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Rogers Sugar Income Fund TSX: RSI.UN 
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Jul 30, 2008 16:00 ET
Rogers Sugar Income Fund: Interim Report for the 3rd Quarter 2008 Results
Amalgamation of Lantic Sugar Limited and Rogers Sugar Ltd.
New Credit Facility Which Will Reduce Total Interest Costs
MONTREAL, QUEBEC--(Marketwire - July 30, 2008) -
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")(TSX:RSI.UN) for the three months ended June 30, 2008.
Volume for the third quarter was 176,062 metric tonnes, as opposed to 172,947 metric tonnes in the comparable quarter of last year, for an increase of approximately 3,100 metric tonnes. The increase is all due to higher liquid volume of 11,400 metric tonnes during the quarter, as we recovered one major high fructose corn syrup substitutable account earlier in the year. This was partially offset by lower industrial volume of 5,600 metric tonnes, and lower consumer volume of 4,100 metric tonnes. We believe the lower consumer volume is due mainly to timing in deliveries. Export sales increased by 1,500 metric tonnes due to our continued sales to Mexico. Year to date volume is lower by 9,700 metric tonnes due to lower industrial volume, which is partially offset with higher liquid volume.
With the adoption of new accounting policies on 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 provide 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. These adjusted results 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 June 30, 2008. In this press release, and future press releases, we will discuss adjusted gross margins, which reflect the operating income without the impact of the mark-to-market of derivative financial instruments and embedded derivatives in non-financial instruments.
For the quarter, adjusted gross margin decreased by $2.4 million, when compared to the same quarter of last year. On a per metric tonne basis, adjusted gross margin was $142.19 compared to $158.73 for the comparable quarter of last year. The decrease in the adjusted gross margin rate is due mainly to sales mix with higher liquid volume, higher maintenance and energy costs during the quarter. In addition, a profit of $0.1 million was generated on Taber's pre-hedge program during the quarter compared to $1.7 million for the comparable quarter of last year. Taber's pre-hedge represented $9.00 per metric tonne of additional gross margin in fiscal 2007. Year to date adjusted gross margin rate per metric tonne was $154.92 compared to $155.03 in fiscal 2007.
For the quarter, adjusted distributable cash was $11.9 million, as compared to $15.1 million in fiscal 2007. The decrease was due mainly to the lower profitability of the operations. During the third quarter, the Fund distributed $10.1 million compared to $9.5 million in fiscal 2007. Year to date adjusted distributable cash is $37.7 million as compared to $39.6 million in fiscal 2007, a decrease of $1.9 million. Year to date payout ratio is 79.4%.
On June 30, 2008, the Fund's wholly-owned subsidiaries, Lantic Sugar Limited and Rogers Sugar Ltd., amalgamated into a new operating entity now known as Lantic Inc. The two operating companies have worked together as one for a number of years. The established trademarks of both Lantic and Rogers will continue to be used by the new entity as we leverage the historical brand awareness enjoyed in Eastern Canada with the Lantic name, and the Rogers name in Western Canada. In addition, to improve financing capabilities as discussed below, the merger will also allow for improved tax planning at the operating level.
Also, on June 30, 2008, the new merged operation, Lantic Inc., entered into a five year term new revolving credit facility with a syndicate of lenders for an amount of $200 million. This new credit facility replaces the $65 million private debentures of Lantic Sugar Limited that matured June 4, 2008, and the term debt of $50 million held by Rogers Sugar Ltd. In order to fix the interest rates on a substantial portion of the expected drawdown of the new credit facility, on July 7, 2008, Lantic Inc. entered into a five year interest swap agreement for an amount of $70 million, at a base rate of 4.0%, before any applicable margin fees of the Credit Agreement. With this new revolving credit facility, the Company will be able to better utilize available cash reserves, and will reduce total interest costs by approximately $0.8 to $1 million annually.
FOR THE BOARD OF TRUSTEES,
(Signed)
Edward Y. Baker,
Vancouver, British Columbia - July 30, 2008
Rogers Sugar Income Fund
Interim Report for the third quarter 2008 results
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. ("Lantic") (collectively 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. Forward-looking statements should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether, or the times at which, such performance or results will be achieved. Forward-looking statements are based on information available at the time they are made, assumptions made by management, and management's good faith belief with respect to future events, and are subject to the risks and uncertainties outlined in this report that 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 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 July 23, 2008.
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 to provide reasonable assurance that (i) information required to be disclosed by the Company in its quarterly filings or other reports filed or submitted by it under applicable securities legislation is recorded, processed, summarized and reported within the prescribed time periods, and (ii) material information regarding the Company is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer in a timely manner.
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 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes. There have been no changes in internal controls during the quarter that have had a material effect on the Company's internal controls.
