Edited Transcript of RSI.TO earnings conference call or presentation 5-May-20 9:30pm GMT

These changes have impacted our business in a variety of ways that I would like to take a moment to discuss. Overall, sales volumes are generally positive for both Sugar and Maple with lower volumes in some segments being offset by growth in others. Operating costs are generally higher due to temporary increases in expenses such as nonstandard supply chain costs, temporary wage premiums and health and safety consumables. In addition, manufacturing efficiency has lowered due to the commissioning delays and modified staffing plans to comply with our enhanced health and safety protocols driven by our response to COVID-19.

Raw material supplies experienced longer lead times and require more planning. We continue to monitor these situations closely and where possible are keeping more inventory on hand. Capital spending has been delayed somewhat as we experienced some delays in equipment supply and limited access to our facilities for essential services only. These delays do not pose any risk to our operations.

Overall, much of what we are currently facing is unknown. We believe our business and our actions to date will allow us to continue to deliver year-on-year EBITDA improvements, maintain our dividend and have cash available to continue to reduce debt or buy back shares.

Consolidated EBITDA in the second quarter was approximately $16.5 million, in line with the same period last year. We are very pleased with the results we achieved in our Sugar business. The plans we made, which included ramping up production capacity at our Vancouver and Montreal refinery, along with some selected importation of refined sugar were all well executed and allowed us to fil customer orders despite the shortage caused by the Taber crop. Extensive planning that went into our original sales and operating plan has allowed us to respond quickly to the new U.S. Sugar quota and secure 5,000 metric tonnes of additional beet sugar toward allocation.

Our cane refineries are operating well. Vancouver continues to see operational improvements, and Montreal, for their past and recent investments in equipment and higher maintenance expense, is consistently delivering above plan volumes. The strong performance has allowed us to increase our sales outlook from the second quarter to capitalize on the quota and the new high tier sales opportunities in the coming months.

Overall, we continue to expect domestic volume growth in the low single digits, and given the announcement for additional U.S. tariff quotas and the general tight supply conditions in that market, we expect opportunities for near term growth in the United States. With a proven reconfigured supply chain and assets that are running well, we are now projecting our total sales for fiscal 2020 to be approximately 750,000 metric tonnes, a 9,000 metric tonne improvement on fiscal year 2019 shipments. Considering the loss of 60,000 metric tonnes of sugar production at the start of the year, this will be an outstanding achievement.

Turning to our Maple operations for the quarter, the planned move to the new facility in Granby was completed on time. Commissioning the new facility has been delayed by COVID-19 which restricts access of third party contractors. COVID-19 further disrupted our Maple operations in the quarter as new operating procedures were put in place to maintain employee health and safety. These procedures are generally more impactful on work in the Maple operations due to the proximity of people working on the packing lines. Despite these challenges, the plants were still able to increase production by 15% versus the same quarter a year ago.

Work to compete the commissioning will be completed in the third quarter using reassigned internal resources from our refining business. Employee work procedures and line modifications are also being made so we can maintain employee safety and recapture some lost productivity.

The completion of a total reconfiguration of our Quebec manufacturing footprint is a significant and important milestone for our business. As a global industry leader in the maple syrup industry, with a continuous improvement mindset, we will leverage this platform to deliver high quality, low cost products to our customers.

Some mention has been made in the media about the impact of COVID-19 on maple syrup supply. These reports were focused on traditional sugar shack business which has been curtailed. This situation does not have any impact on maple syrup production which although not yet complete, is projected to be above average. We’ll be able to report on this in more detail in the next quarter.

Moving onto some other developments, the new Canada-U. S. trade agreement which was recently ratified is expected to increase our sugar quota by 96 [sic] metric tonnes annually. As quotas are established on a calendar year basis, these additional volumes will be adjusted on a pro rata basis in this calendar year. We expect to have access to this new quota starting in July. However, the reduced Taber crop in Taber this year and the USDA’s allocation of 5,000 metric tonnes of beet sugar against the recently announced refined sugar quota, we anticipate the new pro rata volume will be delivered in the first quarter of fiscal 2021. This carryover and the new 2021 calendar allocation will provide us with approximately 25,000 metric tonnes of quota in fiscal 2021.

