Rogers Sugar
Annual Report 2018

Plain-text annual report

R O G E R S S U G A R I N C . 2 0 1 8 A N N U A L R E P O R T WE ARE CANADA’S LARGEST PRODUCER OF SUGAR PRODUCTS AND BOTTLER OF MAPLE SYRUP TOTAL DIVIDEND (thousand of $) OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP TOTAL Fiscal 2018 Fiscal 2017 – – – – 9,517 8,460 – – – – 9,517 8,459 – – – – 9,487 8,460 – – – – 9,450 37,971 9,517 34,896 PER SHARE DIVIDEND ($) OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP TOTAL Fiscal 2018 Fiscal 2017 – – – – 0.09 0.09 – – – – 0.09 0.09 – – – – 0.09 0.09 – – – – 0.09 0.09 0.36 0.36 2018 ANNUAL REPORT 1 1 SUGAR VS. MAPLE SYRUP PRODUCTS 25% Maple Syrup 75% Sugar MAKING GOOD BUSINESS BETTER With a respected heritage of over 125 years of business achievements, Lantic has surely been doing many things right! At the core of our success is the need to continuously reflect and pragmatically act on the strengths and weaknesses of our overall business – and to swiftly deal with any threats to our ongoing growth. The addition of the Maple business last year represents an important GEOGRAPHIC PARTITION step in our strategy to bring innovation and expansion to our business. The initiative has provided Lantic with access to new export markets. This investment was strategic and represents the first step in the evolution of our business into a natural sweetener supplier. A year of integration work is now behind us, and solid transformational plans are now guiding us. We have resumed a mindset that focuses on day-to-day operational efficiency and continuous improvement. These are the dynamics that have shaped our 125-year history, and which will ensure Lantic’s success going forward. 5% Other 5% Europe 14% U.S. 76% Canada More on page 6 OUR FACILITIES ROGERS LBMT 1. Head Office and Cane Refinery VANCOUVER, BC 2. Beet Plant TABER, AB 3. Distribution Centre and Blending Facility TORONTO, ON 4. Administrative Office and Cane Refinery MONTREAL, QC 5. Head Office — Bottling Plant, Eastern Sales and Distribution GRANBY, QC 6. Bottling Plant, Warehousing and Shipping SAINT-HONORÉ-DE- SHENLEY, QC 7. Bottling Plant, Warehousing and Shipping DÉGELIS, QC 8. Botting Plant, Warehousing and Shipping WEBSTERVILLE, VT 1 2 6 7 4 5 3 8 2018 ANNUAL REPORT 2 REPORT FROM THE CHAIRMAN To my fellow shareholders: I am pleased to report that, excluding acquisition and non-recurring costs, the consolidated EBITDA results for fiscal 2018 were $99.9 million. These results came with a solid volume growth in the Sugar segment, which grew by approximately 3.5% during the current year. Looking at the results of the Sugar segment, year-over-year volume was approximately 25,400 metric tonnes greater than in fiscal 2017. A significant portion of this improvement was attributable to the liquid and export markets, both benefiting from low #11 sugar values which improved our competitiveness with respect to high tier refined sugar sales to the U.S. and, similarly, brought more conversion opportunities against High Fructose Corn Syrup suppliers in Canada. Overall, adjusted gross margins for the sugar business was approximately $138 per metric tonne compared to approximately $144 per metric tonne last year. The lower adjusted gross margin per metric tonne is largely explained by the somewhat lower profitability of the Taber facility where lower # 11 raw sugar values can become decoupled from our beet costs and erode some of the economic value. With the acquisition of LBMT in August and the subsequent acquisition of Decacer in November 2017, the business has tackled a significant amount of integration work. The Maple products segment adjusted EBITDA was lower than anticipated and finished the year at $18.6 million. Fiscal 2019 should offer better results with the benefit of a full year of operation of Decacer and anticipated savings and/ or operational gains, whereby we expect adjusted EBITDA to amount to $21.0 million, excluding non-recurring costs. Although the financial outcomes on the newly acquired maple business have been lower than anticipated, I am pleased by the amount of work that has been done and management’s resolve and well considered plans to still deliver the expected economic value, albeit over a modestly longer time horizon. Over the next twenty-four months, the final stages of the maple business integration should be completed. The four individual autonomous business units will have been reconfigured into one business, led by enterprise-wide business teams, with common processes that are supported by a redesigned, retooled, 2018 ANNUAL REPORT 3 best in class manufacturing platform that can support future growth. The Board continues to believe in the strategy of developing a broader product offering and expanded geographic offering of alternate natural sweeteners. Notwithstanding the time commitments and challenges that come with integrating a new business, it was encouraging for the Board to see that management ensured that the core sugar business delivered excellent results in a challenging trading environment. Overall, fiscal 2018 is the first step in the evolution of the business from a leading Canadian sugar refiner to a leading North American natural sweetener supplier. To achieve this vision we will maintain our investment and good stewardship of the core sugar business, whilst we seek new growth through acquiring and growing alternative natural sweetener businesses. The Board expects that the more diversified business platform will deliver stronger growth with more diversified and stable earnings performance. In fiscal 2018, Rogers paid quarterly dividends of $0.09 per share for a yearly total of $0.36 per share. Rogers’ free cash flow of $47.8 million represented a distribution ratio of 79% of the declared dividend for fiscal 2018 of $38.0 million. The Board of Directors will continue to assess the appropriateness of the level of the dividend based on performance and on the outlook for the business. The Board views sustainable returns to shareholders and maintenance of the dividend as a strategic priority. During the current year, Rogers issued $97.8 million of seventh series 4.75% convertible unsecured subordinated debentures. Funds were used to repay the fifth series 5.75% convertible unsecured subordinated debentures that had a maturity date of December 31, 2018. In addition, Rogers, through its subsidiary Lantic, used the remaining funds to reduce the revolving credit facility. Also, during the year, Rogers put in place a Normal Course Issuer Bid and as a result, the Corporation purchased and cancelled 736,900 common shares for a total cash consideration of $4.0 million. Finally, as we make these commitments to change, I would also like to thank all of our employees for their efforts and resolve to strengthen the Corporation. We are always guided by our obligation to both ensure and enhance the value of your investment. We thank you our shareholders for the trust and the continued support you have accorded us. On behalf of the Board of Directors, Dallas Ross Chairman November 21, 2018 2018 ANNUAL REPORT 4 REPORT FROM THE PRESIDENT AND CEO In fiscal 2018, we continued our efforts to make a good business better. The acquisition of Decacer added an important asset and capability to our maple syrup portfolio and solidified our leadership position in this growing natural sweetener segment. With our core sugar refining business and the maple syrup acquisitions, we have made good progress towards our Vision of becoming a leading North American natural sweetener supplier. The acquisition of Decacer early in fiscal 2018 created some delays to our original integration plans for LBMT and added more complexity to the overall undertaking. More importantly however, the addition of Decacer delivered an excellent manufacturing facility that, when fully leveraged, will allow us to lower our cost, improve overall product quality and support planned future growth. Measured strictly in economic terms, the