Rogers Sugar Inc.
TSX : RSI

Rogers Sugar Inc.

August 14, 2017 17:01 ET

Rogers Sugar Inc.: Interim Report for the 3rd Quarter 2017 Results

Added a New Platform for Growth With the Acquisition of a Maple Syrup Bottler

Delivered Another Strong Quarter With Positive Volume Growth Yielding Improved Adjusted EBIT for the Quarter and Year-to-Date

MONTRÉAL, QUÉBEC--(Marketwired - Aug. 14, 2017) - Rogers Sugar Inc. (TSX:RSI)

Subsequently to quarter end, Rogers Sugar Inc. (the "Company") added a new platform for growth with the acquisition of a maple syrup bottler. On August 5, 2017, the Company acquired from Champlain Financial Corporation Inc. 100% of L.B. Maple Treat Corporation ("LBMT"), for approximately $160.3 million, subject to closing adjustments. LBMT is one of the world's largest branded and private label maple syrup bottling and distribution companies. Headquartered in Granby, Québec, LBMT has three bottling plants in the heart of the world's maple syrup harvesting region (Québec and Vermont). The acquisition of LBMT will allow the Company to diversify into the large and growing market of maple syrup, a natural sweetener, with one of the leaders in the industry. This new platform will provide us with opportunities to grow organically, leverage sales and operational gains, and look at other acquisitions.

The Company delivered another strong quarter with volume growth yielding improved adjusted EBIT for the quarter and year-to-date.

Volume for the third quarter of fiscal 2017 was 173,969 metric tonnes compared to 169,481 metric tonnes in the comparable quarter of last year, an improvement of approximately 4,500 metric tonnes. Year-to-date, volume of 511,068 metric tonnes was approximately 23,000 metric tonnes higher than last year. Industrial volume decreased from the comparable quarter by approximately 3,400 metric tonnes largely as a result of timing and slower growth from existing customers. Year-to-date, the industrial segment was approximately 300 metric tonnes higher than the comparable period last year. Consumer volume was higher than last year's comparable quarter by approximately 1,300 metric tonnes and higher than the first nine months of fiscal 2016 by approximately 1,000 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 4,900 metric tonnes and approximately 11,900 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 1,700 metric tonnes and approximately 9,800 metric tonnes higher than the third quarter and year-to-date of fiscal 2016, respectively. The variation for the quarter and year-to-date, is mainly explained by the additional tonnage contracted under a three year agreement with a customer in Mexico, which started at the beginning of this fiscal year. However, for the quarter, the additional volume from Mexico was somewhat offset by a reduction in the Canada specific U.S. quota, which was mostly sold in the first half of current fiscal year, as opposed to fairly evenly throughout the first nine months of fiscal 2016.

With the mark-to-market of all 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 $13.0 million for the third quarter and a mark-to-market loss of $20.6 million year-to-date, which were added to calculate adjusted EBIT and adjusted gross margin results. See "Non-GAAP measures" section in the MD&A.

Adjusted gross margin improved for the quarter and year-to-date versus fiscal 2016 and amounted to $22.8 million and $75.2 million, respectively. Last year's adjusted gross margins for the comparable periods were $20.4 million for the quarter and $66.5 million year-to-date and included a non-cash pension charge of $2.4 million for committed future pension upgrades to one of the Company's defined benefit pension plans following the bargaining agreement reached with the Montreal unionized employees. Without this non-cash expense, adjusted gross margin was the same as last year's comparable quarter and $6.3 million higher year-to-date. The improvement in adjusted gross margin for the quarter resulting from additional sales volume was mostly offset by an increase in maintenance costs, due to additional work undertaken in Montreal and to an increase in Taber's energy costs mainly attributable to the new Carbon tax in Alberta since January 1, 2017. Finally, also having a negative impact on adjusted gross margin, are some operational inefficiencies in Vancouver, driven by an extended planned shut-down and in Taber, as a result of an extended beet campaign. Year-to-date, the adjusted gross margin improvement is mainly due to an increase in sales volume and to higher by-product revenues, as a result of a larger beet crop, somewhat offset by an increase in energy and maintenance costs incurred in the third quarter. See "Non-GAAP measures" section in the MD&A.