In anticipation of the larger quota associated with the new Canada-U.S.-Mexico trade agreement and a need to rebuild our supply pipeline for beet sugar, we will plant a record 30,000-acre crop which we expect to deliver an estimated 132,000 metric tonnes of sugar.

Before handing the call over to Manon to review financial results, I want to reemphasize that we remain positive on our view of the Sugar segment and expect to generate higher EBITDA than last year. With respect to the Maple business, the footprint optimization is now complete and we are seeing good operational improvements at each site. Moving forward, as commissioning is completed, we expect to continue to benefit from improving efficiencies and service levels. As we enter into the important pricing season, we are now turning our attention to margin improvement where we will be adjusting pricing to recover costs and manage our profitability whilst maintaining customer loyalty and market competitiveness.

Finally, I want to thank again our employees for their ongoing efforts and collaboration. Especially during the current COVID-19 situation where we have proudly demonstrated their commitment to our customers. With that, I turn 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. This earnings season will be marked by COVID-19 and its impact on people and businesses. Although it has been very challenging times, we are pleased to report that COVID-19 has had minimal financial impact for Rogers Sugar for the quarter.

Now looking at the second quarter results in more detail, I will start by discussing the Sugar segment. As John mentioned, our overall sales volume for the quarter was in line with the second quarter of last year. We estimate that the volume impact associated with COVID-19 was minimal in all segments except for the consumer segment. Consumer volume increased by approximately 4,800 metric tonnes compared to the previous quarter, continuing the quarterly trend of year-over-year improvements we have seen for the past year. The incremental sales in the second quarter were mainly associated with new business gain in fiscal 2019 from a national retail account. In addition, the COVID-19 driven pantry loading movement, which started in mid-March, has provided increased demand and growth in the segment and contributed to the quarter-over-quarter improvement.

Volume also increased in our liquid segment with an increase of approximately 3,300 metric tonnes driven by incremental volumes on new accounts gained later in fiscal 2019 and continued strong demand from existing customers. The impact of increased consumer and liquid volume in the quarter was offset by lower industrial and export volume. The Industrial segment sold approximately 6,100 metric tonnes less than the comparable quarter last year, of which approximately 2,000 tonnes was driven by the rail blockades that occurred in February, and impeded transportation to our Toronto distribution center resulting in lost volume to the competition. Volume also lowered in the quarter due to timing in deliveries.

Finally, as expected, export volumes lowered by approximately 1,800 metric tonnes compared to the same quarter last year, due to planned reductions and shipments to Mexico. The postponed shipments have been rolled over to fiscal 2022, allowing us to meet the needs of our domestic customers.

For the Sugar segment, adjusted gross margin and adjusted gross margin rates for the current quarter were comparable to last year. Maintenance costs were $1.8 million higher than last year as we incurred incremental spending to ensure the reliability of our cane facilities in Montreal and Vancouver as we ramped up production volumes to offset the shortfall in Taber. In addition, gross margin was impacted by $1.6 million in additional costs associated with refined sugar imported and largely sold in the quarter. We chose to import refined sugar in the quarter as a way to reduce supply chain risk. The remaining variance was due to lower byproduct revenue, somewhat offset by a reduction in energy costs, both of which were driven by the smaller crop in Taber

Overall, results were comparable to the same quarter last year as the incremental costs incurred in the current quarter were offset by costs related to facility commissioning in Vancouver incurred during the second quarter of fiscal 2019. As expected, the smaller crop in Taber added $1.1 million in distribution costs for the current quarter. This increase was partly offset by incremental distribution costs incurred in the second quarter of last year of $0.8 million relating to the Vancouver commissioning issues.

Overall, the Sugar segment’s adjusted EBITDA for the quarter was $0.4 million above last year’s comparable quarter. The adoption of IFRS 16 on the Sugar segment resulted in an increase of $0.8 million for the current quarter which was partly offset by the increase in distribution costs.