Results of operations
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For the three months For the nine months
Consolidated Results ended June 30 ended June 30
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(In thousands of dollars, 2008 2007 2008 2007
except for volume (Unaudited) (Unaudited) (Unaudited) (Unaudited)
and per trust unit
information)
Volume (metric tonnes) 176,062 172,947 502,614 512,358
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Revenues $115,686 $117,900 $332,636 $368,228
Gross margin 25,693 20,012 83,127 87,522
Administration and selling 5,599 5,456 14,945 14,050
Distribution 2,499 1,960 8,388 7,310
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Earnings before interest,
provision for income taxes,
depreciation and
amortization (EBITDA) $17,595 $12,596 $59,794 $66,162
Depreciation and
amortization 3,191 3,140 9,572 9,424
Interest, net of interest
income and other charges 3,702 3,740 11,151 11,618
(Recovery of) provision
for income taxes 411 (829) 2,692 7,561
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Net earnings $10,291 $6,545 $36,379 $37,559
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Net earnings per trust
unit - basic $0.12 $0.07 $0.41 $0.43
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In the normal course of business, the Fund uses derivative financial instruments consisting of sugar futures, foreign exchange forward contracts and natural gas futures. The Fund's operating companies sell 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 gain/loss 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 evaluate the performance of the business through its adjusted gross margin and adjusted EBITDA. 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 and adjusted EBITDA 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:
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For the three months For the nine months
Income (loss) ended June 30 ended June 30
2008 2007 2008 2007
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
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Mark-to-market adjustment,
including transitional
amortization $4,102 $(1,741) $6,676 $5,473
Timing in recognition of
liquidation income for
sugar inventories, sales
and purchase contracts,
natural gas futures swaps
and options and foreign
exchange futures (3,447) (5,699) (1,416) 2,617
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Total $655 $(7,440) $5,260 $8,090
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Adjusted financial
information
(non-GAAP reconciliation):
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For the three months For the nine months
Consolidated Results ended June 30 ended June 30
2008 2007 2008 2007
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
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Gross margin as per
financial statements $25,693 $20,012 $83,127 $87,522
Adjustment as per above (655) 7,440 (5,260) (8,090)
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Adjusted gross margin 25,038 27,452 77,867 79,432
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EBITDA as per financial
statements 17,595 12,596 59,794 66,162
Adjustment as per above (655) 7,440 (5,260) (8,090)
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Adjusted EBITDA 16,940 20,036 54,534 58,072
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Net earnings as per
financial statements 10,291 6,545 36,379 37,559
Adjustment as per above (655) 7,440 (5,260) (8,090)
Deferred taxes on above 277 (2,814) 1,793 2,548
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Adjusted net earnings $9,913 $11,171 $32,912 $32,017
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Net earnings per trust
unit basic, as per
financial statements $0.12 $0.07 $0.41 $0.43
Adjustment for the
above (0.01) 0.06 (0.03) (0.07)
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Adjusted net earnings
per trust unit basic $0.11 $0.13 $0.38 $0.36
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Third quarter volume increased by 3,100 metric tonnes from the comparable quarter in fiscal 2007. Industrial volume was down by 5,600 metric tonnes due to the loss of a large account for calendar 2008. Liquid volume was up 11,400 metric tonnes due to the recapture of one HFCS substitutable business for which deliveries started at the end of February. Consumer volume decreased by 4,100 metric tonnes due in large part to timing in deliveries. Export volume was up 1,500 metric tonnes due to increased sales to Mexico. Year to date volume decreased by 9,700 metric tonnes from the prior year. Industrial volume decreased by 19,400 metric tonnes due to timing in deliveries and loss of one large account, while consumer volume was lower by 4,800 metric tonnes. This is partially offset by an increase of 11,100 metric tonnes in liquid volume and of 3,400 metric tonnes in export volume due in part to increased sales under the U.S. global quota and shipments to Mexico.
Revenues for the quarter were $2.2 million lower than the previous year's comparable quarter due in large part to the lower price of world raw sugar in fiscal 2008, than in the comparable quarter of fiscal 2007, and to the sales mix.
As previously mentioned, gross margin of $25.7 million does not reflect the economic margin of the Fund, as it includes a gain of $0.7 million for the mark-to-market of derivative financial instruments. We will therefore comment on adjusted gross margin results.
For the quarter, adjusted gross margin decreased by $2.4 million, when compared to the same quarter of last year. On a per metric tonne basis, adjusted gross margins were $142.19 compared to $158.73 for the comparable quarter of last year. The decrease in adjusted gross margin is due mainly to an unfavourable sales mix with higher liquid volume and to higher maintenance and higher energy costs during the quarter. In addition, Taber's pre-hedge generated $0.1 million this quarter, as compared to $1.7 million in the comparable quarter of fiscal 2007. This represents over $9.00 per metric tonne less in adjusted margin in the third quarter of fiscal 2008. On a per metric tonne basis, adjusted gross margins were $154.92 in 2008 compared to $155.03 in fiscal 2007. Taber's pre-hedge program income was $1.9 million in fiscal 2008 as compared to $4.2 million in fiscal 2007, a difference of $4.57 per metric tonne.
