Rogers Sugar Inc.: Interim Report for the 2nd Quarter 2017 Results

May 3, 2017

MONTRÉAL, QUÉBEC–(Marketwired – May 3, 2017) – Rogers Sugar Inc. (TSX:RSI)

Message to Shareholders: On behalf of the Board of Directors, I am pleased to present the unaudited condensed consolidated interim financial results of Rogers Sugar Inc. (the “Company”) for the three and six months ended April 1, 2017.

Volume for the second quarter of fiscal 2017 was 168,723 metric tonnes compared to 161,638 metric tonnes in the comparable quarter of last year, an increase of approximately 7,100 metric tonnes. Year-to-date, volume of 337,099 metric tonnes was approximately 18,500 metric tonnes higher than last year. Industrial volume decreased from the comparable quarter by approximately 2,100 metric tonnes largely as a result of timing and slower growth from existing customers. Year-to-date, the industrial segment was approximately 3,700 metric tonnes higher than the comparable period last year, driven by the increase in the first quarter volume due to strong demand from existing customers. Consumer volume was higher than last year’s comparable quarter by approximately 600 metric tonnes but was slightly lower than the first half of fiscal 2016 by approximately 300 metric tonnes. The variation for the quarter and year-to-date is due to timing in customers’ retail promotions. Liquid volume increased for the quarter and year-to-date by approximately 2,700 metric tonnes and 7,000 metric tonnes respectively, mainly explained by the start at the end of October 2016 of a new long-term contract with a High Fructose Corn Syrup (“HFCS”) substitutable customer in Western Canada. Some of the positive variance was offset by modest volume losses in Eastern Canada against HFCS and liquid sucrose competition. Finally, export volume was approximately 5,900 metric tonnes and 8,100 metric tonnes higher than the second quarter and year-to-date of fiscal 2016, respectively. The improvement in volume is mainly explained by the additional tonnage contracted in Mexico for the next three years, which started at the beginning of this fiscal year. In addition, beet sugar deliveries under the Canada specific U.S. quota are ahead of last year for the quarter and year-to-date, which also contributed to the positive variation for both periods.

With the mark-to-market of certain derivative financial instruments and embedded derivatives in non-financial instruments at the end of each reporting period, our accounting income does not represent a complete understanding of factors and trends affecting the business. Consistent with previous reporting, we therefore prepared adjusted gross margin and adjusted earnings results to reflect the performance of the Company during the period without the impact of the mark-to-market of derivative financial instruments and embedded derivatives in non-financial instruments. Earnings before interest and income taxes (“EBIT”) included a mark-to-market loss of $6.7 million for the second quarter and a mark-to-market loss of $7.6 million year-to-date, which were added to calculate adjusted EBIT and adjusted gross margin results.

Adjusted gross margin improved for the quarter and year-to-date versus fiscal 2016. Adjusted gross margin amounted to $23.3 million for the current quarter and $52.4 million year-to-date. Last year’s adjusted gross margins for the comparable periods were $20.4 million for the quarter and $46.2 million year-to-date. The increase in adjusted gross margin for the quarter of $2.9 million and year-to-date of $6.2 million is due mainly to an increase in sales volume and higher by-product revenues, due to additional acreage planted for the 2016 beet crop. Adjusted gross margin per metric tonne for the current quarter was $137.90 compared to $126.00 for the comparable quarter of fiscal 2016, an improvement of $11.90. Year-to-date, adjusted gross margin rate per metric tonne was $155.39, an increase of $10.36 per metric tonne from last year’s comparable period. The increase for the quarter and year-to-date is due mainly to improved selling margins, higher by-product revenues and efficiency gain as a result of a higher throughput in Taber.

Administration and selling expenses were $0.3 million and $2.0 million higher than the second quarter of last year and year-to-date, respectively. In the first quarter of fiscal 2016, the Company reversed a non-cash accrual of $1.2 million for the settlement of the Western salaried defined benefit pension plan. Excluding the impact of this settlement, administration and selling expenses were $0.8 million higher than the first half of last fiscal year. The increase for the quarter and year-to-date is mainly due an increase in employee benefits and timing.

Distribution expenses were $0.1 million and $0.2 million lower for the current quarter and year-to-date.

As a result, adjusted EBIT was $15.4 million for the second quarter of fiscal 2017 versus $12.7 million for the comparable quarter and $37.0 million year-to-date, versus $32.6 million for the comparable period last year.

On April 27, 2017, the Company reached a five-year labour agreement with the Taber factory unionized employees.

Free cash flow was $4.3 million higher than the comparable quarter in fiscal 2016 and was $5.6 million higher than the first half of fiscal 2016. The increase in free cash flow for the quarter is mostly due to higher adjusted gross margin of $2.9 million, lower capital expenditures, net of operational excellence capital expenditures of $2.0 million and lower pension plan contributions of $0.2 million. In the second quarter last year, the Company purchased and cancelled common shares for a total value of $0.4 million, which had a positive cash flow variance when comparing quarter-over-quarter. However, these positive variances were partially offset by higher income taxes paid of $1.4 million. Year-to-date, the increase is also explained by higher adjusted gross margin of $6.2 million, lower capital expenditures, net of operational excellence capital expenditures of $2.0 million and lower pension plan contributions of $1.7 million. In fiscal 2017, the Company received $0.4 million as a result of the exercise of share options by certain executives, as opposed to a cash outflow of $0.7 million to purchase and cancel common shares of the Company. This created a year-over-year positive variance of $1.2 million. Somewhat offsetting these positive variances are an increase of $5.3 million in income taxes paid.

