ) | (9,383 | ) | 43,017 | 29,585 | (16,710 | ) | |||||
Excess of net earnings over cash distributions paid | $ | 15,953 | $ | 6,510 | $ | 5,028 | $ | 2,331 | $ | 8,052 | |||
In the first quarter of fiscal 2011, inventories increased by $49.6 million due to the higher price of raw sugar and to the larger harvest of the Taber beet crop. Every year, in the first quarter, inventories will increase as a result of the Taber beet crop being harvested, hence the reason for the shortfall of cash flow over cash distributions paid of both fiscal quarters. This shortfall was financed from available cash balances and short-term borrowings.
Contractual obligations
There are no significant changes in the contractual obligations table disclosed in the Management's Discussion and Analysis of the September 30, 2010 Annual Report.
At December 31, 2010, the operating companies had commitments to purchase a total of 1,691,000 metric tonnes of raw sugar, of which 96,000 metric tonnes had been priced for a total dollar commitment of $78.0 million.
Capital resources
Lantic has $200.0 million as authorized lines of credit available to finance its operation. At quarter's end, $70.0 million had been drawn from the working capital facility.
At quarter's end, inventories are high compared to the balance at September 30, 2010, as a result of the higher value of raw sugar and to the harvest of the Taber beet crop during the first quarter.
Cash requirements for working capital and other capital expenditures are expected to be paid from available credit resources and from funds generated from operations.
Outstanding securities
On January 1, 2011, the Fund converted into a corporation and all outstanding trust units were converted on a one-for-one basis for common shares of Rogers Sugar Inc., the successor of Rogers Sugar Income Fund. As at January 25, 2011, there were 87,534,113 common shares outstanding.
Changes in accounting policies and critical accounting estimates
Our accounting policies and critical accounting estimates remain substantially unchanged from those that were disclosed in our Management's Discussion and Analysis of the Annual Report for the year ended September 30, 2010.
International financial reporting standards ("IFRS")
In February 2008, the AcSB confirmed that publicly accountable enterprises will be required to adopt IFRS for interim and annual reporting purposes, for fiscal years beginning on or after January 1, 2011. The Company will be required to begin reporting under IFRS for the quarter ending December 31, 2011 and will be required to prepare an opening balance sheet and provide information that conforms to IFRS for comparative periods presented.
The Company began planning the transition from current Canadian GAAP to IFRS by establishing a project plan and a project team. The project team is led by senior finance executives who provide overall project governance, management and support. The project team reports quarterly to the Audit Committee the progress made, and discusses key findings and future accounting requirements.
The project plan consists of three phases: the initial assessment, detailed assessment and design, and implementation. The Company has completed the initial assessment phase, which included the completion of a high level review of the major differences between current Canadian GAAP and IFRS. The initial assessment also included training sessions for project team members and discussions with the Company's external auditors.
The Company is now engaged in the detailed assessment and design phase. The detailed assessment and design phase involves completing a comprehensive analysis of the impact of the IFRS differences identified in the initial assessment phase. The design of solutions to resolve these IFRS differences is progressing according to plan. The following are some of the significant differences between Canadian GAAP and IFRS that have been identified to date and which are currently being evaluated:
Property, Plant and Equipment (International Accounting Standard ("IAS") 16): Under IFRS, components of capital assets with different useful lives must be identified to calculate depreciation. The Corporation is currently in the process of examining the componentization of our capital assets which will have an impact on depreciation under IFRS.
Borrowing Costs (IAS 23): Under IFRS, borrowing costs incurred during the period in which a qualifying capital asset is being constructed must be capitalized as part of the cost of the asset. Under the Corporation's current accounting policy, all borrowing costs are charged to earnings and included in interest expense. The Corporation expects to use an optional exemption in order to capitalize borrowing costs only for assets for which the commencement date for capitalization is on or after the transition date. Accordingly, the Corporation does not expect to record an opening IFRS balance sheet adjustment for borrowing costs incurred prior to the transition date.
Impairment of Assets (IAS 36): Under IFRS, assets need to be grouped in cash generating units (CGU's) on the basis of independent cash inflows for impairment testing purposes, using a single-step approach. The Corporation has determined its group of cash generating units to be used for the purpose of goodwill impairment testing. The Corporation has determined that there was no goodwill impairment as at the date of transition to IFRS.