Administration and selling costs were $0.1 million higher than the comparable quarter of fiscal 2007, and $0.9 million year to date. For the quarter, a charge of $0.6 million was incurred in relation to the departure of a senior executive of the Company. The year to date variance is due mainly to the recognition of a one-time gain of $1 million in fiscal 2007 from the sale of a Seat on the Commodity Exchange.
Distribution expenses are $0.5 million higher for the quarter due mainly to storage costs incurred in Taber for the larger beet crop. Again, this also accounts for the year to date increase of $1.1 million.
Interest expense for year to date was lower by approximately $0.5 million due mainly to short-term interest income earned on current cash balances.
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.
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QUARTERS
(In thousands except for volume 2008
and per trust unit information) (Unaudited)
3-Q 2-Q 1-Q
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Volume (MT) 176,062 153,507 173,045
Total revenues $115,686 $101,834 $115,116
Gross margin 25,693 23,039 34,395
EBITDA 17,595 14,846 27,353
Net earnings $10,291 $8,968 $17,120
Gross margin rate per MT $145.93 $150.09 $198.76
Per trust unit
Net earnings
Basic $0.12 $0.10 $0.20
Diluted $0.11 $0.10 $0.17
Non-GAAP Measures
Adjusted gross margin $25,038 $21,816 $31,013
Adjusted EBITDA 16,940 13,623 23,971
Adjusted net earnings $9,913 $8,157 $14,842
Adjusted gross margin rate per MT $142.19 $142.13 $179.22
Adjusted net earnings per trust unit
Basic $0.11 $0.09 $0.17
Diluted $0.11 $0.09 $0.15
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(In thousands except QUARTERS
for volume and 2007 2006
per trust unit (Unaudited) (Unaudited)
information) 4-Q 3-Q 2-Q 1-Q 4-Q
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Volume (MT) 177,382 172,947 160,733 178,680 199,316
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Total revenues $117,369 $117,900 $115,448 $134,880 $150,994
Gross margin 19,542 20,012 27,296 40,214 38,458
EBITDA 11,309 12,596 20,796 32,770 27,975
Net earnings $7,568 $6,545 $11,337 $19,677 $16,634
Gross margin rate
per MT $110.17 $115.71 $169.82 $225.06 $192.95
Per trust unit
Net earnings
Basic $0.09 $0.07 $0.13 $0.22 $0.19
Diluted $0.09 $0.07 $0.12 $0.19 $0.16
Non-GAAP Measures
Adjusted gross
margin $28,408 $27,452 $22,177 $29,803 $32,091
Adjusted EBITDA 20,175 20,036 15,677 22,359 21,608
Adjusted net
earnings $13,591 $11,171 $8,515 $12,330 $12,342
Adjusted gross
margin rate per MT $160.15 $158.73 $137.97 $166.80 $161.00
Adjusted net
earnings per trust
unit
Basic $0.15 $0.13 $0.10 $0.14 $0.14
Diluted $0.14 $0.12 $0.09 $0.13 $0.13
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Liquidity
The distributable cash generated by the operating company 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.
The Canadian Securities Administrators (the "CSA") issued National Policy 41-201, to address the disclosure of distributable cash. This was also supported by an Interpretive Release issued in July 2007 by the Canadian Institute of Chartered Accountants (the "CICA"). This Interpretive Release aims to provide a transparent measure of cash available for distribution to Unitholders that would be comparable between entities and consistent over time. This will now be labeled as Standardized Distributable Cash.
Standardized Distributable Cash 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:
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Cumulative
amounts
for last
5 fiscal
For the three months For the nine months years, ended
ended June 30 ended June 30 September 30
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2008 2007 2008 2007 2007
(In thousands (Unau- (Unau- (Unau- (Unau- (Unau-
of dollars) dited) dited) dited) dited) dited)
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Cash flow from
Operating
activities $19,802 $25,071 $14,001 $60,419 $279,289
Capital
expenditures (1,607) (1,469) (5,405) (4,757) (35,962)
Financing
restrictions - - - - -
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Standardized
distributable
cash $18,195 $23,602 $8,596 $55,662 $243,327
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There were no restrictions on distributions arising from the compliance of financial covenants for the periods shown above.
Cash flow from operations was $19.8 million in the third quarter of 2008, as opposed to $25 million in the comparable quarter of fiscal 2007. Timing in receipts of trade receivables and payments of trade payables are the major reasons for the variance. The year to date decrease in cash flow is due mainly to the large increase in inventories caused by two successive years of record beet crops, and timing in cane raw sugar receipts, and mark to market of derivative financial instruments.
Maintenance capital expenditures for the current quarter were higher than the previous year, due mainly to timing in projects when compared to fiscal 2007.