Looking ahead, we expect the industrial volume to be slightly down versus last year due to slower growth from our existing customers while the consumer segment is forecast to be comparable to fiscal 2016.

As previously mentioned, the Company will benefit in fiscal 2017 from an increase in sales volume for the liquid segment due to a long-term contract with a HFCS substitutable customer. As such, we anticipate that the liquid segment will be approximately 15,000 metric tonnes higher than last year, an improvement of 5,000 metric tonnes versus the first quarter outlook, which is explained by additional volume contracted with existing customers.

Finally, the export segment is expected to be approximately 7,000 metric tonnes higher than last year, due to additional tonnage contracted in Mexico as well as opportunistic sales the Company was able to enter into. We continue to closely monitor the export market in order to take advantage of any additional volume the Company could benefit from.

As a result of the above, the Company expects the total volume for the year to be approximately 20,000 metric tonnes higher than last fiscal year.

We contracted 27,000 acres for planting in Taber.

FOR THE BOARD OF DIRECTORS,

Dallas Ross, Chairman

Montreal, Québec – May 3, 2017

MANAGEMENTS’ DISCUSSION AND ANALYSIS

This Management’s Discussion and Analysis (“MD&A”) dated May 3, 2017 of Rogers Sugar Inc. (“Rogers”) should be read in conjunction with the unaudited condensed consolidated interim financial statements and notes thereto for the period ended April 1, 2017, as well as the audited consolidated financial statements and MD&A for the year ended October 1, 2016. The quarterly condensed consolidated interim financial statements and any amounts shown in this MD&A were not reviewed nor audited by our external auditors.

Management is responsible for preparing the MD&A. This MD&A has been reviewed and approved by the Audit Committee of Rogers and its Board of Directors.

Non-GAAP measures

In analyzing our results, we supplement our use of financial measures that are calculated and presented in accordance with 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.

Forward-looking statements

This report contains certain forward-looking statements, which reflect the current expectations of Rogers and Lantic Inc. (together referred to as “the Company”) with respect to future events and performance. Wherever used, the words “may” “will,” “anticipate,” “intend,” “expect,” “plan,” “believe,” and similar expressions identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Although this is not an exhaustive list, the Company cautions investors that statements concerning the following subjects are, or are likely to be, forward-looking statements: future prices of raw sugar, natural gas costs, the opening of special refined sugar quotas in the United States, beet production forecasts, the status of labour contracts and negotiations, the level of future dividends and the status of government regulations and investigations. Forward-looking statements are based on estimates and assumptions made by the Company in light of its experience and perception of historical trends, current conditions and expected future developments, as well as other factors that the Company believes are appropriate and reasonable in the circumstances, but there can be no assurance that such estimates and assumptions will prove to be correct. This could cause actual performance or results to differ materially from those reflected in the forward-looking statements, historical results or current expectations.

Additional information relating to the Company, including the Annual Information Form, Quarterly and Annual reports and supplementary information is available on SEDAR at www.sedar.com.

Internal disclosure controls

In accordance with Regulation 52-109 respecting certification of disclosure in issuers’ interim filings, the Chief Executive Officer and Vice-President Finance have designed or caused it to be designed under their supervision, disclosure controls and procedures.

In addition, the Chief Executive Officer and Vice-President Finance have designed or caused it to be designed under their supervision internal controls over financial reporting (“ICFR”) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes.

The Chief Executive Officer and the Vice-President Finance have evaluated whether or not there were any changes to the Company’s ICFR during the three month period ended April 1, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s ICFR. No such changes were identified through their evaluation.

Results of operations

Consolidated Results		For the three months ended				For the six months ended
(In thousands of dollars, except for volume and per share information)		April 1, 2017 (Unaudited)		April 2, 2016 (Unaudited)		April 1, 2017 (Unaudited)		April 2, 2016 (Unaudited)
Volume (metric tonnes)		168,723		161,638		337,099		318,564
Revenues	$	163,566	$	133,988	$	323,170	$	264,078
Gross margin		16,605		20,520		44,781		59,084
Administration and selling expenses		5,312		4,988		10,602		8,554
Distribution expenses		2,509		2,632		4,799		5,040
Earnings before interest and provision for income taxes (EBIT)		8,784		12,900		29,380		45,490
Net finance costs		2,414		2,595		4,719		4,992
Provision for income taxes		1,582		2,633		6,321		10,755
Net earnings	$	4,788	$	7,672	$	18,340	$	29,743
Net earnings per share basic	$	0.05	$	0.08	$	0.20	$	0.32