Adjusted gross margin per metric tonne for the current quarter was $131.31 compared to $120.11 for the comparable quarter of fiscal 2016, an improvement of $11.20 per metric tonne. Year-to-date, adjusted gross margin rate per metric tonne was $147.19 compared to $136.37 for the comparable period of fiscal 2016, an increase of $10.82 per metric tonne. Excluding the non-cash pension expense, adjusted gross margin rate was $134.32 and $141.31 for the third quarter and year-to-date of fiscal 2016, respectively. The decrease for the quarter of $3.01 is mainly attributable to the additional operating costs incurred during the quarter, as explained above. Year-to-date, the increase of $5.88 per metric tonne is due mainly to improved selling margins and higher by-product revenues, somewhat offset by an increase in maintenance costs. See "Non-GAAP measures" section in the MD&A.

Administration and selling expenses were $0.2 million higher than the third quarter of last year as $0.6 million of expenses were incurred by the end of the quarter in regards to the acquisition of L.B. Maple Treat ("LBMT"), slightly reduced by costs incurred in the third quarter of last year relating to the Montreal refinery work stoppage. Year-to-date, administration and selling expenses increased by $2.3 million from the comparable period last year. 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 $1.1 million higher than the first nine months of last fiscal year mainly due to LBMT acquisition costs incurred by the end of the quarter and to additional employee benefits incurred in the first half of the current year, slightly offset by costs incurred as a result of the work stoppage in fiscal 2016.

Adjusted EBIT was $14.5 million for the third quarter of fiscal 2017 versus $12.3 million for the comparable quarter and $51.5 million year-to-date, versus $44.9 million for the first nine months of last year. The increase in adjusted EBIT for the quarter and year-to-date is due mainly to the higher adjusted gross margin as commented above. See "Non-GAAP measures" section in the MD&A.

Free cash flow was $1.7 million lower than the comparable quarter in fiscal 2016 but was $3.9 million higher than the first nine months of fiscal 2016. The decrease in free cash flow for the quarter is mostly due to an increase in interest and income taxes payments of $0.4 million and $1.2 million, respectively and higher capital expenditures, net of operational excellence projects of $0.5 million. Offsetting some of the negative variances was a decrease in pension plan contributions of $0.2 million. Year-to-date, the increase is explained by higher adjusted gross margin of $6.3 million, adjusted for the non-cash pension expense of $2.4 million, lower capital expenditures, net of operational excellence capital expenditures of $1.5 million and lower pension plan contributions of $1.9 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. These created a total year-over-year positive variance of $10.8 million. Somewhat reducing these positive variances are an increase of $6.5 million and $0.3 million in income taxes paid and interest paid, respectively. See "Non-GAAP measures" section in the MD&A.

Consistent with our prior quarter's view, we expect the total industrial volume for the year 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 18,000 metric tonnes higher than last year, an improvement of 3,000 metric tonnes versus the second quarter outlook, which is explained some volume gain against HFCS as a result of the decrease in the #11 world raw sugar prices.

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 on a High Tier basis in the U.S. 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 18,000 metric tonnes higher than last fiscal year.

With the closing of the acquisition of LBMT on August 5, 2017, the Company expects some benefit in the last quarter of the fiscal year for approximately 2 months of operational results from LBMT. However, administration and selling expenses for the fourth quarter will include approximately $1.6 million of additional acquisition costs incurred after the end of the third quarter. In addition, net finance costs for the last quarter of fiscal 2017 will increase as a result of additional borrowings under the revolving credit facility and the Sixth series debentures issued in July.

FOR THE BOARD OF DIRECTORS,
Dallas H. Ross, Chairman
Vancouver, British Columbia - August 14, 2017

MANAGEMENTS' DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis ("MD&A") dated August 14, 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 July 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.