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 and 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:
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Cumulative
amounts
for last
5 fiscal
For the three months For the nine months years, ended
ended June 30 ended June 30 September 30
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2008 2007 2008 2007 2007
(In thousands (Unau- (Unau- (Unau- (Unau- (Unau-
of dollars) dited) dited) dited) dited) dited)
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Standardized
distributable
cash as per
above $18,195 $23,602 $8,596 $55,662 $243,327
Adjustments:
Changes in
non-cash
working capital (6,645) (10,530) 27,544 1,884 3,271
Mark-to-market
and derivative
timing adjustment (655) 7,440 (5,260) (8,090) (5,591)
Financial
instruments non
cash amount 759 (5,447) 5,796 (7,184) (1,460)
Investment capital
expenditures 271 248 271 723 7,040
Issuance (repurchase)
of trust units - (226) 800 (3,348) 42,599
Interest expense
on equity portion
of convertible
unsecured
debentures - - - - (20,669)
Net long-term
debt repayment - - - - (48,135)
Deferred financing
charges - - - - (8,760)
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Adjusted
distributable
cash $11,925 $15,087 $37,747 $39,647 $211,622
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Declared
Distributions $(10,111) $(9,527) $(29,986) $(28,071) $185,968
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Available cash $1,814 $5,560 $7,761 $11,576 $25,654
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Adjusted distributable cash was $3.1 million lower than the comparable quarter in fiscal 2007. This was due to the lower profitability at the operational level, with adjusted EBITDA being $3.1 lower than the comparable quarter in fiscal 2007.
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 are due to timing issues and therefore do not constitute available cash for distribution. Such increases or decreases are financed from available cash or from the Company's available credit facility. 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 gain or loss on financial derivative instruments and are therefore non-cash amounts.
Investment capital expenditures represent capital projects which are undertaken due to their benefits. In fiscal 2008 the major project to date is the development of plantation raw production in Montreal. It will reduce freight costs incurred, as it is currently shipped from the Vancouver refinery.
In fiscal 2007 the Fund, in the third quarter, repurchased and cancelled some units for a total value of $0.2 million under its Normal Course Issuer Bid.
Year to date adjusted distributable cash is $1.9 million lower than the prior year. In fiscal 2007, $3.3 million was invested in trust units repurchase, while $0.8 million was collected in fiscal 2008 in trust units issue for a net positive cash of $4.1 million year-over-year. This was partially offset by higher maintenance capital expenditures of $1.1 million in fiscal 2008 (net of investment capital), lower adjusted EBITDA of $3.5 million and timing in cash outlay for pension benefits.
Excess cash flow and net income on distributions paid
Cash flow from operating activities includes year-over-year movement in current assets such as inventories and accounts receivable, and current liabilities, like accounts payable. Movements in these accounts are due to, in large part, timing and therefore do not constitute available cash for distribution.
The following table presents excess cash flows from operating activities and net income on distributions paid for the last three years ended September 30, and for the three and nine months ended June 30, 2008 and 2007:
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For the three months For the nine months
ended June 30 ended June 30
--------------------------------------------------------------------------
2008 2007 2008 2007
(In thousands of dollars) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
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Cash flow from
operating activities $19,802 $25,071 $14,001 $60,419
Net earnings (loss) 10,291 6,545 36,379 37,559
Distributions paid 10,111 9,527 29,986 28,071
Excess (shortfall) of cash
flows from operating
activities over cash
distributions paid 9,691 15,544 (15,985) 32,348
Excess (shortfall) of net
earnings (loss) over
cash distributions paid 180 (2,982) 6,393 9,488
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Years ended September 30
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2007 2006 2005
(In thousands of dollars) (Audited) (Audited) (Audited)
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Cash flow from
operating activities $88,607 $30,833 $35,491
Net earnings (loss) 45,127 40,922 (57,249)
Distributions paid 37,728 35,869 35,583
Excess (shortfall) of cash
flows from operating
activities over cash
distributions paid 50,879 (5,036) (92)
Excess (shortfall) of net
earnings (loss) over cash
distributions paid 7,399 5,053 (92,832)
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Year to date shortfall is due mainly to the larger increase in inventories in fiscal 2008 from the year end level as compared to the same increase in fiscal 2007, even though total inventory values are comparable at $73 million for each period ended June 30. The September 30, 2007 inventories were at a level of $48.9 million as compared to $76.9 million as at September 30, 2006. The higher value at September 2006 was due mainly to the higher raw sugar value at that time, and timing of cane raw sugar vessel receipts.
In fiscal 2005, the Fund recorded a goodwill write-off of $95 million, not a cash flow item, hence the reason for the shortfall of net earnings over cash distributions in that year.
Contractual obligations
There are no material changes in the contractual obligations table disclosed in the Management's Discussion and Analysis of the September 30, 2007 Annual Report.