Now I’ll turn to the Maple products segment. We are pleased to report that our revenue in the quarter were 10.6% or $5.3 million higher than the comparable quarter last year as a result of increased demand from large accounts and pantry loading associated with COVID-19. Adjusted gross margin for the quarter decreased by $0.6 million when compared to the same quarter last year, resulting in a decrease of 2.1% in adjusted gross margin percentage. The impact of increased sales volume was offset by a reduction in adjusted gross margin due to competitive pressures experienced in the second half of fiscal 2019 that carried into the current quarter.

In addition, labor costs increased by $0.6 million during the current quarter due to an increase production volume to meet demand and added production capacity prior to the move to the new Granby location at the end of January. Finally, assets acquired for the footprint optimization project and the lease of the new Granby location resulted in an increase of $0.3 million in depreciation expense. Overall, adjusted gross margin for the second quarter of fiscal 2020 amounted to $4.4 million. Administration and selling expenses were $0.3 million higher than the comparable quarter last year mainly driven by additional employee benefits.

The Maple products segment adjusted EBITDA for the second quarter amounted to $2.7 million, down $0.4 million from the comparable period last year. The adoption of IFRS 16 on the Maple products segment resulted in an increase of $0.2 million for the current quarter. Consolidated adjusted EBITDA at $15.5 million was in line with the second quarter of last year, as improvement in the Sugar segment was offset by lower adjusted EBITDA in the Maple products segment.

During the quarter, the company acquired approximately 1,150,000 common shares under the normal course issuer bid for a total cash consideration of $5.4 million. Prior to quarter end, an automatic share purchase plan was put in place to continue to purchase shares during blackout periods. The NCIB was completed on March 30, 2020 following the purchase of all 1.5 million shares approved by the TSX.

Free cash flow for the trailing 12 months decreased by $9.9 million versus the comparable period last year. Free cash flow decreased as a result of lower adjusted EBITDA as well as $3.1 million in incremental share purchase under the share buyback program, higher payments for capital leases, higher interest paid, and higher capital spending net of operational excellence CapEx. This was partly offset by a reduction in income taxes paid and lower pension plan contribution. We are pleased to confirm that the declaration of a dividend of $0.09 per common share to shareholders of record on June 26, 2020 and payable on or about July 21, 2020. The total payout is estimated at $9.4 million.

I will now turn to the outlook for the remainder of fiscal 2020. It is important to note that our outlook assumes that our plants will continue to operate fully despite the COVID-19 pandemic. Starting with the Sugar segment, our volume expectations for fiscal 2020 have increased to approximately 750,000 metric tonnes, an increase of roughly 9,000 metric tonnes compared to fiscal 2019.

As John mentioned, we should benefit in the second half of the fiscal year from newly announced Canadian and global U.S. special quotas which we intend to maximize. Therefore, despite having reduced deliveries to Mexico earlier this year, we now anticipate that the total export volume should be comparable to fiscal 2019. No additional volume is expected from the Canada-United States-Mexico agreement in the current fiscal year.

As for the domestic market, we expect that an increase in consumer volume driven by COVID-19 may be offset by an anticipated reduction in the food service sector. Meanwhile, we expect minimal impact from the industrial and liquid segments. As a result, our expectations remain unchanged from the previous quarter with an increase in consumer volume of approximately 10,000 metric tonnes and comparable volumes for the industrial and liquid segments.

We will continue to backfill the volume shortfall from the reduced beet crop from production from our cane refineries. As a result, distribution costs are expected to increase versus fiscal 2019 as we ship bulk sugar to Taber to mostly service our domestic liquid customers.

Our initial estimate assumes additional costs related to COVID-19 of $1 million driven by a $2 per hour temporary premium paid to our employees working at our plant and by an increase in spending on the health and safety supplies. Overall, despite the challenges resulting from the smaller crop in Taber, we continue to expect that the Sugar segment adjusted EBITDA will exceed fiscal 2019 results. The increase in volume, the reduction in energy cost in the first half of the fiscal year, and the margin improvements from the additional consumer and special quota export volume are expected to be beneficial for the current year.