The following is a description of the non-GAAP measures used by the Company in the MD&A:

  • Adjusted gross margin is defined as gross margin adjusted for:
    • "the adjustment to cost of sales", which comprises of the mark-to-market gains or losses on sugar futures, foreign exchange forward contracts and embedded derivatives (and natural gas futures contracts for fiscal 2016) as shown in the notes to the unaudited condensed consolidated interim financial statements and the cumulative timing differences as a result of mark-to-market gains or losses on sugar futures, foreign exchange forward contracts and embedded derivatives (and natural gas futures for fiscal 2016) as described below; and
    • "the amortization of transitional balance to cost of sales for cash flow hedges", which is the transitional marked-to-market balance of the natural gas futures outstanding as of October 1, 2016 amortized over time based on their respective settlement date until all existing natural gas futures have expired, as shown in the notes to the unaudited condensed consolidated interim financial statements.
  • Adjusted EBIT is defined as EBIT adjusted for the adjustment to cost of sales and the amortization of transitional balances to cost of sales for cash flow hedges.
  • Adjusted net earnings is defined as net earnings adjusted for the adjustment to cost of sales, the amortization of transitional balances to cost of sales for cash flow hedges, the amortization of transitional balance to net finance costs and the income tax impact on these adjustments. Amortization of transitional balance to net finance costs is defined as the transitional marked-to-market balance of the interest rate swaps outstanding as of October 1, 2016, amortized over time based on their respective settlement date until all existing interest rate swaps agreements have expired, as shown in the notes to the condensed consolidated interim financial statements.
  • Adjusted gross margin rate per MT is defined as adjusted gross margin divided by the sales volume.
  • Adjusted net earnings per share is defined as adjusted net earnings divided by the weighted average number of shares outstanding.
  • Free cash flow is defined as cash flow from operations excluding changes in non-cash working capital, mark-to-market and derivative timing adjustments, amortization of transitional balances, financial instruments non-cash amount, and includes funds received or paid from the issue or purchase of shares and capital expenditures, net of operational excellence capital expenditures.

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. These non-GAAP measures should not be considered in isolation, or as a substitute for, analysis of the Company's results as reported under GAAP. 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 July 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 nine months ended
(In thousands of dollars, except for volume and per share information) July 1, 2017
(Unaudited)
July 2, 2016
(Unaudited)
July 1, 2017
(Unaudited)
July 2, 2016
(Unaudited)
Volume (metric tonnes) 173,969 169,481 511,068 488,046
Revenues $ 166,363 $ 138,600 $ 489,533 $ 402,678
Gross margin 9,886 36,721 54,667 95,805
Administration and selling expenses 5,653 5,423 16,255 13,977
Distribution expenses 2,720 2,662 7,519 7,702
Earnings before interest and provision for income taxes (EBIT) 1,513 28,636 30,893 74,126
Net finance costs 2,139 2,393 6,858 7,385
Provision for income taxes (178 ) 6,860 6,143 17,615
Net earnings $ (448 ) $ 19,383 $ 17,892 $ 49,126
Net earnings per share basic $ - $ 0.21 $ 0.19 $ 0.52

Volume for the third quarter of fiscal 2017 was 173,969 metric tonnes compared to 169,481 metric tonnes in the comparable quarter of last year, an improvement of approximately 4,500 metric tonnes. Year-to-date, volume of 511,068 metric tonnes was approximately 23,000 metric tonnes higher than last year. Industrial volume decreased from the comparable quarter by approximately 3,400 metric tonnes largely as a result of timing and slower growth from existing customers. Year-to-date, the industrial segment was approximately 300 metric tonnes higher than the comparable period last year. Consumer volume was higher than last year's comparable quarter by approximately 1,300 metric tonnes and higher than the first nine months of fiscal 2016 by approximately 1,000 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 4,900 metric tonnes and approximately 11,900 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 1,700 metric tonnes and approximately 9,800 metric tonnes higher than the third quarter and year-to-date of fiscal 2016, respectively. The variation for the quarter and year-to-date, is mainly explained by the additional tonnage contracted under a three year agreement with a customer in Mexico, which started at the beginning of this fiscal year. However, for the quarter, the additional volume from Mexico was somewhat offset by a reduction in the Canada specific U.S. quota, which was mostly sold in the first half of current fiscal year, as opposed to fairly evenly throughout the first nine months of fiscal 2016.

Revenues for the quarter were $27.8 million and $86.9 million higher than the third quarter and year-to-date of last year, respectively, due to the increase in sales volume in fiscal 2017, combined with an increase in #11 world raw sugar values during the current fiscal year.

Gross margin of $9.9 million for the quarter and $54.7 million year-to-date does not reflect the economic margin of the Company, as it includes a loss of $13.0 million and $20.6 million year-to-date, respectively, for the mark-to-market of derivative financial instruments as explained below.