Consolidation (IAS 27) and Special Purpose Entities (Standing Interpretations Committee ("SIC") 12): The Variable Interest Entity ("VIE") model of consolidation does not exist under IFRS. The Corporation must assess whether Lantic Inc. can be consolidated under the Control model of IAS 27 and SIC 12. Upon transition to IFRS, the Corporation may have to use the equity method of accounting for its wholly-owned subsidiary, Lantic, instead of the consolidation method.
Leases (IAS 17): The Corporation has entered into various leases which are accounted for as operating leases under Canadian GAAP. The Corporation is in the process of assessing whether or not this classification will change to a finance (capital) lease under IFRS.
Employee Benefits (IAS 19): Under IFRS, vested past service costs under a defined benefit plan are immediately recognized in net earnings. As of the transition date, the Corporation is expected to record the balance of all vested past service costs against retained earnings. In addition, as permitted under IFRS, the Corporation is expected to recognize actuarial gains and losses as they occur in other comprehensive income, with no impact on net earnings.
First time Adoption of IFRS (IFRS 1): The Corporation intends to use the business combinations exemption and not restate the accounting of past business acquisitions. The Corporation does not intend to apply the exemption to use fair value as deemed cost, rather it intends to keep property, plant and equipment at their original costs.
The transition plan remains on-track and the Company believes it is well positioned to transition to IFRS in accordance with the timelines mandated by the AcSB. The work completed to date suggests that there should be minimal impact on the Company's business processes, IT systems, disclosure controls and procedures, and internal controls over financial reporting. However, these preliminary conclusions may change as the Company continues to progress through its transition plan and considers any new IFRS developments leading up to the Company's changeover date.
Subsequent events
On January 1, 2011, the Fund converted into a corporation, Rogers Sugar Inc. All outstanding trust units were converted on a one-for-one basis for common shares of the new corporation. As at that date, all the assets of the Fund, such as the common shares of Lantic Inc and the existing notes were transferred to Rogers Sugar Inc., which also assumed all liabilities of the Fund, including the obligations with respect to the existing unsecured subordinated convertible debentures.
In addition, an amendment to the Plan of Arrangement allowed a reduction of the share capital of Rogers Sugar Inc., without payment or reduction to its stated capital, by the accounting deficit at January 1, 2011. As a result, the share capital of $560.5 million will be reduced to $284.1 million and the deficit of $276.5 million will be reduced to nil.
The Unit Option Plan existing under Rogers Sugar Income Fund is being replaced by a Stock Option Plan of Rogers Sugar Inc., as at January 1, 2011. As at that date, all options outstanding under the Unit Option Plan of the Fund were transferred to a Stock Option Plan of Rogers Sugar Inc., on a one-for-one basis.
On February 1, 2011, the shareholders of Rogers Sugar Inc. will vote on a Special Resolution to reduce the stated capital of Rogers Sugar Inc., by $200.0 million, effective as at that date. If the Resolution is approved, the stated capital will be reduced to $84.1 million and contributed surplus will increase by $200.0 million to $204.7 million.
Risk factors
Risk factors in the Fund's business and operations are discussed in the Management's Discussion and Analysis of our Annual Report for the year ended September 30, 2010. This document is available on SEDAR at www.sedar.com or on one of our websites at www.lantic.ca or www.rogerssugar.com.
OUTLOOK
The world raw sugar supply is currently very tight as the 2010 Brazilian crop was lower than expected and current crops in Australia, Central America and other producing countries, are lower than originally forecast. As a result, raw sugar prices have increased significantly and substantial premiums over and above the # 11 raw sugar values are now being charged for shipments over the next nine months. For the balance of fiscal 2011, over 75% of the raw sugar requirements had been contracted earlier under long- term contracts. The balance, representing approximately 140,000 metric tonnes was purchased in December 2010, but at significant premiums over the raw sugar values. These premiums will negatively impact gross margins per metric tonne if Lantic is unable to increase its selling margins.