In the normal course of business, the Company uses derivative financial instruments consisting of sugar futures, foreign exchange forward contracts, natural gas futures and interest rate swaps. For fiscal 2016, all derivative financial instruments were marked-to-market at each reporting date, with the unrealized gains/losses charged to the unaudited condensed consolidated interim statement of earnings. As of October 2, 2016, the Company adopted all the requirements of IFRS 9 (2014) Financial Instruments. As a result, the Company has designated as effective hedging instruments its natural gas futures and its interest rate swap agreements entered into in order to protect itself against natural gas prices and interest rate fluctuations as cash flow hedges. Derivative financial instruments pertaining to sugar futures and foreign exchange forward contracts continue to be marked-to-market at each reporting date and are charged to the unaudited condensed consolidated interim statement of earnings. The unrealized gains/losses related to natural gas futures and interest rate swaps are accounted for in other comprehensive income. The amount recognized in other comprehensive income is removed and included in net earnings under the same line item in the consolidated statement of earnings and comprehensive income as the hedged item, in the same period that the hedged cash flows affect net earnings, reducing earnings volatility related to the movements of the valuation of these derivatives hedging instruments. The transitional marked-to-market balances outstanding as of October 1, 2016 will be amortized over time based on their settlements until all existing natural gas futures and all existing interest rate swaps agreements have expired.

The Company sells refined sugar to some clients in U.S. dollars. Prior to October 1, 2016, these sales contracts were viewed as having an embedded derivative if the functional currency of the customer was not U.S. dollars, the embedded derivative being the source currency of the transaction. The embedded derivatives were marked-to-market at each reporting date, with the unrealized gains/losses charged to the unaudited condensed consolidated interim statement of earnings with a corresponding offsetting amount charged to the unaudited condensed consolidated statement of financial position. As of October 2, 2016, the U.S. dollars of these sales contract will no longer be considered as being an embedded derivative as it was determined that the U.S. dollar is commonly used in Canada. This change in estimate will be applied prospectively, as a result, only the embedded derivatives relating to sales contracts outstanding as of October 1, 2016 will continue to be marked-to-market every quarter until all the volume on these contracts has been delivered.

Management believes that the Company’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 hedge accounting is not applied. These adjusted financial results provide a more complete understanding of factors and trends affecting our business. This measurement is a non-GAAP measurement.

Management uses the non-GAAP adjusted results of the operating company to measure and to evaluate the performance of the business through its adjusted gross margin, adjusted EBIT and adjusted net earnings. In addition, management believes that these measures are important to our investors and parties evaluating our performance and comparing such performance to past results. Management also uses adjusted gross margin, adjusted EBIT and adjusted net earnings when discussing results with the Board of Directors, analysts, investors, banks and other interested parties.

The results of operations would therefore need to be adjusted by the following:

Income (loss)		For the three months ended						For the six months ended
(In thousands)		April 1, 2017 (Unaudited)			April 2, 2016 (Unaudited)			April 1, 2017 (Unaudited)			April 2, 2016 (Unaudited)
Mark-to-market adjustment on other derivatives	$	(3,079	)	$	(6,194	)	$	(8,064	)	$	(1,437	)
Cumulative timing differences		(4,208	)		6,348			(1,010	)		14,321
Adjustment to cost of sales		(7,287	)		154			(9,074	)		12,884
Amortization of transitional balance to cost of sales for cash flow hedges		625			–			1,473			–
Total adjustment to cost of sales	$	(6,662	)	$	154		$	(7,601	)	$	12,884

For fiscal 2017, the mark-to-market on other derivatives represents the following elements: sugar futures, foreign exchange forwards and embedded derivatives. The price movements in raw sugar resulted in a mark-to-market loss for fiscal 2017 of $1.7 million and $6.3 million for the current quarter and year-to-date, respectively. Foreign exchange forward contracts and embedded derivatives, on which foreign exchange movements have an impact, had a combined mark-to-market loss of $1.4 million for the second quarter of fiscal 2017 and a mark-to-market loss of $1.8 million, year-to-date. For fiscal 2016, the fluctuation in raw sugar values resulted in a $1.3 million mark-to-market loss for the comparable quarter of fiscal 2016 and a mark-to-market gain of $3.1 million for the first half of fiscal 2016. Foreign exchange forward contracts and embedded derivatives, on which foreign exchange movements have an impact, had a combined mark-to-market loss of $3.9 million for the second quarter of fiscal 2016. Year-to-date, a mark-to-market loss of $1.5 million was recorded in fiscal 2016. Natural gas prices variation resulted in a mark-to-market loss of $1.0 million and $3.0 million for the second quarter of fiscal 2016 and year-to-date, respectively.

Cumulative timing differences, as a result of mark-to-market gains or losses, are recognized by the Company only when sugar is sold to a customer and previously, to October 1, 2016, when natural gas was used. The gains or losses on sugar and related foreign exchange paper transactions are largely offset by corresponding gains or losses from the physical transactions, namely sale and purchase contracts with customers and suppliers.