Administration and selling expenses were $0.2 million higher than the third quarter of last year as $0.6 million of expenses were incurred by the end of the quarter in regards to the acquisition of L.B. Maple Treat ("LBMT"), slightly reduced by costs incurred in the third quarter of last year relating to the Montreal refinery work stoppage. Year-to-date, administration and selling expenses increased by $2.3 million from the comparable period last year. 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 $1.1 million higher than the first nine months of last fiscal year mainly due to LBMT acquisition costs incurred by the end of the quarter and to additional employee benefits incurred in the first half of the current year, slightly offset by costs incurred as a result of the work stoppage in fiscal 2016.

Distribution expenses were $0.1 million higher for the current quarter and $0.2 million lower year-to-date when compared to last year's comparable periods.

As a result, EBIT was $1.5 million for the third quarter of fiscal 2017 versus $28.6 million for the comparable quarter and $30.9 million year-to-date, compared to $74.1 million for the same period of last year.

Net finance costs were $0.3 million and $0.5 million lower for the current quarter and year-to-date mainly due to the transfer of a gain from other comprehensive income of $0.1 million and $0.3 million, respectively, relating to the transitional balance of October 1, 2016 of cash flow hedges of interest rate swap agreements while the third quarter and year-to date last year included a nominal mark-to-market gain on interest rate swaps. The repayment of the Fourth Series Convertible Debentures on May 1, 2017 also help reduce the net finance costs as it was replaced by an increase in the revolving credit facility, which carries a lower cost of borrowing.

The provision for income taxes decreased for the quarter and year-to-date versus to the comparative periods of fiscal 2016, which is consistent with the decrease in earnings before taxes.

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. These adjusted financial results provide a more complete understanding of factors and trends affecting our business. This measurement is a non-GAAP measurement. See "Non-GAAP measures" section.

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. See "Non-GAAP measures" section.

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

Income (loss) For the three months ended For the nine months ended
(In thousands) July 1, 2017
(Unaudited)
July 2, 2016
(Unaudited)
July 1, 2017
(Unaudited)
July 2, 2016
(Unaudited)
Mark-to-market on:
Sugar futures contracts $ (1,672 ) $ 3,864 $ (7,998 ) $ 6,991
Natural gas future contracts - 1,958 - (1,078 )
Foreign exchange forward contracts 2,117 (336 ) 181 2,934
Embedded derivatives (216 ) 1,697 (18 ) (3,101 )
Total mark-to-market adjustment on derivatives 229 7,183 (7,835 ) 5,746
Cumulative timing differences(1) (13,879 ) 9,182 (14,889 ) 23,503
Adjustment to cost of sales (13,650 ) 16,365 (22,724 ) 29,249
Amortization of transitional balance to cost of sales for cash flow hedges 693 - 2,166 -
Total adjustment to cost of sales(1) $ (12,957 ) $ 16,365 $ (20,558 ) $ 29,249
(1) See "Non-GAAP measures" section.

The fluctuations in mark-to-market adjustment on derivatives are due to the price movements in #11 world raw sugar, foreign exchange movements and natural gas prices variations. See "Non-GAAP measures" section.

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. See "Non-GAAP measures" section.

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 $0.7 million and $2.2 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. See "Non-GAAP measures" section.

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 third quarter of the current year, the total cost of sales adjustment is a loss of $13.0 million to be added to the unaudited condensed consolidated interim operating results versus a gain of $16.4 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 $20.6 million to be added to the unaudited condensed consolidated interim operating results compared to a gain of $29.2 million to be deducted from the unaudited condensed consolidated interim operating results for the comparable period last year. See "Non-GAAP measures" section.

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 $0.3 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 minimal mark-to-market gain for the third quarter and for the first nine months. The transitional balance relating to interest rate swap agreements will be fully depleted in fiscal 2020. See "Non-GAAP measures" section.