results in our maple business were disappointing. Measured by what we accomplished in terms of restructuring the business and setting it up for future success, a significant amount was accomplished. New sales and go-to market strategies, new information technology platforms, new supply chain structure, a complete rethink and manufacturing optimization plan, and new standard financial procedures and policies required a significant amount of effort. We continue to believe that this new natural sweetener segment, once fully integrated and optimized, will deliver the financial results we expected. The core sugar business navigated very volatile market conditions with large commodity swings, currency fluctuations and trade threats that brought both opportunities and risks. The overall outcomes exceeded our expectations for volume which grew just short of 720,000 metric tonnes or an increase of 3.7% versus fiscal 2017. Adjusted results from operating activities (“Adjusted EBIT”) amounted to $67.8 million, which ranked fiscal 2018 as our second best result in the last 15 years when we exclude extraordinary years where the U.S. issued special refined sugar quotas due to temporary supply shortages. In fact, on this measure, our last three years represent the best three fiscal financial results over the last 15 years. These results are a testament to a strong management team that had the capacity to manage a heavy integration agenda on maple, and at the same time, maintain its attention to the needs of our sugar business. 2018 ANNUAL REPORT 5 We continue to believe our three core strategies of Operational Excellence, Market Access and Acquisition/Brand development provide the right focus for our business. This focus helps us to communicate our priorities and channel our resources, human and capital, towards making meaningful progress. With the flatter growth outlook for sugar, we have made a greater effort to increase our return on investment projects that will deliver bottom line growth and/or absorb inflation. Our operating budget earmarked approximately $6 million of capital to support investments in solutions that lower energy costs, increase automation and deliver new value-added manufacturing capabilities. A complete redesign of our sugar decolourization system in Vancouver, the automation of palletizing operations in Taber, the addition of a new fully automated retail packing line in our Toronto Blending plant and the installation of newer processing technology to lower our energy consumption in Montreal, represent the bulk of our investment initiatives in fiscal 2018. This capital spending is complemented by continuous investments in replacement of equipment that has reached the end of its useful life, and together, will lower our costs and improve our reliability and help deliver on our Operational Excellence Strategy. After much uncertainty, NAFTA negotiations concluded with a new modernized agreement, the USMCA. Although not fully ratified and likely not to take effect until mid-calendar 2019, the agreement provides a better environment for investment by food processors and some opportunities for improved market access for Canadian beet sugar and sugar-containing products. Through our association with the Canadian Sugar Institute, Lantic provided technical support to the trade negotiations that helped deliver improved outcomes for our industry. Our Market Access Strategy is equally applicable to our maple syrup business. Largely unencumbered by tariffs, the maple syrup portfolio offers us an excellent opportunity to expand sales beyond our borders. In fact, approximately 75% of our revenues in this newly acquired business come from export sales, our largest market being the USA which continues to provide good opportunities for growth in both the traditional retail and the food ingredient channels. Lastly our Acquisition Strategy continues to be an important enabler to our overall vision for the company. To achieve our vision of becoming a leading North American natural sweetener supplier, we will need to find new targets for growth. Our immediate focus in this area is the integration, but in parallel, we continue to build insights and explore potential ways to further strengthen our product offering and market development within North America through strategic partnerships or targeted acquisitions. We are continuing to pursue our strategies and achieving success will require hard work, perseverance, team work, a common purpose and a continuous improvement mindset. Reaching our vision for the future will certainly not always follow a straight line but when difficult decisions will need to be made, we will turn to our values for guidance. Finally I would like to take this opportunity to thank our valued employees for all their contributions in fiscal 2018 as well as for their ongoing support in fiscal 2019 as we work together towards evolving our business into a leading natural sweetener supplier that will deliver long-term growth and value for our shareholders. John Holliday President and Chief Executive Officer November 21, 2018 2018 ANNUAL REPORT 6 OUR EFFORTS TO MAKE A GOOD BUSINESS BETTER OPERATIONAL EXCELLENCE In fiscal 2018 a number of investments to enhance Operational Excellence were planned and executed. We introduced new technology to lower energy costs, increase automation, and deliver additional value-added manufacturing capabilities. Our deep-seated operational knowledge has in many cases yielded valuable innovation. The result has been seamless integration of new processing solutions within legacy operating assets. Underlying all of our initiatives is a passion for what we do, which has played a critical role in our recent success. MARKET ACCESS STRATEGY The sugar industry is steeped in a history of regulation and trade barriers. The USMCA represents the most recent example of such an agreement. When ratified, it will double our access to U.S. markets. Canadian origin sugar will benefit from an additional 9,600 metric tonnes of access. EXPANDING BEYOND BORDERS For Lantic, access to other markets is also being realized through our maple syrup platform. Given the nature of its unique sourcing and characteristics, this product faces substantially fewer tariffs. Our maple platform, dominated by export sales, now represents over 75% of our sales. Creating awareness and new marketing channels for this ingredient offers substantial opportunities for growth. 2018 ANNUAL REPORT 7 IMPROVED PACKAGING Paper packaging has been in use for decades. It provides an economical format to package sugar. While we continue to offer sugar in paper bags, we have recently broadened our options to include flexible pouch packaging. We are offering several OUR NEW POUCH IS RESEALABLE WITH A WIDE OPENING ALLOWING of our sugars in this modern format. Our new pouch is resealable with a wide opening USERS TO PUT A MEASURING allowing users to put a measuring spoon inside. Continuing to offer packaging SPOON INSIDE. improvements to enhance the consumer’s experience is a priority for us. NEW SPECIALIZED PRODUCTS Maple flakes and maple sugar are perfect additions to a growing roster of natural sweeteners under our brands. Consumers demand choices when it comes to natural sweeteners. We are always looking for ways to enhance our consumers’ everyday needs. Leveraging our existing relationships in the baking aisle with retailers nation-wide, provides us an efficient way to distribute innovative natural maple products. Maple flakes and maple sugar are made from 100% pure maple syrup, simply dehydrated to offer unique textural and functional characteristics. They are great on yogurt, tea and coffee, baked goods, fresh fruit and toppings for dessert. 