In addition, the financial impact from the Vancouver commissioning issues encountered in fiscal 2019 are behind us. All these elements should more than offset the additional costs expected as a result of the smaller production volume in Taber.

Capital spending for the current year is expected to be between $17 million and $19 million instead of the previously anticipated total of $20 million. The reduction is driven by a slowdown of projects associated with COVID-19.

Now turning to the Maple products segment, we have experienced a more stable competitive environment over the past few months. And as such, we expect that adjusted gross margin rates should remain comparable to year-to-date results. Although we continue to see strong demand associated with COVID-19, we do not project that this trend will continue for the rest of the fiscal year. Labor costs for the second half of fiscal 2020 are expected to improve versus the first half, but should remain above previously anticipated levels due to inefficiencies associated with COVID-19 and ongoing improvements required on new and installed equipment.

Capital spending for the Maple product segment should be approximately $6 million which is mostly related to the footprint optimization project. Less than $1 million is anticipated to be spent in the second half of the current year. We expect that free cash flow will cover the company’s dividend payment as improved adjusted EBITDA and lower capital expenditures net of operational excellence projects are expected to drive an increase in free cash flow when compared to fiscal 2019 despite having purchased more than 6 million in shares.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Michael Van Aelst from TD Securities. Your line is open.

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Michael Van Aelst, TD Securities Equity Research – Research Analyst [2]

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Good afternoon. Th volume outlook for the second half looks obviously quite good, so I wanted to focus more on the margins. So starting on Sugar, the EBITDA was flat despite having some significant additional costs last year due to inefficiencies. And I know you called out some higher costs in maintenance of $1.8 million and I guess imported refined sugar $1.6 million, so that’s $3.4 million. I think it was somewhere closer to $5 million last year, definitely over $4 million last year. So I’m wondering what else might have happened on the consumer gross margin in the quarter. Was that just mix or is that something else? Consumer was strong and industrial and liquid was down, so you would have thought that margin improvement would have been a bit better.

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

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The piece that you’re missing is the byproduct revenues. They had significant impact in the quarter because of the smaller crop in Taber. Beet pulp in particular was lower than last year. So that’s the other reason why the EBITDA, the gross margin was flat quarter-over-quarter.

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Michael Van Aelst, TD Securities Equity Research – Research Analyst [4]

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So would that have been at least $1 million?

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Manon Lacroix, Rogers Sugar Inc. – VP of Finance, CFO & Secretary [5]

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Yes, definitely.

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Michael Van Aelst, TD Securities Equity Research – Research Analyst [6]

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Okay. And on the Maple side, again, that margin — so I’m a little confused here because in Q1 you had I think it was a $0.45 per pound margin and you had talked at the time about competition had stabilized in the recent months and you expected margins to be stable. But now it’s I think you had $0.34 a pound in this quarter. So what changed on that front?

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

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There’s two elements to the reduced gross margin Q1 to Q2. The main, one of the main reasons is labor cost. If you are looking at the labor costs for the current quarter were above last year, last quarter, because of the move in Granby, higher production, some inefficiencies because of the COVID and higher overtime. So that’s one part. The second part is we’ve been talking about a stabilized competitive environment, but the negotiations that we’d done last year had resulted in reduced margin rates that we are carrying into this quarter. So quarter-over-quarter it doesn’t have an impact, but the mix of products that we sold to our customer, it was strong in particular in the retail large accounts and overall the margin rates for those accounts are lower. So that brought the margin rate down quarter-over-quarter when you’re comparing Q1 to Q2.

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Michael Van Aelst, TD Securities Equity Research – Research Analyst [8]

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Okay, and those employee — the higher costs tied to labor that you called out, moving to Granby, inefficiencies, COVID. Are you — are the moving costs to Granby, is that behind you now and the inefficiencies?