At June 30, 2008, Lantic had commitments to purchase a total of 1,554,000 metric tonnes of raw sugar, of which only 29,667 metric tonnes had been priced, for a total dollar commitment of $8.4 million.
Capital resources
A new authorized line of credit of $200 million is now available to finance the operations of Lantic. At quarter's end only $90 million had been drawn from the then existing line, and the Company had $8.2 million of cash.
Cash requirements for working capital and other capital expenditures are expected to be paid from available cash resources and from funds generated from operations.
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, 2007.
Risk factors
Risk factors in Lantic's and Rogers' businesses and operations are discussed in the Management's Discussion and Analysis of our Annual Report for the year ended September 30, 2007. 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
On June 30, 2008, the new merged entity, Lantic Inc., entered into a five year term new revolving credit facility with a syndicate of lenders for an amount of $200 million. This new credit facility replaces the $65 million private debentures of Lantic Sugar Limited that matured June 4, 2008, and the term debt of $50 million held by Rogers Sugar Ltd. In order to fix the interest rates on a substantial portion of the expected drawdown of the new credit facility, on July 7, 2008, Lantic Inc. entered into a five year interest swap agreement for an amount of $70 million, at a fixed base rate of 4.0%, before any applicable margin fees of the Credit Agreement. With this new revolving credit facility, the Company will be able to better utilize available cash reserves, and is therefore estimated to reduce total interest costs by approximately $0.8 to $1 million annually.
Rogers' export volume will be slightly higher than last year, as additional volume was shipped against the U.S. global quota in the first quarter, and sales volumes to Mexico should be slightly higher than the previous year.
Industrial volume for fiscal 2008 is estimated to be about 3 to 4% lower than fiscal 2007, as one large industrial account was not re-signed in fiscal 2008. As most other large accounts are currently under contract for 2008, we forecast not being able to offset this volume shortfall in 2008, unless additional export opportunities arise.
In Taber, a one year contract was negotiated with the Alberta Sugar Beet Growers. Higher prices of other agricultural commodities made it difficult to agree to a longer term contract. Beet acreage is approximately 80% of the total acreage requested. The shortfall of approximately 30,000 metric tonnes will be supplied by the Vancouver refinery.
Over 90% of the natural gas forecast use for Summer 2008 has been hedged at average prices slightly higher than the previous year. For fiscal 2009, approximately 55% has also been hedged at comparable prices to last year. In addition, some futures positions for fiscal 2010 to 2011 have been taken at levels better than what was achieved to date in fiscal 2008. We will continue to monitor natural gas market dynamics in order to minimize our natural gas costs.
The labour contracts for Lantic's Montreal facility expired at the end of February 2008. Negotiations are underway, and management expects these collective agreements to be renewed at competitive market rates.
Rogers Sugar Income Fund
Consolidated Balance Sheet
June 30, 2008 and 2007
(In thousands of dollars- except per trust unit amounts)
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June 30 September 30 June 30
2008 2007 2007
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(Unaudited) (Audited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $8,208 $53,818 $38,792
Accounts receivable 41,588 41,342 35,361
Inventories 73,017 48,868 72,907
Prepaid expenses 2,495 2,483 3,278
Future income taxes 1,409 - -
Derivative financial
instruments (Note 2) 2,502 1,626 2,048
--------------------------------------------------------------------------
129,219 148,137 152,386
Capital Assets 196,355 200,328 201,266
Derivative financial
instruments (Note 2) 5,090 668 1,849
Other assets 433 225 252
Goodwill 229,952 229,952 229,952
--------------------------------------------------------------------------
$561,049 $579,310 $585,705
--------------------------------------------------------------------------
LIABILITIES AND
UNITHOLDERS' EQUITY
Current liabilities:
Short-term borrowings (Note 3) $90,000 $- $-
Accounts payable and
accrued liabilities 37,722 40,665 39,276
Future income taxes - 867 2,398
Derivative financial
instruments (Note 2) 3,168 3,647 4,275
Current debt (Note 3) - 114,402 -
--------------------------------------------------------------------------
130,890 159,581 45,949
Employee future benefits 13,091 15,453 16,227
Derivative financial
instruments (Note 2) 88 107 439
Long-term debt (Note 3) - - 114,156
Convertible unsecured
subordinated debentures (Note 4) 130,282 130,360 130,139
Future income taxes 23,085 18,124 19,699
--------------------------------------------------------------------------
297,436 323,625 326,609
UNITHOLDERS' EQUITY
Trust units (Note 4) 563,510 561,966 563,927
Contributed surplus 3,153 3,162 2,523
Deficit (303,050) (309,443) (307,354)
--------------------------------------------------------------------------
263,613 255,685 259,096
--------------------------------------------------------------------------
$561,049 $579,310 $585,705
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Rogers Sugar Income Fund
Unaudited Consolidated Statements of Operations
For the periods ended June 30, 2008 and 2007