2018 ANNUAL REPORT 8 OUR VALUES We strive to reduce our environmental footprint and add value to the bottom line. We are adopting new and better business practices, while investing in better processing technology, to reduce our environmental footprint. These initiatives require sustained effort and a mindset focused on continuous improvement. Much of this work occurs at our manufacturing facilities. Unfortunately, when embedded in our financial results, some achievements risk going unnoticed. For this reason we wanted to highlight some important successes and future goals in the area of waste reduction, energy conservation and best practices adoption. WASTE REDUCTION • Divert 100% of processing waste from landfill to composting site and reuse by producers • Achieving “Zero Waste” certification in Vancouver ENERGY CONSERVATION • Fiscal 2018 plant efficiencies lowered natural gas consumption by 5% (equivalent to the average annual amount of energy used to heat 1,590 homes in Canada) • Fiscal 2018 plant efficiencies lowered water consumption by 1.8 million liters (equivalent to the average amount of water used per day by 5,500 people) • Looking forward, our ongoing focus and investments involve a continuous reduction of our energy/water consumption. Benefits from investments made in Fiscal 2018 will be substantial, generating an additional 2% in natural gas reduction (equivalent to the annual heating consumption of 558 homes) and water reduction equivalent to 2.7 million liters (daily usage of 8,200 people). BEST PRACTICES ADOPTION • Collaborating with Alberta Sugar Beet Growers to have growers certified by recognized sustainability program • Collaboration with the Town of Taber to develop a wet land site • Working with Alberta Environment and Park on the approval and execution of our air particulate emissions reduction project in Taber. New system commissioning will be completed in Fiscal 2019. 2018 ANNUAL REPORT 9 MANAGEMENT’S DISCUSSION AND ANALYSIS CONSOLIDATED FINANCIAL STATEMENTS For the years ended September 29, 2018 and September 30, 2017 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS10 T his Management’s Discussion and Analysis (“MD&A”) of consolidated financial statements for the years ended Rogers Sugar Inc.’s (“Rogers” or the “Corporation”) audited September 29, 2018 and September 30, 2017 should be read in measures calculated and presented in accordance with IFRS. Non-GAAP financial measures are not standardized; therefore, it may not be possible to compare these financial measures with the non-GAAP financial measures of other companies having the conjunction with the audited consolidated financial statements same or similar businesses. We strongly encourage investors to and related notes for the years ended September 29, 2018 and review the audited consolidated financial statements and publicly September 30, 2017. The Corporation’s MD&A and consolidated filed reports in their entirety, and not to rely on any single financial financial statements are prepared using a fiscal year which typically measure. consists of 52 weeks, however, every five years, a fiscal year consists of 53 weeks. The fiscal years ended September 29, 2018, We use these non-GAAP financial measures in addition to, and in September 30, 2017 and October 1, 2016 all consist of 52 weeks. conjunction with, results presented in accordance with IFRS. These non-GAAP financial measures reflect an additional way of viewing All financial information contained in this MD&A and audited aspects of the operations that, when viewed with the IFRS results consolidated financial statements are prepared in accordance with and the accompanying reconciliations to corresponding IFRS International Financial Reporting Standards (“IFRS”). All amounts financial measures, may provide a more complete understanding are in Canadian dollars unless otherwise noted, and the term of factors and trends affecting our business. “dollar”, as well as the symbol “$”, designate Canadian dollars unless otherwise indicated. The following is a description of the non-GAAP measures used by the Company in the MD&A: Management is responsible for preparing the MD&A. Rogers’s audited consolidated financial statements and MD&A have been • Adjusted gross margin is defined as gross margin adjusted for: approved by its Board of Directors upon the recommendation > “the adjustment to cost of sales”, which comprises of of its Audit Committee prior to release. This MD&A is dated the mark-to-market gains or losses on sugar futures, November 21, 2018. foreign exchange forward contracts and embedded derivatives as shown in the notes to the consolidated Additional information relating to Rogers, Lantic Inc. (“Lantic”) financial statements and the cumulative timing differences (Rogers and Lantic together referred as the “Sugar segment”), as a result of mark-to-market gains or losses on sugar L.B. Maple Treat Corporation (“LBMTC”), 9020-2292 Québec Inc. futures, foreign exchange forward contracts and (“Decacer”) and Highland Sugarworks Inc. (“Highland”) (the embedded derivatives as described below; and latter three companies together referred to as “LBMT” or the > “the amortization of transitional balance to cost of sales “Maple products segment”), including the annual information for cash flow hedges”, which is the transitional marked- form, quarterly and annual reports, management proxy to-market balance of the natural gas futures outstanding circular, short form prospectus and various press releases as of October 1, 2016 amortized over time based on their issued by Rogers is available on the Rogers’s website at respective settlement date until all existing natural gas www.LanticRogers.com or on the Canadian Securities futures have expired, as shown in the notes to the Administrators’ System for Electronic Document Analysis and consolidated financial statements. Retrieval (“SEDAR”) website at www.sedar.com. Information contained in or otherwise accessible through our website does not • Adjusted EBIT is defined as EBIT adjusted for the adjustment form part of this MD&A and is not incorporated into the MD&A by to cost of sales, the amortization of transitional balances to reference. cost of sales for cash flow hedges. NON-GAAP MEASURES • Adjusted EBITDA is defined as adjusted EBIT adjusted to In analyzing results, we supplement the use of financial measures add back depreciation and amortization expenses, the Sugar that are calculated and presented in accordance with IFRS with a segment acquisition costs and the Maple products segment number of non-GAAP financial measures. A non-GAAP financial non-recurring expenses. measure is a numerical measure of a company’s performance, financial position or cash flow that excludes (includes) amounts, or is • Adjusted net earnings is defined as net earnings adjusted subject to adjustments that have the effect of excluding (including) for the adjustment to cost of sales, the amortization of amounts, that are included (excluded) in most directly comparable transitional balances to cost of sales for cash flow hedges, the Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS 11 amortization of transitional balance to net finance costs and • Adjusted pro forma EBITDA assuming the LBMTC Integration the income tax impact on these adjustments. Amortization Gains and the RSI Integration Gains is defined as the of transitional balance to net finance costs is defined as the adjusted pro forma EBITDA assuming the LBMTC Integration transitional marked-to-market balance of the interest rate Gains, adjusted to include business efficiencies, including swaps outstanding as of October 1, 2016, amortized over time procurement cost reductions and Operational Excellence, and based on their respective settlement date until all existing customer gains, as a result of the Rogers integration. interest rate swaps agreements have expired, as shown in the notes to the consolidated financial statements. • Decacer’s pro forma Adjusted EBITDA is defined as earnings before interest expenses, taxes, depreciation and amortization • Adjusted gross margin rate per MT is defined as adjusted gross expense for the twelve-month period ended March 31, 2017, margin of the Sugar segment