As previously mentioned, starting on October 2, 2016, natural gas futures were designated as an effective cash flow hedging instrument and as a result, mark-to-market adjustments are now recorded in other comprehensive income. The transitional balances, representing the mark-to-market value recorded as of October 1, 2016, will be subsequently removed from other comprehensive income when the natural gas futures will be liquidated, in other words, when the natural gas is used. As a result, in the current quarter and year-to-date, the Company removed a gain of $0.6 million and $1.5 million, respectively, from other comprehensive income and recorded a gain of the same amount in cost of sales. The transitional balance relating to natural gas futures will be fully depleted in fiscal 2020.

The above described adjustments are added or deducted to the mark-to-market results to arrive at the total adjustment to cost of sales. For the second quarter of the current year, the total cost of sales adjustment is a loss of $6.7 million to be added to the unaudited condensed consolidated interim operating results versus a gain of $0.2 million to be deducted from the unaudited condensed consolidated interim operating results for the comparable quarter last year. Year-to-date, the total cost of sales adjustment is a loss of $7.6 million to be added to the unaudited condensed consolidated interim operating results compared to a gain of $12.9 million to be deducted from the unaudited condensed consolidated interim operating results for the comparable period last year.

Similar to the natural gas futures, starting on October 2, 2016, interest rate swap agreements were designated as effective cash flow hedging instruments and as a result, mark-to-market adjustments are now recorded in other comprehensive income. The transitional balances, representing the mark-to-market value recorded as of October 1, 2016, will be subsequently removed from other comprehensive income when each of the fixed interest rate tranches will be liquidated, in other words, when the fixed interest rate is paid. As a result, in the current quarter and year-to-date, the Company removed a gain of $0.1 million and $0.2 million, respectively from other comprehensive income and recorded a gain of the same amount in net finance costs. For the comparative periods of fiscal 2016, the Company recorded a mark-to-market loss of $0.1 million for the second quarter of fiscal 2016 and a minimal gain for the first six months. The transitional balance relating to interest rate swap agreements will be fully depleted in fiscal 2020.

The following is a table showing the adjusted unaudited condensed consolidated interim results (non-GAAP) without the above mark-to-market adjustments:

Consolidated Results		For the three months ended						For the six months ended
(In thousands of dollars, except per share information)		April 1, 2017 (Unaudited)			April 2, 2016 (Unaudited)			April 1, 2017 (Unaudited)			April 2, 2016 (Unaudited)
Gross margin as per financial statements	$	16,605		$	20,520		$	44,781		$	59,084
Adjustment as per above		7,287			(154	)		9,074			(12,884	)
Amortization of transitional balance to cost of sales as per above		(625	)		–			(1,473	)		–
Adjusted gross margin		23,267			20,366			52,382			46,200
EBIT as per financial statements		8,784			12,900			29,380			45,490
Adjustment as per above		7,287			(154	)		9,074			(12,884	)
Amortization of transitional balance to cost of sales as per above		(625	)		–			(1,473	)		–
Adjusted EBIT		15,446			12,746			36,981			32,606
Net earnings as per financial statements		4,788			7,672			18,340			29,743
Adjustment to cost of sales as per above		7,287			(154	)		9,074			(12,884	)
Amortization of transitional balance to cost of sales as per above		(625	)		–			(1,473	)		–
Amortization of transitional balance to net finance costs		(87	)		–			(202	)		–
Adjustment for mark-to-market of finance costs		–			97			–			10
Income taxes on above adjustments		(1,735	)		15			(1,993	)		3,512
Adjusted net earnings	$	9,628		$	7,630		$	23,746		$	20,381
Net earnings per share basic, as per financial statements	$	0.05		$	0.08		$	0.20		$	0.32
Adjustment for the above		0.05			–			0.05			(0.10	)
Adjusted net earnings per share basic	$	0.10		$	0.08		$	0.25		$	0.22

Revenues for the quarter were $29.6 million and $59.1 million higher than the second quarter and year-to-date last year, respectively, due to the increase in sales volume in fiscal 2017, combined with an increase in raw sugar values during the current fiscal year.

As previously mentioned, gross margin of $16.6 million for the quarter and $44.8 million year-to-date does not reflect the economic margin of the Company, as it includes a loss of $6.7 million for the current quarter for the mark-to-market of derivative financial instruments explained earlier and a loss of $7.6 million for the first half of fiscal 2017. We will therefore comment on adjusted gross margin results.

Distribution expenses were $0.1 million and $0.2 million lower for the current quarter and year-to-date.

Net finance costs for the quarter and year-to-date include the transfer of a gain from other comprehensive income of $0.1 million and $0.2 million, respectively, relating to the transitional balance as of October 1, 2016 of the cash flow hedges of interest rate swap agreements while the second quarter last year included a mark-to-market loss on interest rate swaps of $0.1 million and a nominal amount year-to-date. Without the above adjustments, net finance costs for the second quarter were comparable to last year and $0.1 million lower than the first six months of fiscal 2016.