In December 2010, we also negotiated new long-term contracts with raw sugar suppliers for approximately 75% of our estimated raw sugar requirements through June 2014. These contracts will protect the Company from large premiums should the world raw sugar market retain its current tight supply environment.
Approximately half of the remaining domestic beet sugar volume to be sold has been pre-hedged at values close to 20 cents per pound. In the event that raw sugar prices remain firm for the balance of this fiscal year, Lantic would benefit from the higher value of raw sugar on approximately 10,000 tonnes being the remaining volume not yet priced by customers.
On November 1, 2010, the Canadian International Trade Tribunal (the "CITT") extended for a further 5 years the anti-dumping duties against the U.S., but rescinded the anti-dumping and countervailing duties against refined sugar shipments from the E.U. After reviewing the reasons of the CITT to remove such duties, the Canadian Sugar Institute, representing the Canadian refining industry, appealed that decision on December 1, 2010. The appeal process will take a number of months, and there is no certainty that the CITT's decision will be reversed.
The Taber sugar beet slicing campaign was completed on December 30, 2010, and the total beet sugar production is now estimated at approximately 86,000 metric tonnes, once the thick juice campaign is completed in the Spring of 2011. This is approximately 22,000 metric tonnes more than last year's production.
A large portion of fiscal 2011's natural gas requirements have been hedged at average prices comparable to those realized in fiscal 2010. The remaining un-hedged volume should benefit from the current low prices of natural gas and therefore increase adjusted gross margin rates. In addition, futures positions for fiscal 2012 to 2014 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 what was achieved in fiscal 2010. 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. One plan's actuarial valuation was completed in fiscal 2010, while the other three plans' actuarial valuations are required to be completed in fiscal 2011. The pension cash contributions were increased by approximately $1.0 million following last year's actuarial valuation and it is anticipated that future cash contribution levels will increase following the other three plans' actuarial valuations.
Rogers Sugar Income Fund |
Unaudited Consolidated Balance Sheets |
December 31, 2010 and 2009 |
(In thousands of dollars) |
December 31 | September 30 | December 31 | ||||||||
2010 | 2010 | 2009 | ||||||||
ASSETS | ||||||||||
Current assets: | ||||||||||
Cash and cash equivalents | $ | 19,046 | $ | 38,781 | $ | 6,672 | ||||
Accounts receivable | 47,722 | 58,231 | 42,161 | |||||||
Inventories | 100,946 | 51,358 | 104,807 | |||||||
Prepaid expenses | 815 | 1,885 | 2,046 | |||||||
Future income taxes | 624 | 1,030 | 1,668 | |||||||
Derivative financial instruments (Note 3) | 176 | 24 | 1,276 | |||||||
169,329 | 151,309 | 158,630 | ||||||||
Capital assets | 181,148 | 183,361 | 186,220 | |||||||
Defined benefits pension plan assets | 19,224 | 19,672 | 17,749 | |||||||
Derivative financial instruments (Note 3) | 23 | 1 | 22 | |||||||
Other assets | 464 | 510 | 676 | |||||||
Goodwill | 229,952 | 229,952 | 229,952 | |||||||
$ | 600,140 | $ | 584,805 | $ | 593,249 | |||||
LIABILITIES AND UNITHOLDERS' EQUITY | ||||||||||
Current liabilities: | ||||||||||
Short-term borrowings | $ | 70,000 | $ | 70,000 | $ | 82,000 | ||||
Accounts payable and accrued liabilities | 41,918 | 42,716 | 38,560 | |||||||
Derivative financial instruments (Note 3) | 9,019 | 8,989 | 10,108 | |||||||
Current capital lease obligation | 82 | 82 | 21 | |||||||
121,019 | 121,787 | 130,689 | ||||||||