divided by the sales volume of adjusted to take into account non-recurring items identified the Sugar segment. by the Decacer Management, non-recurring items identified by the Corporation during the course of its due diligence and • Adjusted gross margin percentage is defined as the adjusted estimated adjustments required to reflect the going-forward gross margin of the Maple products segment divided by the EBITDA run-rate. revenues generated by the Maple products segment. • Adjusted net earnings per share is defined as adjusted net excluding changes in non-cash working capital, mark-to- earnings divided by the weighted average number of shares market and derivative timing adjustments, amortization of • Free cash flow is defined as cash flow from operations outstanding. transitional balances, financial instruments non-cash amount, deferred financing charges and includes funds received from • Maple products segment Adjusted EBITDA is defined as the the issue or excludes funds paid for the purchase of shares earnings before interest expenses, taxes and depreciation and includes capital and intangible assets expenditures, net and amortization expenses of the Maple products segment, of operational excellence capital expenditures. Free cash flow adjusted for the total adjustment to cost of sales relating to for fiscal 2017 excludes any funds received or paid as part of its segment, non-recurring expenses and depreciation and the short form prospectus offering for subscription receipts amortization expenses. and convertible unsecured subordinated debentures issued in July 2017. Free cash flow for fiscal 2018 excludes any funds • LBMTC’s EBITDA is defined as earnings before interest received or paid for the issuance of the convertible unsecured expenses, taxes, depreciation and amortization expenses, subordinated debentures issued in March 2018. business combination related costs, gain on business acquisition and fair value adjustment to purchase price In the MD&A, we discuss the non-GAAP financial measures, allocation on inventories. including the reasons why we believe these measures provide useful information regarding the financial condition, results of • Adjusted pro forma EBITDA is defined as LBMTC’s EBITDA, operations, cash flows and financial position, as applicable. We also adjusted to include the EBITDA of Highland and Great discuss, to the extent material, the additional purposes, if any, for Northern from April 1, 2016 until their respective acquisition which these measures are used. These non-GAAP measures should by LBMTC and the expected EBITDA of Sucro-Bec for the not be considered in isolation, or as a substitute for, analysis of twelve-month period ended March 31, 2017, as well as certain the Company’s results as reported under GAAP. Reconciliations of non-recurring operating expenses. non-GAAP financial measures to the most directly comparable IFRS financial measures are also contained in this MD&A. • Adjusted pro forma EBITDA assuming the LBMTC Integration Gains is defined as the adjusted pro forma EBITDA, adjusted to include any recent customer gains, procurement efficiencies, re-alignment of production lines, reduction of maple syrup losses and previous integration of acquired businesses. 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS12 FORWARD-LOOKING STATEMENTS the Acquisitions, including that the Representation and Warranty This report contains Statements or information that are or may be Insurance (“RWI”) Policy may not be sufficient to cover such costs “forward-looking statements” or “forward-looking information” or liabilities or that the Corporation may not be able to recover within the meaning of applicable Canadian securities laws. Forward- such costs or liabilities from the shareholders of LBMTC and looking statements may include, without limitation, statements Decacer, the risks related to the regulatory regime governing the and information which reflect the current expectations of Rogers, purchase and sale of maple syrup in Québec, including the risk that Lantic and LBMT (together all referred to as “the Company”) with LBMT may not be able to maintain its authorized buyer status with respect to future events and performance. Wherever used, the the Federation des Producteurs Acéricoles du Québec (“FPAQ”) words “may,” “will,” “should,” “anticipate,” “intend,” “assume,” and the risk that it may not be able to purchase maple syrup in “expect,” “plan,” “believe,” “estimate,” and similar expressions sufficient quantities, the risk related to the production of maple and the negative of such expressions, identify forward-looking syrup being seasonal and subject to climate change, the risk of any statements. Although this is not an exhaustive list, the Company government regulation and foreign trade policies change, the risk cautions investors that statements concerning the following related to customer concentration and LBMT’s reliance on private subjects are, or are likely to be, forward-looking statements: future label customers, the risks related to consumer habits and the risk prices of raw sugar, natural gas costs, the Canadian origin quota related to LBMT’s business growth, substantially relying on exports. to the United States (“U.S.”), the opening of special refined sugar quotas in the U.S., beet production forecasts, growth of the maple Although the Corporation believes that the expectations and syrup industry, anticipated benefit of the LBMTC and Decacer assumptions on which forward-looking information is based are acquisitions (including expected Maple products segment adjusted reasonable under the current circumstances, readers are cautioned EBITDA), the status of labour contracts and negotiations, the level not to rely unduly on this forward-looking information as no of future dividends and the status of government regulations and assurance can be given that it will prove to be correct. Forward- investigations. Forward-looking statements are based on estimates looking information contained herein is made as at the date of this and assumptions made by the Company in light of its experience MD&A and the Corporation does not undertake any obligation to and perception of historical trends, current conditions and expected update or revise any forward-looking information, whether as a result future developments, as well as other factors that the Company of events or circumstances occurring after the date hereof, unless believes are appropriate and reasonable in the circumstances, but so required by law. Adjusted EBITDA for fiscal 2018 amounted to there can be no assurance that such estimates and assumptions $18.6 million, short of Management’s expectations at $19.9 million. will prove to be correct. Forward-looking statements involve known The lower than expected results are mainly explained by lower and unknown risks, uncertainties and other factors that may cause sales volume and sales growth than anticipated due to market actual results or events to differ materially from those anticipated competitiveness and to higher distribution costs. Given the lower in such forward-looking statements. Actual performance or results than anticipated results from fiscal 2018, and as of the date of this could differ materially from those reflected in the forward-looking MD&A, Management believes it is prudent to reduce expectations statements, historical results or current expectations. These risks with regards to the Maple products segment Adjusted EBITDA are referred to in the Company’s Annual Information Form in the for fiscal 2019 by approximately the same value of the fiscal 2018 “Risk Factors” section and include, without limitation: the risks shortfall and therefore, expects that Adjusted EBITDA should be related to the Corporation’s dependence on the operations and approximately $21.0 million, excluding non-recurring costs. Refer assets of Lantic, the risks related to government regulations and to the “Outlook” section of this MD&A for further