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

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We expect that labor costs in the back half will be still higher than expected, but lower than Q2. There is still some inefficiency gains to be had on the production lines, but the actual move and the commotion about that is behind us.

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Michael Van Aelst, TD Securities Equity Research – Research Analyst [10]

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Okay. All right, then on your, on the extra quota — I missed some numbers there. So you said for, I think you said you’re going to deliver 25,000 metric tonnes more in fiscal 2021 from the Canada-U. S. trade agreement. What was the number, what did you expect to deliver in Q1 fiscal 2021 and in this current year?

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John Holliday, Rogers Sugar Inc. – President & CEO [11]

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In this current year, we’ll deliver our full quota which is the 9,600, And we have the additional access to the quota that was associated with the sugar shortfall in the U.S. which is an additional 5,000 tonnes. And the 2021, fiscal 2021 quantity is correct, 25,000 tonnes. And the timing of that will be dependent on market opportunities where think it is best to complete those sales.

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Michael Van Aelst, TD Securities Equity Research – Research Analyst [12]

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Okay, so the 25,000 metric tonnes, is that an increase year-over-year or is that your total quota then?

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

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That’s the total quota. So a normal quota would be 9,600. So it includes 9,600 of the historical U.S. Trade Agreement and new 9,600 for the calendar year 2021. And the carryforward of the allocation, the pro rata allocation that we have this year that we won’t use because we do not have the sugar to sell and we’ve used whatever sugar we had to sell against this one-time quota that we just received.

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Michael Van Aelst, TD Securities Equity Research – Research Analyst [14]

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Okay. Can you give us any idea how much you were able to ship into the U.S. under the global quota allocation and whether that door is closed now?

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

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The door is not closed. It’s different than historical. It’s typically a run to the border and first come first serve, and the USDA determined that they were going to provide tranches. So the first two tranches have been filled. I believe there’s three more tranches to go and the first two tranches were filled at roughly say 25% of what people shipped. So we can’t establish exactly what our quota allocation will be by the end of the process. What isn’t sold under the quota will be sold as high tier into the United States. So the high tier market is attractive because No. 11 sugar is probably in the $0.10 range, $0.10 to $0.11 range, which is traditionally low, and the Canadian dollar is weak, so it makes those opportunities also attractive.

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Operator [16]

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(Operator Instructions) Your next question comes from Stephen MacLeod from BMO Capital Markets. Your line is open. Stephen MacLeod, your line is open.

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

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Oh, hi there. Sorry, I was on mute. Apologize for that. Hi, John. Hi, Manon. Thank you. I just wanted to follow-up on the Maple segment. Particularly around the competitive pressures easing. And I think I just want to clarify kind of how that dovetails with Manon, your comment that contracts entered into last year are still carrying lower margins. Can you just talk a bit about what’s happened in the competitive environment over the last few months? And where do your margins shift? Do you expect them to eventually increase?

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

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I’ll tackle some of that. So from the competitive — we characterize it as stabilized. Meaning not gone, not been any worse, not been any better. So we’ve even able to recover, renew business largely at margins that we had before. We are — there’s not much pricing activity that happened in the last quarter. We’re entering into that period of pricing now and as we mentioned in the call, what we intend to do is recover increased costs and we are looking for improving our margins in the business, but we will be doing that in a manner which ensures that we are able to remain competitive in the industry and protect our business at the same time. So the market has been stable, looking to enter into the pricing period, recovering costs, and looking to improve our margins. But do so with the intent of also maintaining our business.

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

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Okay, that’s helpful. Thank you. Then I just wanted to follow-up on Michael’s question around just the quota. I can’t seem to find that 25,000 reference in the MD&A in fiscal 2021. Could you just clarify, I know you’ve mentioned it a couple of times, but I just want to make sure I’m understanding it correctly, just when those volumes will flow through and what the different programs are?