Employee future benefits | 29,425 | 29,545 | 29,014 | |||||||
Derivative financial instruments (Note 3) | 8,815 | 12,343 | 8,690 | |||||||
Long-term capital lease obligation | 179 | 181 | 106 | |||||||
Convertible unsecured subordinated debentures | 130,803 | 130,599 | 131,592 | |||||||
Future income taxes | 21,135 | 17,542 | 19,702 | |||||||
311,376 | 311,997 | 319,793 | ||||||||
UNITHOLDERS' EQUITY | ||||||||||
Trust units (Notes 4 and 6) | 560,543 | 560,543 | 559,677 | |||||||
Contributed surplus | 4,686 | 4,683 | 4,715 | |||||||
Deficit | (276,465 | ) | (292,418 | ) | (290,936 | ) | ||||
288,764 | 272,808 | 273,456 | ||||||||
$ | 600,140 | $ | 584,805 | $ | 593,249 | |||||
Rogers Sugar Income Fund |
Unaudited Consolidated Statements of Operations and Comparative Income |
For the three months ended December 31, 2010 and 2009 |
(In thousands of dollars – except per trust unit amounts) |
2010 | 2009 | |||||
Revenues | $ | 151,438 | $ | 143,456 | ||
Cost of sales | 111,546 | 114,993 | ||||
Gross margin | 39,892 | 28,463 | ||||
Expenses: | ||||||
Administration and selling | 4,769 | 4,746 | ||||
Distribution | 1,655 | 1,867 | ||||
Depreciation and amortization | 188 | 143 | ||||
6,612 | 6,756 | |||||
Earnings before interest and provision | ||||||
for income taxes | 33,280 | 21,707 | ||||
Interest on convertible debentures | 1,955 | 1,993 | ||||
Amortization of deferred financing costs | 250 | 267 | ||||
Short-term interest (income) | (102 | ) | 519 | |||
2,103 | 2,779 | |||||
Earnings before provision for income taxes | 31,177 | 18,928 | ||||
Provision for income taxes: | ||||||
Current | 1,159 | 267 | ||||
Future | 3,999 | 2,109 | ||||
5,158 | 2,376 | |||||
Net earnings and other comprehensive income | $ | 26,019 | $ | 16,552 | ||
Net earnings per trust unit: | ||||||
Basic | $ | 0.30 | $ | 0.19 | ||
Diluted | $ | 0.25 | $ | 0.17 | ||
Supplemental disclosure: | ||||||
Employee future benefits expense | $ | 1,357 | $ | 1,121 |
Rogers Sugar Income Fund |
Unaudited Consolidated Statements of Unitholders' Equity |
For the three months ended December 31, 2010 and 2009 |
(In thousands of dollars – except per trust unit amounts) |
2010 | |||||||||||
Number of Trust Units | Trust Units | Contributed Surplus | Deficit | Total | |||||||
Balance, beginning of period | 87,534,113 | $ | 560,543 | $ | 4,683 | $ | (292,418 | ) | $ | 272,808 | |
Distributions | - | - | - | (10,066 | ) | (10,066 | ) | ||||
Stock-based compensation | - | - | 3 | - | 3 | ||||||
Net earnings | - | - | - | 26,019 | 26,019 | ||||||
Balance, end of period | 87,534,113 | $ | 560,543 | $ | 4,686 | $ | (276,465 | ) | $ | 288,764 | |
2009 | |||||||||||
Number of Trust Units | Trust Units | Contributed Surplus | Deficit | Total | |||||||
Balance, beginning of period | 87,327,887 | $ | 559,662 | $ | 4,712 | $ | (297,446 | ) | $ | 266,928 | |
Distributions | - | - | - | (10,042 | ) | (10,042 | ) | ||||
Stock-based compensation | - | - | 3 | - | 3 | ||||||
Conversion of convertible debentures into trust units (Note 4) | 2,830 | 15 | - | - | 15 | ||||||
Net earnings | - | - | - | 16,552 | 16,552 | ||||||
Balance, end of period | 87,330,717 | $ | 559,677 | $ | 4,715 | $ | (290,936 | ) | $ | 273,456 |
Rogers Sugar Income Fund |
Unaudited Consolidated Statements of Cash Flows |
For the three months ended December 31, 2010 and 2009 |
(In thousands of dollars) |
For the three months ended | |||||||
December 31 | |||||||
2010 | 2009 | ||||||
(Unaudited) | (Unaudited) | ||||||
Cash flows from operating activities: | |||||||
Net earnings | $ | 26,019 | $ | 16,552 | |||
Adjustments for items not involving cash: | |||||||
Depreciation and amortization | 3,507 | 3,459 | |||||
Amortization of deferred financing costs | 250 | 267 | |||||
Future income taxes | 3,999 | 2,109 | |||||
Employee future benefits | 328 | 123 | |||||