details. foreign trade policies, the risks related to competition faced by Lantic, the risks related to fluctuations in margins, foreign exchange and raw sugar prices, the risks related to security of raw sugar FORWARD-LOOKING INFORMATION IN THIS MD&A supply, the risk related to weather conditions affecting sugar beets, The following table outlines the forward-looking information the risks relating to fluctuation in energy costs, the risks that LBMT’s contained in this MD&A, which the Corporation considers historical financial information may not be representative of future important to better inform readers about its potential financial performance, the risk that following the acquisition of LBMTC on performance, together with the principal assumptions used to August 5, 2017 and of Decacer on November 18, 2017 (together derive this information and the principal risks and uncertainties that referred to the “Acquisitions”), Rogers and Lantic may not be able could cause actual results to differ materially from this information. to successfully integrate LBMTC and Decacer’s businesses with their current business and achieve the anticipated benefits of the Acquisitions, the risks of unexpected costs or liabilities related to Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS13 EXPECTED ADJUSTED EBITDA FOR LBMTC Principal Risks and Uncertainties Principal Assumptions The expected adjusted EBITDA is the expected earnings before • Historical financial information used may not be representative of future results. interest expenses, taxes, depreciation and amortization expense • Variability in Decacer’s performance. for a twelve-month period, adjusted for one-time costs and including the integration gains. The Corporation estimates annual • Unexpected administration, selling or distribution operating earnings by subtracting from the estimated revenues expenditures. the estimated annual operating costs, from which it subtracts estimated general and administrative expenses. The integration • Uncertainty of successful integration and operational gains. gains include LBMTC for fiscal 2018 and RSI integration gains for fiscal 2019. LBMTC integration gains are estimated gains resulting from the three acquisitions completed by LBMTC since CONTROLS AND PROCEDURES February 2, 2016 and which include customer gains, procurement In compliance with the provisions of Canadian Securities efficiencies, re-alignment of production lines, reduction of maple Administrators’ Regulation 52-109, the Corporation has filed syrup losses and previous integration of acquired businesses. RSI certificates signed by the President and Chief Executive Officer integration gains are estimated operational gains resulting from the (“CEO”) and by the Vice-President Finance and Chief Financial combination of the Corporation and LBMTC which include business Officer (“CFO”), in that, among other things, report on: efficiencies and customer gains. Principal Risks and Uncertainties • their responsibility for establishing and maintaining disclosure controls and procedures and internal control over financial • Historical financial information used to estimate budgeted reporting for the Company; and amounts may not be representative of future results. • Variability in LBMTC’s performance. procedures and the design and effectiveness of internal • the design and effectiveness of disclosure controls and controls over financial reporting. • Unexpected administration, selling or distribution expen di tures. • Uncertainty of successful integration and operational gains. The CEO and the CFO, have designed the disclosure controls and procedures (“DC&P”), or have caused them to be designed under • Other risks relating to the business of LBMTC (refer to the their supervision, in order to provide reasonable assurance that: DISCLOSURE CONTROLS AND PROCEDURES “Risk Factors” section). • material information relating to the Company is made known to the CEO and CFO by others, particularly during the period EXPECTED ADJUSTED PRO FORMA EBITDA FOR DECACER in which the interim and annual filings are being prepared; and Principal Assumptions • information required to be disclosed by the Company in its Decacer’s Adjusted pro forma EBITDA is the expected earnings annual filings, interim filings or other reports filed or submitted before interest expenses, taxes, depreciation and amortization by it under securities legislation is recorded, processed, expense for a twelve-month period, adjusted to take into summarized and reported within the time periods specified in account non-recurring items identified by Decacer Management, securities legislation. non-recurring items identified by the Company during the course of its due diligence and estimated adjustments required to reflect As at September 29, 2018, an evaluation was carried out, under the the going-forward EBITDA run-rate. supervision of the CEO and the CFO, of the design and operating effectiveness of the Company’s DC&P. Based on this evaluation, the CEO and the CFO concluded that the Company’s DC&P were appropriately designed and were operating effectively as at September 29, 2018. 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS14 INTERNAL CONTROLS OVER FINANCIAL REPORTING CHANGES IN INTERNAL CONTROLS OVER The CEO and CFO have also designed internal controls over FINANCIAL REPORTING financial reporting (“ICFR”), or have caused them to be designed There were no changes in the Company’s internal controls over under their supervision, in order to provide reasonable assurance financial reporting during the year that have materially affected, regarding the reliability of financial reporting and the preparation of or are reasonably likely to materially affect, the Company’s internal financial statements for external purposes in accordance with IFRS control over financial reporting. using the framework established in “Internal Control – Integrated Framework (COSO 2013 Framework) published by the Committee of Sponsoring Organizations of the Treadway Commission OVERVIEW (COSO)”. As at September 29, 2018, an evaluation was carried Rogers is a corporation incorporated under the Canada Business out, under the supervision of the CEO and the CFO, of the design Corporations Act, which holds all of the common shares and and operating effectiveness of the Company’s ICFR. Based on that subordinated notes of Lantic. evaluation, they have concluded that the design and operation of the Company’s internal controls over financial reporting were The following chart illustrates the structural relations between effective as at September 29, 2018. shareholders, debenture holders, Rogers, Lantic Capital Inc., Rogers’s operating company, Lantic and its subsidiaries, namely In designing and evaluating such controls, it should be recognized LBMTC, Decacer and Highland. that, due to inherent limitations, any controls, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and may not prevent or detect misstatements. Projections of any evaluations of SHAREHOLDERS DEBENTURE HOLDERS effectiveness to future periods are subject to the risk that controls ROGERS SUGAR INC. may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Additionally, management is obliged to use judgement in evaluating controls and procedures. Common Shares and Subordinated Notes (100%) LIMITATION ON SCOPE OF DESIGN The Company has limited the scope of its DC&P and ICFR to exclude controls, policies and procedures of Decacer acquired not more than 365 days before the last day of the period covered by the annual filing. The Company elected to exclude it from the scope of certification as allowed by NI 52-109. The Company intends to perform such testing within one year of acquisition. The chart below presents the summary financial information included in the Corporation’s consolidated financial statements for LANTIC INC. LANTIC CAPITAL INC. 2 Classic Shares Governance Agreement Common Shares and Subordinated Notes (100%) L.B. MAPLE TREAT CORPORATION Common Shares (100%) HIGHLAND SUGARWORKS INC. 9020-2292 QUÉBEC INC. (DECACER) the excluded business: Decacer (In thousands of dollars, unaudited) Statement of Financial Position Total assets Statement of Comprehensive Income Total revenue Results from operating activities 2018 $ 75,305 37,696 4,771 Rogers is governed by not less than three, nor more than seven directors who are appointed annually at the annual general meeting of the shareholders of Rogers. As of the date of this MD&A, there were five directors. The directors are responsible for, among other things: acting for, voting on behalf of and representing Rogers as a shareholder and noteholder of Lantic; maintaining records and providing reports to the shareholders; supervising the activities and managing the investments and affairs of Rogers; and effecting payments of dividends to shareholders. Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS 15 Communication with shareholders on matters relating to the Sales are focused in three specific market segments: industrial, Company is primarily the responsibility of the Administrator, Lantic, consumer, and liquid products. The domestic market represents through its CEO and CFO. Regular meetings and discussions are more than 90% of the Company’s total volume. held between these individuals and industry analysts, brokers, institutional investors, as well as other interested parties. In fiscal 2018, the domestic refined sugar market increased by An Audit Committee of Rogers exists and is composed of three directors, all of whom are independent and unrelated. The industrial segment is the largest segment accounting for approximately 2% versus last fiscal year. SUGAR SEGMENT Production Facilities approximately 60% of all shipments. The industrial segment is comprised of a broad range of food processing companies that serve both the Canadian and American markets. Some of these processors are able to take the relative advantage of a weaker Canadian dollar and lower value of the #11 world raw sugar prices, Lantic is the largest refined sugar producer in Canada, with annual compared to #16 raw sugar prices used as the basis for pricing in nominal production capacity of approximately 1,000,000 metric the U.S. market, to expand sales into export markets as most of tonnes. Lantic operates cane refineries in Montréal, Québec and these sales are not subject to duty tariffs. Vancouver, British Columbia, and a sugar beet factory in Taber, Alberta. In the consumer market segment, a wide variety of products are offered under Lantic and Rogers brand name. This segment has With total sales volume of approximately 650,000 to 725,000 remained fairly stable during the last several years although volume metric tonnes per year, Lantic has ample capacity to meet all sold within this market in fiscal 2018 represented a 2% growth current volume requirements. None of the production facilities year-over-year. We continue our marketing efforts by bringing currently operate at full capacity. Lantic is the only sugar producer more new innovations to the sugar and sweetener category. with operating facilities across Canada. The strategic location of Recognizing the need to offer more packaging choices, we have these facilities confers operating flexibility and the ability to service launched a series of sugar staples in a bold new packaging format. all customers across the country efficiently and on a timely basis. Our staples – fine granulated sugar, organic sugar, jam and jelly mix as well as super fine sugar are now also available in stand up Lantic also operates a custom blending and packaging operation in re-sealable bags. This new packaging features high quality graphics Toronto which blends and packs high sugar containing products, as and visuals, re-sealable closure, a wide opening with a rip-proof well as non-sugar products, for manufacturing and food processing feature, all of which will enhance the end users’ experience of our companies and selected products for retail customers. In addition products. In addition, with the integration of the maple business, to domestic sales opportunities, the Blending operation provides we successfully launched Maple Sugar and Maple Sugar Flakes with Lantic with the capability to leverage sugar containing products major retailers. Also, the integration of our four websites into one (“SCP”) quotas under certain trade agreements such as the existing has been completed – www.LanticRogers.com – is now the one North American Free Trade Agreement (“NAFTA”) and the yet to portal where consumers can access product information, recipes, be ratified United States-Mexico-Canada Agreement (“USMCA”), investor information and other relevant company information. as well as Canada-European Union Comprehensive Economic and Trade Agreement (“CETA”). The total capacity of this plant is The liquid market segment is comprised of core users whose approximately 40,000 metric tonnes per year. process or products require liquid sucrose and another customer group that can substitute liquid sucrose with high fructose corn Lantic also operates a full service rail truck transfer and distribution syrup (“HFCS”). The purchasing patterns of substitutable users are centre in Toronto. Our Products largely influenced by the absolute price spread between HFCS and liquid sugar. Increasingly, other considerations, such as ingredient labeling could also bear some influence on the purchasing decision. All Lantic operations supply high quality white sugar as well as a The liquid segment grew during the current fiscal year as a result broad portfolio of specialty products which are differentiated by of an increase in overall demand and conversion from HFCS to colour, granulation, and raw material source. We are committed sucrose that was beneficial for the Canadian refiners. to responding to the evolving needs of our customers through innovative packaging and supply chain solutions, as well as customized product specifications. 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS16 Lantic’s Taber plant is the only beet sugar factory in Canada and of sugar beets to the Taber beet plant. The 2018 crop, which will be is therefore the only producer of Canadian origin sugar. As such, harvested in the fall and processed in fiscal 2019, would have been this plant is the sole participant in an annual Canadian-specific the last one under this contract. However, during the third quarter quota to the U.S. of 10,300 metric tonnes. As part of the recently of the current year, the Company entered into an additional two announced USMCA, an additional quota of 9,600 metric tonnes of year agreement with the Growers. As a result of this agreement, Canadian origin sugar has been awarded to Canada but has not yet the Company has secured sugar beet supply up to fiscal 2021. taken effect. This additional market access should be beneficial to Any shortfall in beet sugar production related to crop problems is Lantic once the USMCA is ratified (see “Government Regulations replaced by refined cane sugar from the Vancouver refinery, which and Foreign Trade Policies with regards to Sugar” within the “Risk acts as a swing capacity refinery. Factors” section). In addition, there is a 7,090 metric tonnes U.S. global refined sugar quota, which opens and is usually filled on a The contract with the Growers stipulates a fixed price for all beet first-come first-served pro-rata basis on October 1st of every year. sugar derived from the beets processed in addition to a scaled The Montréal and Vancouver cane operations and the Taber beet incentive as the price of raw sugar increases. As a consequence, factory can all participate in this global quota. Sales to the U.S. the Company is exposed to fluctuations in the #11 world raw sugar under both the Canadian-specific and the U.S. global quotas are price for all domestic beet sugar volume sold against the #11 world typically made at above average margins as U.S. pricing