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

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We have — they’ll flow through in the full fiscal year. We don’t have a prescribed we’ll sell X metric tonnes in every month. We make the decisions on when we think the best timing is in the market to sell that sugar. And that 25,000 metric tonnes comes from the two, the existing quota of 9,600, the new quota of 9,600, and the pro rata share of the new quota that will not be shipped in this fiscal year, but be shipped in the last quarter of this fiscal year. So I guess if there’s any fore signing, it will be we’ll be shipping that 4,000 or 5,000 tonnes before the end of this calendar year.

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

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I see. And then does any portion of that come from the global refine tier two quota that you referenced of 167,000 metric tonnes?

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John Holliday, Rogers Sugar Inc. – President & CEO [22]

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No, none whatsoever.

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Stephen MacLeod, BMO Capital Markets Equity Research – Analyst [23]

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How does that work? You said it’s first come first served. How does that work in terms of bidding on that business?

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John Holliday, Rogers Sugar Inc. – President & CEO [24]

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You basically need to have the product in the United States, cleared customers, that we can ship across the border and we can put it into bonded warehouses, have it ready, and then once the quota is made available, then people apply against it and they allocate on a pro rata basis.

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Stephen MacLeod, BMO Capital Markets Equity Research – Analyst [25]

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Okay, that’s great, thank you. Then maybe just finally, you outlined your COVID, the estimated COVID cost impact of $1 million. Is that what would you expect? Do you see that potentially moving higher over time? Or what would be the biggest delta that would make that move either lower or higher?

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Manon Lacroix, Rogers Sugar Inc. – VP of Finance, CFO & Secretary [26]

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You could split it half/half. Half is on the premium that we’re paying to our employees that are showing up to work, so it’s a $2 per hour premium that we’re paying. So this number would go up if we were to go past the end of May. And then the other half is on health and safety equipment, our supplies and I think it should be a good estimate.

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Operator [27]

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And we have another question from Michael Van Aelst from TD Securities. Your line is open.

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Michael Van Aelst, TD Securities Equity Research – Research Analyst [28]

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Yes, so the Maple pricing activity that you’re negotiating now, what period does that typically kick in at? Is that — does that start in Q3 or does that start next year or when?

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

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It will start in Q3. We do not have long term contracts in the Maple business.

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

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All right. Then I think in Maple you talked about an employee benefit as well. Or employee benefits had an increase. Is that — that was in your admin and general. Is that a one-time occurrence or is that an increase in wages and benefits, or what is it?

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

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It’s not a one-time, it’s something that you would expect would continue. It’s additional employees effectively.

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Michael Van Aelst, TD Securities Equity Research – Research Analyst [32]

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Okay, increased employees. Okay. Why do you need increased employees given that you’re becoming more efficient in the plants that you have?

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Manon Lacroix, Rogers Sugar Inc. – VP of Finance, CFO & Secretary [33]

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We’ve added personnel in selling in particular and we have also added personnel in accounting, support staff.

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Michael Van Aelst, TD Securities Equity Research – Research Analyst [34]

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Okay. And have you got efficiencies that you wanted to at Degelis yet?

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John Holliday, Rogers Sugar Inc. – President & CEO [35]

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In Degelis we got to the line efficiencies that we anticipated and we took a little bit of a step back because of COVID because some of the line efficiencies are driven by operating practices that we cannot support, or could not initially support in the COVID environment. So they were lost for probably 6 to 8 weeks. We’ve got plans on how to reconfigure some of the work to ensure that we’re protecting the health and safety of employees and recover or recuperate some of those efficiencies to get back to where we were which is where we plan to be.

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Michael Van Aelst, TD Securities Equity Research – Research Analyst [36]

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Okay. And in Granby, I think in Q1 you were still working out of that, both plants. In 2Q, did you close the old plant already?

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John Holliday, Rogers Sugar Inc. – President & CEO [37]

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We closed it on the — we switched over to the new plant on the 1st of February, 31st of January.

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Michael Van Aelst, TD Securities Equity Research – Research Analyst [38]

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Okay. And then you talked about cutting down your backlog by I think it was 50% last quarter. Are you caught up on the backlog yet?