(In thousands of dollars- except per trust unit amounts)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
For the three months For the nine months
ended June 30 ended June 30
--------------------------------------------------------------------------
2008 2007 2008 2007
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $115,686 $117,900 $332,636 $368,228
Cost of sales 89,993 97,888 249,509 280,706
--------------------------------------------------------------------------
Gross margin 25,693 20,012 83,127 87,522
Expenses:
Administration and selling 5,599 5,456 14,945 14,050
Distribution 2,499 1,960 8,388 7,310
--------------------------------------------------------------------------
8,098 7,416 23,333 21,360
Earnings before interest,
provision for income taxes
and depreciation and
amortization 17,595 12,596 59,794 66,162
Depreciation and
amortization 3,191 3,140 9,572 9,424
--------------------------------------------------------------------------
Earnings before interest and
provision for income taxes 14,404 9,456 50,222 56,738
--------------------------------------------------------------------------
Interest on long-term debt
and convertible debentures 3,348 3,714 10,961 11,268
Amortization of deferred
financing costs 344 380 936 1,141
Short-term interest (income) 10 (354) (746) (791)
--------------------------------------------------------------------------
3,702 3,740 11,151 11,618
--------------------------------------------------------------------------
Earnings before provision
for income taxes 10,702 5,716 39,071 45,120
Provision for (recovery of)
income taxes:
Current - (12) 6 (362)
Future 411 (817) 2,686 7,923
--------------------------------------------------------------------------
411 (829) 2,692 7,561
--------------------------------------------------------------------------
Net earnings $10,291 $6,545 $36,379 $37,559
Other comprehensive income - - - 3,282
--------------------------------------------------------------------------
Comprehensive income $10,291 $6,545 $36,379 $40,841
--------------------------------------------------------------------------
Net earnings per trust unit:
Basic $0.12 $0.07 $0.41 $0.43
Diluted $0.11 $0.07 $0.38 $0.39
--------------------------------------------------------------------------
Supplemental disclosure:
Employee future benefits
expense $456 $726 $1,309 $2,166
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Rogers Sugar Income Fund
Unaudited Consolidated Statements of Unitholders' Equity
For the periods ended June 30, 2008 and 2007
(In thousands of dollars except per trust unit amounts)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
For the three months ended
(Unaudited) June 30, 2008
--------------------------------------------------------------------------
Contri-
Number of Trust buted
Trust Units Units Surplus Deficit Total
--------------------------------------------------------------------------
Balance,
beginning
of period 87,786,712 $562,790 $3,148 $(303,230) $262,708
Distributions - - - (10,111) (10,111)
Stock-based
compensation - - 5 - 5
Conversion of
convertible
debentures into
trust units 141,175 720 - - 720
Net earnings - - - 10,291 10,291
--------------------------------------------------------------------------
Balance, end
of period 87,927,887 $563,510 $3,153 $(303,050) $263,613
--------------------------------------------------------------------------
--------------------------------------------------------------------------
For the nine months ended
(Unaudited) June 30, 2008
--------------------------------------------------------------------------
Contri-
Number of Trust buted
Trust Units Units Surplus Deficit Total
--------------------------------------------------------------------------
Balance,
beginning
of period 87,582,791 $561,966 $3,162 $(309,443) $255,685
Distributions - - - (29,986) (29,986)
Stock-based
compensation - - 15 - 15
Issue of trust
units (Note 4) 200,000 804 (24) - 780
Conversion of
convertible
debentures into
trust units 145,096 740 - - 740
Net earnings - - - 36,379 36,379
--------------------------------------------------------------------------
Balance, end
of period 87,927,887 $563,510 $3,153 $(303,050) $263,613
--------------------------------------------------------------------------
--------------------------------------------------------------------------
For the nine months ended
(Unaudited) June 30, 2007
--------------------------------------------------------------------------
Accumu-
lated
Other
Contri- Compre-
Number of Trust buted hensive
Trust Units Units Surplus Income Deficit Total
--------------------------------------------------------------------------
Balance,
beginning
of period 88,788,391 $571,034 $52 $- $(318,202) $252,884
Distributions - (1,324) - - (26,747) (28,071)
Stock-based
compensation - - 36 - - 36
(Repurchase)
issue of
trust units (900,000) (5,783) 2,435 - - (3,348)
Adjustment
for change
in accounting
policies,
effective
October
1, 2006 - - - (3,282) 36 (3,246)
Reversal to
cost of
sales of
accumulated
other
comprehensive
income - - - 3,282 - 3,282
Net earnings - - - - 37,559 37,559
--------------------------------------------------------------------------
Balance,
end of
period 87,888,391 $563,927 $2,523 $- $(307,354) $259,096
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Rogers Sugar Income Fund
Unaudited Consolidated Statements of Cash Flows
For the periods ended June 30, 2008 and 2007
(In thousands of dollars- except per trust unit amounts)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
For the three months For the nine months
ended June 30 ended June 30
2008 2007 2008 2007
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------------------------------------------------------------------