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

Consolidated Results For the three months ended For the nine months ended
(In thousands of dollars, except per share information) July 1, 2017
(Unaudited)
July 2, 2016
(Unaudited)
July 1, 2017
(Unaudited)
July 2, 2016
(Unaudited)
Gross margin as per financial statements $ 9,886 $ 36,721 $ 54,667 $ 95,805
Adjustment as per above 13,650 (16,365 ) 22,724 (29,249 )
Amortization of transitional balance to cost of sales as per above (693 ) - (2,166 ) -
Adjusted gross margin(1) 22,843 20,356 75,225 66,556
EBIT as per financial statements 1,513 28,636 30,893 74,126
Adjustment as per above 13,650 (16,365 ) 22,724 (29,249 )
Amortization of transitional balance to cost of sales as per above (693 ) - (2,166 ) -
Adjusted EBIT(1) 14,470 12,271 51,451 44,877
Net earnings as per financial statements (448 ) 19,383 17,892 49,126
Adjustment to cost of sales as per above 13,650 (16,365 ) 22,724 (29,249 )
Amortization of transitional balance to cost of sales as per above (693 ) - (2,166 ) -
Amortization of transitional balance to net finance costs (85 ) - (287 ) -
Adjustment for mark-to-market of net finance costs - (35 ) - (25 )
Income taxes on above adjustments (3,394 ) 4,276 (5,387 ) 7,788
Adjusted net earnings(1) $ 9,030 $ 7,259 $ 32,776 $ 27,640
Net earnings per share basic, as per financial statements
$
-
$
0.21
$
0.19
$
0.52
Adjustment for the above 0.10 (0.13 ) 0.16 (0.23 )
Adjusted net earnings per share basic(1) $ 0.10 $ 0.08 $ 0.35 $ 0.29
(1) See "Non-GAAP measures" section.

Adjusted gross margin improved for the quarter and year-to-date versus fiscal 2016 and amounted to $22.8 million and $75.2 million, respectively. Last year's adjusted gross margins for the comparable periods were $20.4 million for the quarter and $66.5 million year-to-date and included a non-cash pension charge of $2.4 million for committed future pension upgrades to one of the Company's defined benefit pension plans following the bargaining agreement reached with the Montreal unionized employees. Without this non-cash expense, adjusted gross margin was the same as last year's comparable quarter and $6.3 million higher year-to-date. The improvement in adjusted gross margin for the quarter resulting from additional sales volume was mostly offset by an increase in maintenance costs, due to additional work undertaken in Montreal and to an increase in Taber's energy costs mainly attributable to the new Carbon tax in Alberta since January 1, 2017. Finally, also having a negative impact on adjusted gross margin, are some operational inefficiencies in Vancouver, driven by an extended planned shut-down and in Taber, as a result of an extended beet campaign. Year-to-date, the adjusted gross margin improvement is mainly due to an increase in sales volume and to higher by-product revenues, as a result of a larger beet crop, somewhat offset by an increase in energy and maintenance costs incurred in the third quarter. See "Non-GAAP measures" section in the MD&A.

Adjusted gross margin per metric tonne for the current quarter was $131.31 compared to $120.11 for the comparable quarter of fiscal 2016, an improvement of $11.20 per metric tonne. Year-to-date, adjusted gross margin rate per metric tonne was $147.19 compared to $136.37 for the comparable period of fiscal 2016, an increase of $10.82 per metric tonne. Excluding the non-cash pension expense, adjusted gross margin rate was $134.32 and $141.31 for the third quarter and year-to-date of fiscal 2016, respectively. The decrease for the quarter of $3.01 is mainly attributable to the additional operating costs incurred during the quarter, as explained above. Year-to-date, the increase of $5.88 per metric tonne is due mainly to improved selling margins and higher by-product revenues, somewhat offset by an increase in maintenance costs. See "Non-GAAP measures" section.

As a result, adjusted EBIT was $14.5 million for the third quarter of fiscal 2017 versus $12.3 million for the comparable quarter and $51.5 million year-to-date, versus $44.9 million for the first nine months of last year. The increase in adjusted EBIT for the quarter and year-to-date is due mainly to the higher adjusted gross margin as commented above. See "Non-GAAP measures" section.

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 $0.3 million, respectively, relating to the transitional balance of October 1, 2016 of the cash flow hedges of interest rate swap agreements while the third quarter and year-to-date of last year included a nominal mark-to-market gain on interest rate swaps. Without the above adjustments, net finance costs for the third quarter and year-to-date were $0.2 million and $0.3 million lower than the comparable periods in fiscal 2016, which is mainly explained by the repayment of the Fourth Series Convertible Debentures on May 1, 2017 and was replaced by an increase in the revolving credit facility, which carries a lower cost of borrowing.