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John Holliday, Rogers Sugar Inc. – President & CEO [39]

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We fully caught up on the backlog that we had. Where I would say we have transitioned to, we had a good quarter in volume, we had a particularly good quarter in the month of March, and we had a very strong quarter or strong start to the month which Manon alluded to. So we don’t have a backlog. We had lead times that are longer because the order demand is significantly different than normal.

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Michael Van Aelst, TD Securities Equity Research – Research Analyst [40]

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So we’ve seen, because you mentioned that you had strong demand in I guess the back half of March, but then I thought you also said in your guidance that you didn’t expect that to continue. But so far it is?

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John Holliday, Rogers Sugar Inc. – President & CEO [41]

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So far. We had a good month of April, absolutely. But we have no way, and this very uncharted waters for us and for everybody with response to what will happen to the long-term demand. So we’re not trying to forecast continuation because we don’t have any basis from which to do that.

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Michael Van Aelst, TD Securities Equity Research – Research Analyst [42]

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Okay. And the strong growth, is it coming from within Quebec or are you starting to see improvements in the rest of Canada and U.S. after you boosted your marketing spend?

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John Holliday, Rogers Sugar Inc. – President & CEO [43]

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It’s in the U.S., it’s in Europe, both. Those two markets stand out.

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Michael Van Aelst, TD Securities Equity Research – Research Analyst [44]

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Okay, and rest of Canada, any progress there yet?

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John Holliday, Rogers Sugar Inc. – President & CEO [45]

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Yep, in there as well. Relative to what we’re seeing short term which is hard to kind of separate from what’s COVID and what’s normal course of business.

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Michael Van Aelst, TD Securities Equity Research – Research Analyst [46]

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Okay. And as you move into export markets like U.S. and Europe, are those typically higher margin markets for you? Or are you going to be pricing aggressive to get it?

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

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It’s more account specific. So I don’t think it’s — I wouldn’t want to characterize it totally as geographic.

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Operator [48]

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Your next question comes from Endri Leno from National Bank Financial. Your line is open.

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Endri Leno, National Bank Financial, Inc., Research Division – Associate [49]

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Thanks for taking my questions. The first one, just wondered if you would clarify a little bit on the Maple side of business. Because you mentioned that you want to, when you go into the new pricing environment, get new contracts to recover some of the lost margin or improve margin amongst other things. But at the same time, protect your market share. I was wondering if you can explain like how you intend to do that.

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John Holliday, Rogers Sugar Inc. – President & CEO [50]

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How do we expect —

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Endri Leno, National Bank Financial, Inc., Research Division – Associate [51]

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How do you expect margin improvement while protecting market share?

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John Holliday, Rogers Sugar Inc. – President & CEO [52]

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Because we think that the marketplace will accept that and because there’s a recognition that the market has been under significant pressure and cost recovery will be a requirement and we believe that modest changes to improve our margin are reasonable and acceptable.

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Endri Leno, National Bank Financial, Inc., Research Division – Associate [53]

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Okay, great. Thank you. Another, I think it was Manon that mentioned that you expect some of the food service sector declines, the food service sector to offset gains in the consumer on the Sugar side of business. How has that dynamic played so far into Q3? And yeah, how has that played so far in Q3?

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Manon Lacroix, Rogers Sugar Inc. – VP of Finance, CFO & Secretary [54]

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Well I think the demand is somewhat of a similar answer to what John discussed on the Maple side. I mean consumer volume is still strong on the Sugar side in April, it’s hard to tell really what we think is going to happen. But we did see some reduction on the food service sector, although it’s not a big portion of our business.

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Endri Leno, National Bank Financial, Inc., Research Division – Associate [55]

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Okay. Are you able to at least kind of ballpark quantify like what percentage of the volumes would be consumer and what percent would be food service?

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Manon Lacroix, Rogers Sugar Inc. – VP of Finance, CFO & Secretary [56]

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Oh, the consumer sector is much higher. It’s not even comparable. But if you’re looking at our volume, we’re still calling the full year 10,000 up on the consumer side. And year-to-date we’re up roughly 12,000 tonnes. So look, I can mean ballpark, it’s small numbers.