Cash flows from
operating activities:
Net earnings $10,291 $6,545 $36,379 $37,559
Adjustments for items
not involving cash:
Depreciation and
amortization 3,191 3,140 9,572 9,424
Amortization of
deferred financing costs 344 380 936 1,141
Future income taxes 411 (817) 2,686 7,923
Employee future benefits (438) (435) (2,362) (1,182)
Change in derivative
financial instruments (759) 5,447 (5,796) 7,184
Stock based
compensation expenses 5 12 15 36
Other 112 269 115 218
--------------------------------------------------------------------------
13,157 14,541 41,545 62,303
--------------------------------------------------------------------------
Changes in non-cash
working capital:
Accounts receivable (5,690) 1,926 (246) 13,109
Inventories 12,368 12,682 (24,149) 3,977
Prepaid expense (473) (417) (12) (272)
Accounts payable and
accrued liabilities 440 (3,661) (3,137) (18,698)
--------------------------------------------------------------------------
6,645 10,530 (27,544) (1,884)
--------------------------------------------------------------------------
19,802 25,071 14,001 60,419
Cash flows from
financing activities:
Distributions to
Unitholders (10,111) (9,527) (29,986) (28,071)
Short-term borrowings 90,000 - 90,000 -
Repayment of term debt (115,000) - (115,000) -
Issue (repurchase) of
trust units (Note 4) - (226) 780 (3,348)
--------------------------------------------------------------------------
(35,111) (9,753) (54,926) (31,419)
--------------------------------------------------------------------------
Cash flows from
investing activities:
Additions to capital assets (1,607) (1,469) (5,405) (4,757)
--------------------------------------------------------------------------
Net change in cash and
cash equivalents (16,916) 13,849 (45,610) 24,243
Cash and cash equivalents,
beginning of period $25,124 $24,943 $53,818 $14,549
--------------------------------------------------------------------------
Cash and cash equivalents,
end of period $8,208 $38,792 $8,208 $38,792
--------------------------------------------------------------------------
Supplemental disclosure:
Interest paid on the debt 5,524 5,161 12,114 11,788
Income taxes paid 19 17 53 217
Capital assets included
in accounts payable and
accrued liabilities 796 546 796 546
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Rogers Sugar Income Fund
Notes to Interim Unaudited Consolidated Financial Statements
For the periods ended June 30, 2008 and 2007
(In thousands of dollars - except per trust unit amounts)
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 June 30, 2008, the wholly-owned subsidiaries of the Fund, Lantic Sugar Limited and Rogers Sugar Ltd. merged to form Lantic Inc. It did not create any changes in the ownership by the Fund.
Note 1: Basis of presentation
These interim unaudited consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles. The same accounting policies as disclosed in the consolidated financial statements of the Fund included in our latest annual report have been used. Accordingly, these interim unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2007 annual report. These quarterly consolidated financial statements were not reviewed or audited by our external auditors.
Note 2: Derivative financial assets/Derivative financial liabilities
Details of recorded gains/losses for the quarter, in marking-to-market all derivative financial instruments and embedded derivatives, as well as the reversal of the transitional balances are noted below. For sugar and natural gas futures contracts (derivative financial instruments), the amounts noted below are netted with the variation margins paid or received to/from these 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.
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Financial Instrument Financial Instrument
Assets Liabilities
MARK-TO-MARKET Short-term Long-term Short-term Long-term
--------------------------------------------------------------------------
Sugar futures
contracts $29 $1,512 $2,301 $75
Natural gas futures
contracts 1,526 3,558 - -
Foreign exchange
forward contracts 900 20 828 13
Embedded derivatives 47 - 39 -
--------------------------------------------------------------------------
Total $2,502 $5,090 $3,168 $88
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Amortization of
transitional balances
--------------------------------------------------------------------------
Total
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Gain / (Loss)
Statement of Operations
Cost of Sales
--------------------------------------------------------------------------
Three months ended Nine months ended
MARK-TO-MARKET June 30 June 30
--------------------------------------------------------------------------
2008 2007 2008 2007
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Sugar futures
contracts $(1,784) $2,969 $(3,931) $ 9,454
Natural gas futures
contracts 6,612 (1,521) 11,307 (577)
Foreign exchange
forward contracts (1,005) (2,400) 185 (3,263)
Embedded derivatives 279 606 (885) 444
--------------------------------------------------------------------------
Total $4,102 $(346) $6,676 $6,058
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Amortization of
transitional balances - (1,395) - (585)
--------------------------------------------------------------------------
Total $4,102 $(1,741) $6,676 $5,473
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Note 3: Bank debt
On June 4, 2008, Lantic Sugar Limited's $65 million senior secured debenture matured and was fully repaid from available cash resources and from borrowings on the working capital line of credit.