The provision for income taxes includes an income tax recovery of $3.4 million for the quarter and $5.4 million year-to-date, versus an income tax expense of $4.3 million and $7.8 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 $3.2 million for the quarter and $11.5 million year-to-date. This compares to an expense of $2.6 million and $9.8 million for the same periods last year, respectively. The increase is 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 share 2017
(Unaudited)
2016
(Unaudited)
2015
(Unaudited)
information) 3-Q 2-Q 1-Q 4-Q 3-Q 2-Q 1-Q 4-Q
Volume (MT)
173,969
168,723 168,376 187,179 169,481 161,638 156,926 192,912
Revenues
166,363
163,566 159,604 161,733 138,600 133,988 130,090 155,107
Gross margin 9,886 16,605 28,176 32,418 36,721 20,520 38,564 23,675
EBIT 1,513 8,784 20,596 24,472 28,636 12,900 32,590 13,753
Net (loss) earnings (448 ) 4,788 13,552 16,453 19,383 7,672 22,071 7,801
Gross margin rate per MT 56.83 98.42 167.34 173.19 216.67 126.95 245.75 122.72
Per share
Net (loss) earnings
Basic - 0.05 0.14 0.18 0.21 0.08 0.23 0.08
Diluted - 0.05 0.14 0.16 0.19 0.08 0.21 0.08
Non-GAAP Measures
Adjusted gross margin(1) 22,843 23,267 29,115 29,615 20,356 20,366 25,834 24,054
Adjusted EBIT(1) 14,470 15,446 21,535 21,669 12,271 12,746 19,860 14,132
Adjusted net earnings(1) 9,030 9,628 14,118 14,263 7,259 7,630 12,751 8,494
Adjusted gross margin rate per MT(1) 131.31 137.90 172.92 158.22 120.11 126.00 164.63 124.69
Adjusted net earnings per share
Basic(1) 0.10 0.10 0.15 0.15 0.08 0.08 0.14 0.09
Diluted(1) 0.10 0.10 0.14 0.14 0.08 0.08 0.13 0.09
(1) See "Non-GAAP measures" section.

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 nine months ended
(In thousands of dollars) July 1, 2017
(Unaudited)
July 2, 2016
(Unaudited)
July 1, 2017
(Unaudited)
July 2, 2016
(Unaudited)
Net cash (used in) from operating activities $ (11,397 ) $ 27,099 $ (13,824 ) $ 46,174
Cash flow from (used in) financing activities 14,672 (18,281 ) 21,194 (33,184 )
Cash flow used in investing activities (4,110 ) (2,606 ) (8,543 ) (8,040 )
Net (decrease) increase in cash and cash equivalents $ (835 ) $ 6,212 $ (1,173 ) $ 4,950

Cash flow from operations was negative $11.4 million in the third quarter of 2017, as opposed to positive $27.1 million in the comparable quarter of fiscal 2016. The negative variation of $38.5 million is mostly explained by a decrease in gross margin of $29.2 million, after eliminating the impact of the non-cash pension expense of $2.4 million in fiscal 2016, combined with a negative non-cash working capital variation of $6.4 million and a negative non-cash variance in fair value of derivative financial instruments of $1.7 million. In addition, interest and income taxes paid were $0.4 million and $1.2 million higher than the comparable period. Year-to-date, cash flow from operations was negative $13.8 million compared to positive $46.2 million last year, a negative variation of $60.0 million. The year-to-date variation is mainly explained by a decrease in gross margin of $43.5 million, after eliminating the impact of the non-cash pension expense of $2.4 million in fiscal 2016, combined with a negative non-cash working capital variation of $4.8 million and a negative non-cash variance in fair value of derivative financial instruments of $7.0 million. In addition, interest and income taxes paid were $0.3 million and $6.5 million higher than the comparable period. These negative variances were partially offset by lower pension contributions of $1.9 million.