The provision for income taxes includes an income tax recovery of $1.7 million and $2.0 million for the quarter and year-to-date, respectively versus a nominal income tax expense and an income tax expense of $3.5 million for the comparable periods last year for the total cost of sales and net finance costs adjustments, as explained above. On an adjusted basis, the provision for income taxes was approximately $3.3 million for the current quarter and $8.3 million year-to-date. This compares to $2.6 million and $7.2 million for the same periods last year, respectively. The increase for the quarter is due mainly to an increase in adjusted earnings before income taxes.

Statement of quarterly results

The following is a summary of selected financial information of the unaudited condensed consolidated interim financial statements and non-GAAP measures of the Company for the last eight quarters.


(In thousands of dollars, except for volume, margin rate and per		2017 (Unaudited)				2016 (Unaudited)					2015 (Unaudited)
share information)			2-Q	1-Q	4-Q		3-Q	2-Q	1-Q	4-Q		3-Q
Volume (MT)			168,723	168,376	187,179		169,481	161,638	156,926	192,912		160,713
Revenues			163,566	159,604	161,733		138,600	133,988	130,090	155,107		130,592
Gross margin			16,605	28,176	32,418		36,721	20,520	38,564	23,675		10,854
EBIT			8,784	20,596	24,472		28,636	12,900	32,590	13,753		3,748
Net earnings			4,788	13,552	16,453		19,383	7,672	22,071	7,801		1,050
Gross margin rate per MT			98.42	167.34	173.19		216.67	126.95	245.75	122.72		67.54
Per share
Net earnings
	Basic		0.05	0.14	0.18		0.21	0.08	0.23	0.08		0.01
	Diluted		0.05	0.14	0.16		0.19	0.08	0.21	0.08		0.01
Non-GAAP Measures
Adjusted gross margin			23,267	29,115	29,615		20,356	20,366	25,834	24,054		19,432
Adjusted EBIT			15,446	21,535	21,669		12,271	12,746	19,860	14,132		12,326
Adjusted net earnings			9,628	14,118	14,263		7,259	7,630	12,751	8,494		7,060
Adjusted gross margin rate per MT			137.90	172.92	158.22		120.11	126.00	164.63	124.69		120.91
Adjusted net earnings per share
Basic			0.10	0.15	0.15		0.08	0.08	0.14	0.09		0.08
Diluted			0.10	0.14	0.14		0.08	0.08	0.13	0.09		0.08

Historically the first quarter (October to December) of the fiscal year is the best quarter for adjusted gross margins and adjusted net earnings due to the favourable sales mix associated with an increased proportion of consumer sales during that period of the year. At the same time, the second quarter (January to March) historically has the lowest volume as well as an unfavourable customer mix, resulting in lower revenues, adjusted gross margins and adjusted net earnings. It should be noted that the fourth quarter of fiscal 2015 represents 14 weeks of operation as opposed to 13 weeks in the comparable period of fiscal 2016.

Liquidity

Cash flow generated by the operating company, Lantic, is paid to Rogers 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 Rogers, after having taken reasonable reserves for capital expenditures and working capital. The cash received by Rogers is used to pay dividends to its shareholders.

		For the three months ended						For the six months ended
(In thousands of dollars)		April 1, 2017 (Unaudited)			April 2, 2016 (Unaudited)			April 1, 2017 (Unaudited)			April 2, 2016 (Unaudited)
Cash flow from (used in) operating activities	$	16,869		$	5,334		$	(2,427	)	$	19,075
Cash flow (used in) from financing activities		(15,459	)		(2,109	)		6,522			(14,903	)
Cash flow used in investing activities		(3,136	)		(4,362	)		(4,433	)		(5,434	)
Net decrease in cash and cash equivalents	$	(1,726	)	$	(1,137	)	$	(338	)	$	(1,262	)

Cash flow from operations was positive $16.9 million in the second quarter of 2017, as opposed to positive $5.3 million in the comparable quarter of fiscal 2016. The positive variance of $11.5 million is mostly explained by a positive non-cash working capital variation of $18.7 million, due mainly to a significant year-over-year movement in inventories. In addition, pension contributions were $0.2 million lower than the comparable quarter. Slightly offsetting some of these positive variances were a decrease of $3.9 million in gross margin, a negative non-cash variance in fair value of derivative financial instruments of $2.3 million and higher income taxes paid of $1.4 million. Year-to-date, cash flow from operations was negative $2.4 million compared to positive $19.1 million last year, a negative variation of $21.5 million. The year-to-date variance is mainly explained by a $14.3 million decrease in gross margin, higher income taxes paid of $5.3 million and a negative non-cash variation in fair value of financial instruments of $5.3 million. These negative variances were partly offset by a positive non-cash working capital variation of $1.7 million, lower pension contribution of $1.7 million and lower interest paid of $0.1 million.