On June 30, 2008, the new merged entity, Lantic Inc. entered into a five year term new revolving credit facility, with a syndicate of lenders for an amount of $200 million. Funds were made available on July 4, 2008 to Lantic Inc. As at that date, the Company withdrew a total of $82 million on the revolving credit facility and repaid all short-term borrowings on the existing working capital line including the $50 million term debt of Rogers Sugar Ltd. All of the future borrowings by the operating Company will be made under that facility through Bankers' Acceptances or Prime Rate loans.
On July 7, 2008, Lantic Inc. entered into a five-year interest swap agreement for an amount of $70 million, at a fixed base rate of 4.005%, before any applicable margin fees of the Credit Agreement.
As such, all debt, except for convertible unsecured subordinated debentures, which are shown separately, will be current and therefore presented under current liabilities.
Note 4: Trust units
During the third quarter, $720,000 of the Third Series convertible unsecured subordinated debenture was converted by holders of the securities, for a total number of 141,175 trust units. Year to date total of $740,000 of the Third Series convertible unsecured subordinated debentures was converted for a total number of 145,096 trust units. In addition, earlier in the year a total of 200,000 trust units were exercised under the Stock Option Plan.
Note 5: Segmented information
The Fund, through its operating company operates in the sugar industry. Management organizes the results into two principal operating segments for making operating decisions and assessing performance: Eastern Canada and Western Canada. These segments are managed separately, since they require specific market strategies. The Fund assesses the performance of each segment based on operating income. Accounting policies relating to each segment are identical to those used for the purposes of the consolidated financial statements.
--------------------------------------------------------------------------
--------------------------------------------------------------------------
For the three months ended
June 30
2008
(Unaudited)
--------------------------------------------------------------------------
Eastern Western Intersegment
Canada Canada and other Total
--------------------------------------------------------------------------
Revenues $73,882 $42,628 $(824) $115,686
Earnings before interest,
provision for income
taxes and depreciation
and amortization 11,422 6,307 (134) 17,595
Depreciation and
amortization 1,851 1,027 313 3,191
Interest expense, net 8,150 5,514 (9,962) 3,702
Net earnings $896 $(191) $9,586 $10,291
Additions to property,
plant and equipment 678 929 - 1,607
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
For the three months ended
June 30
2007
(Unaudited)
--------------------------------------------------------------------------
Eastern Western Intersegment
Canada Canada and other Total
--------------------------------------------------------------------------
Revenues $79,753 $39,057 $(910) $117,900
Earnings before interest,
provision for income
taxes and depreciation
and amortization 5,797 6,892 (93) 12,596
Depreciation and
Amortization 1,845 982 313 3,140
Interest expense, net 7,812 5,298 (9,370) 3,740
Net earnings $(3,819) $1,785 $8,579 $6,545
Additions to property,
plant and equipment 1,065 404 - 1,469
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
For the nine months ended
June 30
2008
(Unaudited)
--------------------------------------------------------------------------
Eastern Western Intersegment
Canada Canada and other Total
--------------------------------------------------------------------------
Revenues $208,334 $127,930 $(3,628) $332,636
Earnings before interest,
provision for income
taxes and depreciation
and amortization 44,371 15,841 (418) 59,794
Depreciation and 5,552 3,082 938 9,572
amortization
Interest expense, net 24,586 16,505 (29,940) 11,151
Net earnings $9,568 $(2,642) $29,453 $36,379
Additions to property,
plant and equipment 3,086 2,319 - 5,405
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
For the nine months ended
June 30
2007
(Unaudited)
--------------------------------------------------------------------------
Eastern Western Intersegment
Canada Canada and other Total
--------------------------------------------------------------------------
Revenues $240,153 $131,561 $(3,486) $368,228
Earnings before interest,
provision for income
taxes and depreciation
and amortization 36,347 30,311 (496) 66,162
Depreciation and
Amortization 5,535 2,951 938 9,424
Interest expense, net 22,690 16,075 (27,147) 11,618
Net earnings $5,221 $7,009 $25,329 $37,559
Additions to property,
plant and equipment 3,315 1,442 - 4,757
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Revenues were derived from customers in the following geographic areas:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
For the three months For the nine months
ended June 30 ended June 30
--------------------------------------------------------------------------
2008 2007 2008 2007
(Unaudited) (Unaudited) (Unaudited) Unaudited)
--------------------------------------------------------------------------
Canada $111,985 $114,810 $315,140 $350,554
United States and Other 3,701 3,090 17,496 17,674
--------------------------------------------------------------------------
$115,686 $117,900 $332,636 $368,228
--------------------------------------------------------------------------
--------------------------------------------------------------------------
For more information, please contact
Rogers Sugar Income FundMr. Dan Lafrance
SVP Finance, CFO and Secretary
514-940-4350
514-527-1610 (FAX)
www.rogerssugar.com / www.lantic.ca