reflects raw sugar prices, which is approximately 70,000 metric tonnes. The agricultural and price support and typically exceeds Canadian Company can use a pre-hedge strategy to mitigate the fluctuation pricing, which is derived from #11 world raw sugar pricing. In fiscal risks, which is explained below in the section “Use of Financial 2018, favourable market conditions continued which allowed the Derivatives for Hedging”. Company to complete some additional volume of sales of specialty sugars over and above these two quotas, on a high tier (duty Pricing paid) basis. These favourable conditions occur when the spread In fiscal 2018, the price of raw sugar fluctuated between U.S. 9.83 between #11 world raw sugar prices and U.S. refined sugar prices cents per pound and U.S. 15.49 cents per pound and closed at widens, combined with the devaluation of the Canadian dollar, U.S. 11.20 cents per pound at the end of the fiscal year, which was more than fully offset the U.S. import duties. With its broad and 2.90 cents lower than the closing value at September 30, 2017. diversified production platform, the Company is well positioned Although price variation during the year was much less than in to take advantage of such opportunistic sales. The Company pays fiscal 2017 when raw sugar prices fluctuated between U.S. 12.74 close attention to these market spreads and when appropriate, and U.S. 23.90 cents per pound, the average raw sugar prices in leverages a well-developed customer network to commercialize fiscal 2018 was much lower than fiscal 2017 average. Since 2017, these opportunities. the global sugar market has been in a surplus situation driven by increased output in India, the European Union and Thailand. By-products relating to beet processing and cane refining activities are sold in the form of beet pulp, beet and cane molasses. Beet The price of refined sugar deliveries from the Montréal and pulp is sold domestically and to export customers for livestock feed. Vancouver raw cane facilities is directly linked to the price of the The production of beet molasses and cane molasses is dependent #11 world raw sugar market on the ICE. All sugar transactions are on the volume of sugar processed through the Taber, Montréal and economically hedged, thus eliminating the impact of volatility in Vancouver plants. Our Supply world raw sugar prices. This applies to all refined sugar sales made by these plants. Liquid sales to HFCS substitutable customers are normally priced against competing HFCS prices and are historically The global supply of raw cane sugar is ample. Over the last several the lowest margin sales for the Company. years, Lantic has purchased most of its raw cane sugar from Central and South America for its Montréal and Vancouver cane refineries. Whereas higher #11 world raw sugar values may have the effect All raw cane sugar purchases are hedged on the Intercontinental of reducing the competitiveness of the liquid business versus Exchange (“ICE”) #11 world raw sugar market. This hedging HFCS, the opposite holds true for our beet operation. In Taber, eliminates gains or losses from raw sugar price fluctuations, and the raw material used to produce sugar is sugar beets, for which thus helps Lantic avoid the effects of volatility in the world raw a fixed price, plus a scaled incentive on higher raw sugar values, sugar market. is paid by Lantic to the Growers. As a result, Lantic benefits from, or alternatively, absorbs some of the changes associated with In fiscal 2015, the Company entered into a four-year agreement fluctuations in world raw sugar prices for all volume sold, excluding with the Alberta Sugar Beet Growers (the “Growers”) for the supply non U.S. export volume. Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSISWorld raw sugar cane prices Cents per pound — yearly averages (September 1996 to September 2018) 30 25 20 15 10 5 0 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 Source: #11 ICE Operations Employees are key to our success and employee safety is continuously at the forefront of our priorities. Each of the Company’s manufacturing operations incorporates occupational health and safety components in its annual planning which are reviewed weekly by senior management and quarterly by the Board of Directors. For our refinery operations, labour remains the largest cost item. 17 $0.25 per gigajoule until 2021. This trend could increase the overall energy costs for the Company. The Montréal refinery operates under a firm gas contract as opposed to an interruptible gas contract, which terminates in November 2021. This firm gas contract eliminates incremental energy costs relating to service interruptions as a result of cold winter conditions. Natural gas price continuation chart (January 2004 to September 2018) 16 14 12 10 8 6 4 2 0 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 Source: NYMEX Our operating plants’ labour agreements have staggered expiry Production reliability is also critical to the success of our operations. dates. The Toronto warehouse bargaining agreement expired at Every year, each plant makes considerable investments in preventive the end of June 2018 and negotiations began during the fourth maintenance and repairs, thus maintaining their efficient working quarter of fiscal 2018. order and competitiveness. Energy is our second largest operating expense. We use large The Sugar segment invested $14.9 million in “Stay in Business amounts of natural gas in our refineries. We have a hedging and Safety” capital projects for plant reliability, product security, strategy in place with futures contracts to mitigate the impact of information systems and environmental requirements, of which, large fluctuations in natural gas prices. With a continued weakness $1.3 million was spent for the air emission compliance solution in in natural gas prices, Lantic added some hedged positions for fiscal Taber. The Company is spending an increased amount on stay in 2019 through 2024 at prices equal to or lower than fiscal 2018’s business and safety capital projects when compared to recent fiscal average price. We will continue to closely monitor the natural years due to the start of more significant projects being undertaken, gas market in order to reduce volatility and maintain an overall more specifically, in Montréal and in Vancouver. market competitiveness. Lantic’s forward hedging policy mitigates but does not fully eliminate the impact of year-over-year trends in “Operational Excellence”, or return on investment capital projects, natural gas prices. forms the balance of the fiscal year capital investment for the Sugar segment. In fiscal 2018, operational excellence capital expenditures Provincial application of some form of carbon tax has been amounted to $6.9 million, of which, $3.9 million was spent on increasingly important across Canada. The Company’s two cane an energy saving project at the Vancouver refinery that will be refineries and its beet factory are subject to an additional levy completed in the first half of fiscal 2019 for a total of approximately pertaining to gas emissions, the latter having started on January 1, $5.1 million. In addition, $1.1 million was spent on a new packaging 2017. On January 1, 2018, the Alberta carbon tax increased from equipment that will bring retail packaging innovation to our product $1.011 to $1.517 per gigajoule. In addition, the British Columbia offering and will help reduce co-packaging costs. An energy saving carbon tax increased from $1.49 to $1.7381 per gigajoule on project at the Montréal refinery of approximately $3.3 million April 1, 2018 and is expected to continue to increase annually by started in fiscal 2017 and was completed by the end of the second 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 18 quarter of the current fiscal year. This project generated savings for both the domestic and export markets. Moreover, our blending commencing in the second half of the year. Another