Cash flow from financing activities was negative $15.5 million for the current quarter versus negative $2.1 million for the comparable quarter of last year. The variance is attributable to a decrease in borrowings for the current quarter as opposed to an increase in the comparable quarter. Year-to-date, cash flow from financing activities was positive $6.5 million compared to negative $14.9 million, a variation year-over-year of $21.4 million as a result of higher total borrowings compared to the prior year. The increase in borrowing for the quarter and year-to-date is mostly explained by higher inventories due to a bigger beet crop and timing in raw sugar vessels arrivals in Montreal and Vancouver, combined with an increase in #11 raw sugar prices, which contributed to further increase the inventory value. In addition, in fiscal 2017, $0.4 million was received following the exercise of share options by certain executives. In fiscal 2016, the Company purchased and cancelled common shares under the Normal Course Issuer bid (“NCIB”) for a total cash outflow of $0.7 million.

Capital expenditures were lower by $1.2 million and $1.0 million in the second quarter of fiscal 2017 and year-to-date, respectively, due to timing in spending on capital projects.

In order to provide additional information, the Company believes it is appropriate to measure free cash flow, a non-GAAP measure, which is generated by the operations of the Company and can be compared to the level of dividends paid by Rogers. Free cash flow is defined as cash flow from operations excluding changes in non-cash working capital, mark-to-market and derivative timing adjustments, financial instruments non-cash amount and including capital expenditures net of operational excellence projects.

Free cash flow is as follows:


			For the three months ended						For the six months ended
(In thousands of dollars)			April 1, 2017 (Unaudited)			April 2, 2016 (Unaudited)			April 1, 2017 (Unaudited)			April 2, 2016 (Unaudited)
Cash flow from operations		$	16,869		$	5,334		$	(2,427	)	$	19,075
Adjustments:
	Changes in non-cash working capital		(8,514	)		10,140			23,939			25,597
	Mark-to-market and derivative timing adjustments		7,287			(57	)		9,074			(12,874	)
	Amortization of transitional balances		(712	)		–			(1,675	)		–
	Financial instruments non-cash amount		(294	)		(2,646	)		962			(4,372	)
	Capital expenditures		(3,136	)		(4,362	)		(4,433	)		(5,434	)
	Operational excellence capital expenditures		964			173			1,268			235
	Share options exercised		–			–			428			–
	Purchase and cancellation of common shares		–			(398	)		–			(727	)
Free cash flow		$	12,464		$	8,184		$	27,136		$	21,500
Declared dividends		$	8,459		$	8,449		$	16,919		$	16,907

Changes in non-cash operating working capital represent quarter-over-quarter movement in current assets such as accounts receivables and inventories and current liabilities like accounts payable. Movements in these accounts are due mainly to timing in the collection of receivables, receipts of raw sugar and payment of liabilities. Increases or decreases in such accounts do not therefore constitute available cash for distribution. Such increases or decreases are financed from available cash or from the Company’s available credit facilities of $150.0 million. Increases or decreases in short-term bank indebtedness are also due to timing issues from the above, and therefore do not constitute available cash for distribution.

The combined impact of the mark-to-market and financial instruments non-cash amount of $6.3 million for the quarter and $8.4 million year-to-date does not represent cash items as these contracts will be settled when the physical transactions occur and is therefore adjusted to free cash flow.

Capital expenditures, net of operational excellence projects, were lower than last year by approximately $2.0 million for the quarter and year-to-date, due to timing in spending for capital projects. Operational excellence capital expenditures are added back as these capital projects are not required for the operation of the refineries but are undertaken due to operational savings to be realized when these projects are completed. Most of the spending from operational excellence capital expenditures in fiscal 2017 relate to an energy saving project at the Montreal refinery, which is expected to be completed by the end of the fiscal year and will start generating savings in fiscal 2018.

In the first quarter of the current year, an amount of $0.4 million was received following the exercise of share options by certain executives of the Company. Last year, Rogers repurchased 97,800 common shares during the quarter and 178,600 common shares year-to-date under the NCIB for a total cash consideration of $0.4 million and $0.7 million, respectively.

The Company declared a quarterly dividend of 9.0 cents per common share for a total amount of approximately $8.5 million during the quarter.

Contractual obligations

There are no significant changes in the contractual obligations table disclosed in the Management’s Discussion and Analysis of the October 1, 2016 Annual Report.

At April 1, 2017, the operating company had commitments to purchase a total of 1,048,000 metric tonnes of raw sugar, of which 203,626 metric tonnes had been priced for a total dollar commitment of $125.7 million.

On April 27, 2017, the Company reached a five-year labour agreement with the Taber factory unionized employees.

Capital resources

Lantic has $150.0 million as an authorized line of credit available to finance its operation and it expires in June 2021. At quarter-end, $83.0 million had been drawn from the working capital line of credit. In addition, $0.9 million in cash was also available.

Cash requirements for working capital and other capital expenditures are expected to be paid from available credit resources and from funds generated from operations.

On April 25, 2017, the Company exercised its option to extend the maturity date of its revolving credit facility of $150.0 million to June 28, 2022 under the same terms and conditions of the credit agreement entered into on June 28, 2013. In addition, on April 28, 2017, the Company borrowed an additional amount of $50.0 million by drawing a portion of the funds available under an accordion feature embedded in its revolving credit facility (“Accordion borrowings”). The Accordion borrowings carry the same terms and conditions as the $150.0 million revolving credit facility, except that it will mature on December 31, 2018. The funds from the Accordion borrowings were used to repay the Fourth series convertible unsecured subordinated debentures (“Fourth series debentures”).