Change in derivative financial instruments | (3,672 | ) | (656 | ) | |||
Stock based compensation expenses | 3 | 3 | |||||
Other | - | - | |||||
30,434 | 21,857 | ||||||
Changes in non-cash working capital: | |||||||
Accounts receivable | 10,509 | 7,476 | |||||
Inventories | (49,588 | ) | (29,671 | ) | |||
Prepaid expense | 1,070 | 287 | |||||
Accounts payable and accrued liabilities | (649 | ) | 710 | ||||
(38,658 | ) | (21,198 | ) | ||||
(8,224 | ) | 659 | |||||
Cash flows from financing activities: | |||||||
Short-term borrowings | - | 12,000 | |||||
Distributions to Unitholders | (10,066 | ) | (10,042 | ) | |||
(10,066 | ) | 1,958 | |||||
Cash flows from investing activities: | |||||||
Additions to capital assets | (1,445 | ) | (1,312 | ) | |||
Net change in cash and cash equivalents | (19,735 | ) | 1,365 | ||||
Cash and cash equivalents, beginning of period | $ | 38,781 | $ | 5,367 | |||
Cash and cash equivalents, end of period | $ | 19,046 | $ | 6,672 | |||
Supplemental disclosure: | |||||||
Interest paid on the debt | 5,004 | 4,850 | |||||
Income taxes paid | 206 | 775 | |||||
Capital assets included in accounts payable and accrued liabilities and capital lease obligation | 381 | 498 | |||||
Rogers Sugar Income Fund |
Notes to Interim Unaudited Consolidated Financial Statements |
For the three months ended December 31, 2010 and 2009 |
(In thousands of dollars unless otherwise noted) |
Rogers Sugar Income Fund (the "Fund") is an open-ended, limited purpose trust created under the laws of Ontario by an amended and restated declaration of trust dated February 3, 2005 (the "Declaration of Trust"). An unlimited number of trust units may be issued pursuant to the Declaration of Trust.
On September 29, 2010, the Unitholders of the Fund approved the conversion of the Fund to a corporate structure by way of Plan of Arrangement under Section 192 of the Canada Business Corporations Act. The Plan of Arrangement was subsequently approved by the Supreme Court of British Columbia on October 4, 2010 and, as a result, on January 1, 2011 each trust unit of the Fund was converted on a one-for-one basis for shares of Rogers Sugar Inc., the successor company of Rogers Sugar Income Fund.
Note 1: Basis of presentation
These interim unaudited consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). These interim unaudited consolidated financial statements do not include all disclosures required by the Canadian GAAP and therefore should be read in conjunction with the consolidated financial statements and the notes thereto for the most recently prepared annual financial statements for the year ended September 30, 2010. These quarterly consolidated financial statements were not reviewed or audited by our external auditors.
Note 2: Accounting policies
These financial statements follow the same accounting policies and methods of their application as the most recent annual financial statements for the year ended September 30, 2010.
Note 3: Financial Instruments
Details of recorded gains/losses for the quarter, in marking-to-market all derivative financial instruments and embedded derivatives are noted below. For raw sugar contracts (derivative financial instruments), the amounts noted below are netted with the variation margins paid or received to/from brokers at the end of the reporting period. Natural gas forwards and sugar futures have been marked-to-market using published quoted values for these commodities, while foreign exchange forward contracts have been marked-to-market using rates published by the financial institution which is counter-party to these contracts. The fair value of natural gas contracts, foreign exchange forward contracts and interest swap calculation include a credit risk adjustment for the Fund's or counterparty's credit, as appropriate.