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Operator [57]

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Your next question comes from Frederic Tremblay with Desjardins. Your line is open.

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Frederic Tremblay, Desjardins Securities Inc., Research Division – Analyst [58]

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Thank you. In the Sugar segment, you mentioned $1.8 million in incremental maintenance costs and $1.6 million from imported sugar. Was just wondering if those are one-time costs or if we should expect that to be reputed in future quarters, repeated in future quarters, pardon me. And wondering how that would tie into your expectations for adjusted gross margin in the future quarters for Sugar.

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Manon Lacroix, Rogers Sugar Inc. – VP of Finance, CFO & Secretary [59]

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Okay, well first of all, on the maintenance side, this quarter we were above on the maintenance. It was mostly driven by a ramp up of our operations. In Montreal for example we do a shutdown at Christmas and we took advantage of it to do more maintenance. And also, in Vancouver because of the increase in production, it’s effectively 50% more than we did in the past as the maintenance costs have gone up. But again, it was more on preventive, making sure that the plants were reliable and maintain productivity. In the back half, I would expect that the maintenance costs would stabilize and be more comparable to the previous year. On the refined sugar purchases, we did buy more than we bought and sold in the quarter, but there’s more to come. So I would expect maybe like double that I guess likely that will come in the backend, back half of the year. And then on your gross margin, obviously the TRQ got added, that will be beneficial on our gross margin. And additional volume as well in the back half, that will be positive. Versus last year, the main impact was in the second quarter regarding the Vancouver commissioning issue. There was some cost in Q3 but not as much. So that should be also beneficial on the gross margin.

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Frederic Tremblay, Desjardins Securities Inc., Research Division – Analyst [60]

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Thank you. And then on the Maple business, are you able to quantify what percentage or proportion of your Maple business is subject to the pricing discussions that you mentioned in the coming weeks? Is it the majority of the business that’s impacted by that?

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

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No, I don’t have a comment on that.

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Operator [62]

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We have another question from Michael Van Aelst from TD Securities. Your line is open.

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Michael Van Aelst, TD Securities Equity Research – Research Analyst [63]

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All right, third time in, hopefully the last time. I think you — did I hear you say that year-to-date your consumer volumes were up 12,000? Because I see it up 8,400 —

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Manon Lacroix, Rogers Sugar Inc. – VP of Finance, CFO & Secretary [64]

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Yes, sorry. Yes, 8,400, yes.

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Michael Van Aelst, TD Securities Equity Research – Research Analyst [65]

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Okay, so you’re almost up 10,000 year-to-date and we’re still going through COVID, people are still at home cooking more, baking more. Is there some reason why you’re being so conservative on that consumer volume?

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Manon Lacroix, Rogers Sugar Inc. – VP of Finance, CFO & Secretary [66]

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I think it’s just very hard to predict how long it’s going to continue. And we went the conservative route to predict the volume. It could be soft, it could be stronger than that, depending on how long it lasts.

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Michael Van Aelst, TD Securities Equity Research – Research Analyst [67]

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Is there any category that you think you might be, might not be as conservative then in your guidance?

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

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No, they’re pretty — there’s movement, but for example on the industrial, it’s really minimal. From one year to the next, even if you move like 5,000 tonnes up and down, it’s really tiny, it’s like less than 1%. So it’s kind of similar situation. I think that probably consumer is the part where is maybe the most conservative and then on the export side, we’ll try to maximize as much as we can on the exports with the TRQ or the high tier.

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Operator [69]

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We have no further questions. I’ll turn the call back over to the presenters for closing remarks.

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John Holliday, Rogers Sugar Inc. – President & CEO [70]

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Okay. Well, everybody, thank you very much for your time and your questions. We will talk to you at the end of the next quarter. Have a good day and be safe.

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Manon Lacroix, Rogers Sugar Inc. – VP of Finance, CFO & Secretary [71]

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Thanks, everyone.

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Operator [72]

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Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.