Outstanding securities

During the first quarter of fiscal 2017, a total of 80,000 common shares were issued pursuant to the exercise of share options by certain executives for a total cash consideration of $0.4 million. In addition, holders of the Fourth series 5.7% convertible unsecured subordinated debentures (“Fourth Series”) converted a nominal amount into 1,538 common shares. Year-to-date, a total amount of $0.4 million were converted into 66,922 common shares.

The Fourth series of $49.6 million matured on April 30, 2017 and was repaid by using the Accordion borrowings under the Company’s revolving credit facility.

On December 5, 2016, the Company granted a total of 360,000 share options to certain executives at an exercise price of $6.51 under the share option plan. In addition, during the first quarter, a Share Appreciation Right (“SARs”) was created under the existing Share Option Plan. On December 5, 2016, a total of 125,000 SARs were issued to an executive at an exercise price of $6.51.

In November 2015, the Company received approval from the Toronto Stock Exchange to proceed with another NCIB whereby the Company could purchase up to 500,000 common shares. The NCIB commenced on December 1, 2015 and continued until November 30, 2016. During fiscal 2016, the Company purchased a total of 178,600 common shares under the NCIB in place at the time, for a total cash consideration of $0.7 million. All shares purchased were cancelled.

As at May 3, 2017, there were 93,997,082 common shares outstanding.

Critical accounting estimate and accounting policies

There are no significant changes in the critical estimate and accounting policies disclosed in the Management’s Discussion and Analysis of the October 1, 2016 Annual Report, except as follows:

As at October 2, 2016, embedded derivatives, which relate to the foreign exchange component of certain sales contracts denominated in U.S. currency, will no longer be separated from the host contract as it has been determined that the U.S. dollar is commonly used in Canada. This change in estimate will be applied prospectively, as such, any contracts for which it was determined there was an embedded derivative that needed to be separated from the host contract as of October 1, 2016 will continue to be treated as such as a transitional step to meet the new interpretation. These contracts will continue to be marked-to-market every quarter until all the volume on the contract has been delivered.

Significant accounting policies

The significant accounting policies as disclosed in the Company’s audited annual consolidated financial statements for the year ended October 1, 2016 have been applied consistently in the preparation of these unaudited condensed consolidated interim financial statements except as noted below:

IFRS 9, Financial Instruments:
The Company early adopted all the requirements of IFRS 9 (2014), Financial Instruments with a date of initial application of October 2, 2016. The standard establishes principles for the financial reporting classification and measurement of financial assets and financial liabilities. This standard incorporates a new hedging model which increases the scope of hedged items eligible for hedge accounting and aligns hedge accounting more closely with risk management. This standard also amends the impairment model by introducing a new “expected credit loss” model for calculating impairment.

This new standard also increases required disclosures about an entity’s risk management strategy, cash flows from hedging activities and the impact of hedge accounting on the consolidated financial statements.

IFRS 9 (2014) uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39, Financial Instruments – Recognition and Measurement. The approach in IFRS 9 (2014) is based on how an entity manages its financial instruments and the contractual cash flow characteristics of the financial assets. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward in IFRS 9 (2014).

With the adoption of IFRS 9 (2014), the Company’s natural gas futures and interest rate swap agreements were designated as being effective hedging instrument.

In accordance with the transitional provisions of IFRS 9 (2014) the financial assets and financial liabilities held at October 2, 2016 were reclassified retrospectively without prior period restatement based on the new classification requirements and the characteristics of each financial instrument at October 2, 2016.

The accounting for these instruments and the line item in which they are included in the balance sheet were unaffected by the adoption of IFRS 9 (2014). The adoption of IFRS 9 (2014) did not result in any measurement adjustments to our financial assets and financial liabilities. We have reviewed our significant accounting policies for financial instruments, derivative financial instruments, and hedging relationships to align them with IFRS 9 (2014).

Refer to note 3 (a) to the unaudited condensed consolidated interim financial statements for more detail.

IAS 19 – Employee Benefits – Cash-Settled Share Appreciation Rights:
The Company’s Share Option Plan allows for the issuance of SARs that entitles certain senior personnel of the Company to a cash payment based on the increase in the share price of the Company’s common shares from the grant date to the vesting date. The SARs are automatically exercised upon vesting dates if the share price of the Company’s common shares is greater than the price on the grant date, if not, they are rolled to the next vesting date.

A liability is recognized for the services acquired and is recorded at the fair value of the SARs in other non-current payables, except for the current portion recorded in trade and other payables, with a corresponding expense recognized in selling and administration expenses over the period that the employees become unconditionally entitled to the payment. The fair value of the employee benefits expense of the SARs is measured using the Black-Scholes pricing model.

Estimating fair value requires determining the most appropriate inputs to the valuation model including the expected life of the SARs, volatility, risk-free interest rate and dividend yield and making assumptions about them. At the end of each reporting period until the liabilities are settled, the fair value of the liability is remeasured, with any changes in fair value recognized in the consolidated statement of earnings for the period.