Cash flow from financing activities was positive $14.7 million for the current quarter versus negative $18.3 million for the comparable quarter of last year, a variation of $33.0 million. The variation is attributable to the increase in borrowings and bank overdraft for the current quarter as opposed to a decrease in the comparable quarter, a variation of $82.6 million. This positive variation is offset by the repayment of the Fourth series convertible unsecured subordinated debentures ("Fourth series debentures") during the current quarter for $49.6 million. Year-to-date, cash flow from financing activities was positive $21.2 million compared to negative $33.2 million, a variation year-over-year of $54.4 million also as a result of the increase in borrowings and bank overdraft for the current period as opposed to a decrease in the comparable period, a variation of $102.9 million, offset by the repayment of the Fourth series debentures. The increase in borrowing for the quarter and year-to-date is mostly explained by higher inventories due to a larger beet crop and timing in raw sugar vessels arrivals in Montreal and Vancouver, combined with significant variation in #11 raw sugar prices, which contributed to an increase in margin call payments on raw sugar futures. 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 higher by $1.5 million and $0.5 million in the third 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. See "Non-GAAP measures" section.

Free cash flow is as follows:

For the three months ended For the nine months ended
(In thousands of dollars) July 1, 2017
(Unaudited)
July 2, 2016
(Unaudited)
July 1, 2017
(Unaudited)
July 2, 2016
(Unaudited)
Cash flow from operations $ (11,397 ) $ 27,099 $ (13,824 ) $ 46,174
Adjustments:
Changes in non-cash working capital 5,497 (943 ) 29,436 24,654
Mark-to-market and derivative timing adjustments (1) 13,650 (16,400 ) 22,724 (29,274 )
Amortization of transitional balances (778 ) - (2,453 ) -
Financial instruments non-cash amount 3,144 1,479 4,107 (2,882 )
Capital expenditures (4,110 ) (2,606 ) (8,543 ) (8,040 )
Operational excellence capital expenditures 1,038 56 2,306 291
Stock options exercised - - 428 -
Purchase and cancellation of shares - - - (727 )
Deferred financing charges (160 ) (90 ) (160 ) (90 )
Free cash flow(1) $ 6,884 $ 8,595 $ 34,021 $ 30,106
Declared dividends $ 8,460 $ 8,444 $ 25,379 $ 25,351
(1) See "Non-GAAP measures" section.

Free cash flow was $1.7 million lower than the comparable quarter in fiscal 2016 but was $3.9 million higher than the first nine months of fiscal 2016. The decrease in free cash flow for the quarter is mostly due to an increase in interest and income taxes payments of $0.4 million and $1.2 million, respectively and higher capital expenditures, net of operational excellence projects of $0.5 million. Offsetting some of the negative variances was a decrease in pension plan contributions of $0.2 million. Year-to-date, the increase is explained by higher adjusted gross margin of $6.3 million, adjusted for the non-cash pension expense of $2.4 million, lower capital expenditures, net of operational excellence capital expenditures of $1.5 million and lower pension plan contributions of $1.9 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. These created a total year-over-year positive variance of $10.8 million. Somewhat reducing these positive variances are an increase of $6.5 million and $0.3 million in income taxes paid and interest paid, respectively. See "Non-GAAP measures" section in the MD&A.

Changes in non-cash operating working capital, income taxes payable and interest payable 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 $200.0 million. Increases or decreases in short-term bank indebtedness are also due to timing issues from the above, and therefore do not constitute available cash for distribution.

The combined impact of the mark-to-market and derivative timing adjustments, amortization of transitional balances and financial instruments non-cash amount of $16.0 million for the quarter and $24.4 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. See "Non-GAAP measures" section.

Capital expenditures, net of operational excellence projects, were $0.5 million higher for the quarter and $1.5 million lower year-to-date, due to timing in spending of 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 in the first half of the year 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 July 1, 2017, the operating company had commitments to purchase a total of 1,741,000 metric tonnes of raw sugar, of which 233,388 metric tonnes had been priced for a total dollar commitment of $115.4 million.

Capital resources

Lantic had $150.0 million as an authorized line of credit available to finance its operation, expiring in June 2021. 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 debentures. At quarter-end, $155.0 million had been drawn from the line of credit and $0.1 million in cash was also available.

On August 3, 2017, the Company amended its existing revolving credit facility in line with the acquisition of LBMT. The available credit was increased by $75.0 million by exercising the accordion feature embedded in the revolving credit facility ("Additional Accordion Borrowings"). As a result of the amended revolving credit facility and the Additional Accordion Borrowings, the Company has a total of $275.0 million of available working capital from which it can borrow at prime rate, LIBOR rate or under bankers' acceptances, plus 20 to 250 basis points, based on achieving certain financial ratios. Certain assets of the Company, including trade receivables, inventories and property, plant and equipment have been pledged as security for the revolving credit facility, including some of the assets of LBMT. The maturity date of the amended revolving credit facility is June 28, 2022, except for the $50.0 million portion under the Accordion borrowings, which will expire on December 31, 2018, as disclosed above.