Financial Instrument | Financial Instrument | Gain / (Loss) | Interest | |||||||||||||||
Assets | Liabilities | Cost of Sales | Income / (Expense) | |||||||||||||||
MARK-TO-MARKET | Short-term | Long-term | Short-term | Long-term | ||||||||||||||
For the three month period ended December 31 | ||||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||
Sugar futures contracts | ||||||||||||||||||
and options | $ | 176 | $ | 23 | $ | - | $ | - | $ | 15,645 | $ | 5,005 | $ | - | $ | - | ||
Natural gas futures | ||||||||||||||||||
contracts | 5,018 | 6,435 | 3,249 | (47 | ) | - | - | |||||||||||
Foreign exchange | ||||||||||||||||||
forward contracts | 1,043 | 19 | 88 | 321 | - | - | ||||||||||||
Embedded derivatives | 1,272 | 165 | (800 | ) | 75 | - | - | |||||||||||
Interest swap | 1,686 | 2,196 | - | - | 961 | 397 | ||||||||||||
$ | 176 | $ | 23 | $ | 9,019 | $ | 8,815 | $ | 18,182 | $ | 5,354 | $ | 961 | $ | 397 |
Note 4: Trust units
During the first quarter of 2010, $15 thousand of the second series convertible unsecured subordinated debentures was converted by holders of the securities for a total number of 2,830 trust units. This conversion is a non-cash transaction and therefore is not reflected in this statement of cash flows. At December 31, 2010, 87,534,113 trust units were issued and outstanding.
On December 16, 2010, the Fund received approval from the Toronto Stock Exchange to proceed with a normal course issuer bid to purchase 6,414,297 trust units of the Fund, representing 10% of the public float of the Fund, up to $3.0 million principal amount of the Third Series, 5.9% Convertible Unsecured Subordinated Debentures, and up to $2.0 million principal amount of the Fourth Series, 5.7% Convertible Unsecured Subordinated Debentures of the Fund. The bid started December 21, 2010, and may continue to December 6, 2011. The Normal Course Issuer Bid will continue under Rogers Sugar Inc., the successor of Rogers Sugar Income Fund, starting January 1, 2011.
Note 5: Segmented information
Revenues were derived from customers in the following geographic areas:
For the three months ended | ||||
December 31 | ||||
2010 | 2009 | |||
Canada | $ | 141,702 | $ | 137,732 |
United States and Other | 9,736 | 5,724 | ||
$ | 151,438 | $ | 143,456 |
Note 6: Subsequent events
On September 29, 2010, the Unitholders of the Fund approved the conversion of the Fund to a corporate structure by way of Plan of Arrangement under Section 192 of the Canada Business Corporations Act. The Plan of Arrangement was subsequently approved by the Supreme Court of British Columbia on October 4, 2010 and, as a result, on January 1, 2011 each trust unit of the Fund was converted on a one-for-one basis for shares of Rogers Sugar Inc., the successor company of Rogers Sugar Income Fund.
At the special meeting of September 29, 2010 to approve the Plan of Arrangement, the Unitholders also approved the adoption of a Stock Option Plan for Rogers Sugar Inc., replacing the current Unit Option Plan of Rogers Sugar Income Fund. As at January 1, 2011, all options outstanding under the Unit Option Plan of Rogers Sugar Income Fund were transferred to the Stock Option Plan of Rogers Sugar Inc. on a one-for-one basis.
On January 1, 2011, all of the accounts of the Fund, such as the Common Share of Lantic Inc., and the existing Notes were transferred to Rogers Sugar Inc., which also assumed all liabilities of the Fund, including the obligations with respect to the existing unsecured subordinated convertible debentures. In addition, an amendment to the Plan of Arrangement allowed the Directors to reduce the share capital of Rogers Sugar Inc., without payment or reduction to its stated capital, by its accounting deficit at January 1, 2011. As a result, the stated capital of $560,543 will be reduced to $284,078 and the deficit of $276,465 will be reduced to nil.
Lastly, on February 1, 2011, the shareholders of Rogers Sugar Inc. will vote on a Special Resolution to reduce the stated capital of Rogers Sugar Inc., by $200,000 to take effect at the date of the vote. If the Resolution is approved, the stated capital of Rogers Sugar Inc. will therefore be further reduced to $84,078 and the contributed surplus will increase from $4,686 to $204,686.
Contact Information: Mr. Dan Lafrance
SVP Finance, CFO and Secretary
514-940-4350
514-527-1610 (FAX)
www.rogerssugar.com or www.Lantic.ca