IAS 1, Presentation of Financial Statements:
On December 18, 2015 the IASB issued amendments to IAS 1, Presentation of Financial Statements as part of its major initiative to improve presentation and disclosure in financial reports. The amendments are effective for annual periods beginning on or after January 1, 2016. Early adoption is permitted.

The Company adopted the amendments in the first quarter of the year ending September 30, 2017. The adoption of IAS 1, Presentation of Financial Statements, did not have an impact on the unaudited condensed consolidated interim financial statements.

Annual improvements to IFRS (2012-2014) cycle:
On September 25, 2014 the IASB issued narrow-scope amendments to a total of four standards as part of its annual improvements process. The amendments will apply for annual periods beginning on or after January 1, 2016. Amendments were made to clarify the following in their respective standards:
- Changes in method for disposal under IFRS 5, Non-current Assets Held for Sale and Discontinued Operations;
- “Continuing involvement” for servicing contracts and offsetting disclosures in condensed interim financial statements under IFRS 7, Financial Instruments: Disclosures;
- Discount rate in a regional market sharing the same currency under IAS 19, Employee Benefits;
- Disclosure of information “elsewhere in the interim financial report” under IAS 34, Interim Financial Reporting.
The Company adopted the amendments in the first quarter of the year ending September 30, 2017. The adoption of Annual improvements to IFRS (2012-2014) cycle, did not have an impact on the unaudited condensed consolidated interim financial statements.

Future accounting changes

A number of new standards, and amendments to standards and interpretations, are not yet effective and have not been applied in preparing these unaudited condensed consolidated interim financial statements. These new standards, and amendments to standards and interpretations, are as follows: IFRS 2, Classification and Measurement of Share-based Payment Transactions, IFRS 15, Revenue from contracts with customers, IFRS 16, Leases, IAS 7, Disclosure Initiative, IAS 12, Recognition of Deferred Tax Assets for Unrealized Losses, Annual Improvements to IFRS Standards (2014-2016) Cycle and IFRIC 22, Foreign Currency Transactions and Advance Consideration.

The Company intends to adopt these new standards, and amendments to standards and interpretations, in its consolidated financial statements in each of their respective annual period for which they become applicable. The extent of the impact of adoption of these new standards, and amendments to standards and interpretations, has not yet been determined, except for IAS 7, IAS 12 and the Annual Improvements to IFRS Standards (2014-2016) Cycle, all of whom, the Company does not expect the amendments to have a material impact on the consolidated financial statements. Refer to note 3 (d) to the unaudited condensed consolidated interim financial statements for more detail.

Risk factors

Risk factors in the Company’s business and operations are discussed in the Management’s Discussion and Analysis of our Annual Report for the year ended October 1, 2016. This document is available on SEDAR at www.sedar.com or on one of our websites at www.lantic.ca or www.rogerssugarinc.com.

Outlook

As a result of the above, the Company expects the total volume for the year to be approximately 20,000 metric tonnes higher than last fiscal year.

The ratification process for the CETA is expected to be completed sometime in fiscal 2017. The Company will augment its market development activities and pursue export opportunities with the aim to fully capture any export opportunities provided by the new trade agreement. The Company does not expect CETA to have a significant impact on sales volume and adjusted gross margin in fiscal 2017.

The carbon tax on natural gas announced by the Alberta government took effect on January 1, 2017 with the introduction of a carbon tax of $1.011 per gigajoule. The carbon tax will increase to $1.517 per gigajoule on January 1, 2018. The impact of the carbon tax is expected to be approximately $0.5 million in fiscal 2017 as a significant portion of the slicing campaign was completed before imposition of the tax. We foresee a greater financial impact in subsequent years as the entire slicing campaign will be subject to the new carbon tax.

Approximately 90% of fiscal 2017’s natural gas requirements have been hedged at average prices comparable to those realized in fiscal 2016. In addition, some futures positions for fiscal 2018 to 2022 have been taken. Some of these positions are at prices higher than current market value, but are at the same or better levels than those achieved in fiscal 2016. We will continue to monitor natural gas market dynamics with the objective of maintaining competitive costs and minimizing natural gas cost variances.

We also expect income tax cash installments to increase in fiscal 2017 as the Company depleted its losses carry-forward during fiscal 2016.

Capital expenditures for fiscal 2017 are expected to be comparable to fiscal 2016 due to carry-over of projects and a commitment to update targeted plant control systems in our Western plants. The Company will continue to aggressively pursue operational excellence capital investments in order to reduce costs and improve manufacturing efficiencies.

The beet slicing campaign in Taber was completed in February. We are estimating total beet sugar production at approximately 120,000 metric tonnes, once the thick juice campaign is completed in the spring of 2017. We contracted 27,000 acres for planting in Taber.

The complete financial statements are available at the following address: http://media3.marketwire.com/docs/RSI_FSQ2_2017_ENG.pdf

Ms. Manon Lacroix
Vice President Finance and Secretary
(514) 940-4350
(514) 527-1610 (FAX)
www.rogerssugarinc.com
www.Lantic.ca

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