During the quarter, the Company entered into a five-year interest rate swap agreement for an amount of $20.0 million at a rate of 1.454%, effective for the period of May 29, 2017 to June 28, 2022 and a two-year forward start interest rate swap agreement for an amount of $30.0 million at a rate of 1.733%, effective for the period of June 29, 2020 to June 28, 2022.

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

Outstanding securities

During 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, some holders of the Fourth series debentures converted an amount of $0.4 million into 66,922 common shares.

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

On August 5, 2017, Rogers acquired from Champlain Financial Corporation Inc. 100% of LBMT, for approximately $160.3 million (the "Transaction"), subject to closing adjustments. Rogers financed the Transaction purchase price, including the Transaction costs, with a combination of (i) the net proceeds of a public offering completed on July 28, 2017 consisting of subscription receipts (converted to 11,730,000 common shares upon closing of the Transaction on August 8, 2017) for gross proceeds of $69.2 million and $57.5 million aggregate principal amount of Sixth Series 5.00% convertible unsecured subordinated debentures with a December 31, 2024 maturity date and (ii) a draw-down on the Company's $275.0 million amended credit facility for an amount of approximately $50.0 million.

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 may 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 August 14, 2017, there were 105,727,082 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.

Subsequent Event

With the closing of the acquisition of LBMT on August 5, 2017, the Company expects some benefit in the last quarter of the fiscal year for approximately 2 months of operational results from LBMT. However, administration and selling expenses for the fourth quarter will include approximately $1.6 million of additional acquisition costs incurred after the end of the third quarter. In addition, net finance costs for the last quarter of fiscal 2017 will increase as a result of additional borrowings under the revolving credit facility and the Sixth series debentures issued in July. LBMT is one of the world's largest branded and private label maple syrup bottling and distribution companies. Headquartered in Granby, Québec, LBMT has three bottling plants in the heart of the world's maple syrup harvesting region (Québec and Vermont). The acquisition of LBMT will allow the Company to diversify into the large and growing market of maple syrup, a natural sweetener, with one of the leaders in the industry. This new platform will provide us with opportunities to grow organically, leverage sales and operational gains, and look at other acquisitions.

The acquisition of LBMT has the following strategic fit and business rationale:

  • Market leadership position with significant organic and acquisition growth opportunities: Acquisition allows the Company to enter the maple syrup market with a leading position and a premier platform that is well-positioned to benefit from favorable market trends and a fragmented industry.

  • Favorable market growth trends in Canada and internationally: Worldwide consumption of maple syrup has grown at a high-single digit rate since 2010 as consumer preferences shift towards adopting food & beverages based on natural ingredients and sweeteners.

  • Leading supply chain and distribution network: Long standing partnerships with 1,400+ producers provide LBMT with the lowest cost of acquisition, premium quality, and no reliance on strategic reserves. Long-lasting relationships with producers have allowed LBMT to develop a market leadership position for organic maple syrup.

  • Strong relationship with the FPAQ who is committed to market development and growth: Maple syrup bottlers will continue to benefit from the Fédération des producteurs acéricoles du Québec (the "FPAQ") monetary support in market development and growth.

  • Complements the Company's retail, foodservice & industrial relationships: Opportunity to leverage the Company's existing strong retail and foodservice presence, capitalize on the Company's current marketing efforts and solidify its' value-added sweetener portfolio.

Outlook

Consistent with our prior quarter's view, we expect the total industrial volume for the year 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 18,000 metric tonnes higher than last year, an improvement of 3,000 metric tonnes versus the second quarter outlook, which is explained by some volume gain against HFCS as a result of the decrease in the #11 world raw sugar prices.
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 on a High Tier basis in the U.S. 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 18,000 metric tonnes higher than last fiscal year.

The ratification process for the CETA is expected to be completed sometime in calendar 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.

We contracted 27,000 acres for planting in Taber, which under normal growing conditions should derive approximately 115,000 metric tonnes of refined sugar.

The complete financial statements are available at the following address: http://media3.marketwire.com/docs/RSI_Q3-17_FS_ENG.pdf

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