energy saving facility was recently certified as a packing establishment for maple project at the Montréal refinery was undertaken in fiscal 2018 and products under the Maple products regulations. We are committed should be completed in the first half of fiscal 2019 for a total capital to increasing blending volume in both the industrial and retail spend of $0.5 million. The palletizing station installation in Taber sectors, including non-sugar containing blends. was completed during the current fiscal year for a total capital of approximately $1.2 million. These investments are undertaken because of operational savings to be realized when such projects MAPLE PRODUCTS SEGMENT are completed. On November 18, 2017 the Company acquired 100% of Over the past few years, the Company has been actively working Decacer for $43.0 million, after closing adjustments. Last year, on solutions to reduce the air emissions footprint of the Taber on August 5, 2017, the Company also acquired 100% of LBMTC facility. During the current fiscal year, the Company completed from Champlain Financial Corporation Inc., for approximately the engineering and project design to upgrade the Taber beet $166.4 million, after closing adjustments. factory to be fully compliant with the new air emissions regulations by the start of the fiscal 2020 beet harvesting season (crop 2019). The combined acquisition of LBMTC and Decacer makes the This solution is expected to require between $8.0 million and Company one of the world’s largest branded and private label $10.0 million in capital expenditures, of which, approximately maple syrup bottling and distribution companies. It will also allow $1.3 million was spent in fiscal 2018. The investment required for the Company to diversify into the large and growing market of this project is considered as a one-time incremental investment maple syrup, a natural sweetener, as one of the leaders in the to the ongoing capital expenditure program. For the 2019 beet industry and expand its product offering, including a unique maple harvesting season (crop 2018), the Taber facility obtained from sugar dehydration technology. Alberta Environment and Parks a variance for non-compliance of air emission standards valid until May 2019, which allows us more than Overview of the Maple Syrup and Maple Products Industry sufficient time to process our 2018 sugar beet crop. Maple syrup is fundamentally organic and gluten-free. Maple syrup is increasingly viewed as a healthy alternative to traditional The Company is fully committed to continuous improvement sweeteners. Maple syrup is extracted mainly from two types of and to the competitive supply of quality and safe products that maple trees: sugar maple and red maple. The biggest concentration meet or surpass customer and legislative requirements. Customer of maple trees is located in Québec, New Brunswick, Ontario, satisfaction is achieved and maintained by a qualified and motivated Vermont, Maine and New Hampshire. workforce that is accountable and responsible for all aspects of quality and food safety. By understanding and responding to The production of maple syrup takes place over a period of 6 to evolving needs and expectations, we are well positioned with 8 weeks during the months of March and April of each year. The respect to ever changing requirements such as the Global Food syrup takes its origin from the sap which is collected from the maple Safety Initiative, currently the universal benchmark for food safety tree. Through photosynthesis, sugar maple and red maple convert and consumer protection. the starch stored during the warmer seasons into sugar. This sugar then combines with the water absorbed by the tree’s roots and in As a result of this commitment and focus, we are pleased to report the spring, when temperatures rise, the sweet sap in the trunk and that the Food Safety System Certification 22000 (“FSSC 22000”) is roots expands, creating pressure inside the tree to ultimately push in place at each of our three production facilities. sap out of the maple tree. Furthermore, our blending facility is also certified under the FSSC The sap generally travels from the trees by gravity or through a 22000 standard, thereby demonstrating our commitment to vacuum collector system attached to the trees by small taps provide quality and safe products for our customers. The plant is and connected to larger conveyance tubes that are themselves already registered as a Canadian Food Inspection Agency (“CFIA”) connected to the sugar shack, where it is ultimately boiled into dairy establishment, which allows Lantic to pursue dry dairy blends maple syrup. Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS19 Global Supply and Demand Pursuant to the Sales Agency Regulation, the FPAQ is responsible Canada remains the largest producer of maple syrup, with over for the marketing of bulk maple syrup in Québec. Therefore, 77% of the world’s production. The U.S. is the only other major any container that contains 5L or more of maple syrup must be producing country in the world, producing approximately 22% marketed through the FPAQ as the exclusive selling agent for the of the global supply. Québec represented 71% of the world’s producers. Bulk maple syrup may be handed over to the FPAQ production in 2017. Regulatory Regime in Québec or sold to “authorized buyers” accredited by the FPAQ. Maple syrup producers may hand over unsold inventory to the FPAQ before September 30th of each year. The FPAQ then arranges There are approximately 7,300 commercial-scale maple syrup for the sale of such unsold inventory to industrial and authorized producers in Québec. The maple syrup producers in Québec are buyers. In Québec, nearly 90% of the total production of maple represented by the FPAQ, a body created in 1966 to support the syrup is sold through the FPAQ to the authorized buyers, leaving interests of maple syrup producers and to ensure a “level playing only approximately 10% of the total production being sold directly field”. The FPAQ generally regulates the buying and selling of bulk by the producers to consumers or grocery stores. The authorized maple syrup. buyer status is renewed on an annual basis. The FPAQ, in its capacity as bargaining and sales agent for the Quality Control producers of maple syrup in Québec as well as the body empowered In Québec, maple syrup delivered in barrels is systematically to regulate and organize the production and generic marketing of inspected by an independent company. Every year, ACER Division maple syrup, and the bulk buyers of maple syrup, represented by Inspection Inc. verifies, inspects and grades over 225,000 barrels of the Conseil de l’industrie de l’érable (the Maple Industry Council maple syrup. This inspection system ensures a high quality control (“MIC”)) entered into a Marketing Agreement, which is expected on maple syrup that is produced and sold in Québec. Pursuant to to be renewed on an annual basis. the quality control process set up by the FPAQ and the MIC, the Pursuant to the Marketing Agreement, authorized buyers must pay in Laurierville, Québec, or at authorized buyers’ facilities. a minimum price to the FPAQ for any maple syrup purchased from the producers. The price is fixed on an annual basis and depends The quality control system established by the FPAQ also facilitates on the grade of the maple syrup. In addition, a premium is added the certification of Québec maple syrup as “organic”, as it provides to the minimum price for any organic maple syrup. Pursuant to the ability to trace maple syrup back to the origin maple farm. verification, inspection and grading is performed at the FPAQ plant the Marketing Agreement, authorized buyers must buy maple syrup from the FPAQ in barrels corresponding to the “anticipated The Quota System volume”. The anticipated volume must be realistic and in line In 2004, the FPAQ adopted a policy with respect to production and with volumes purchased in previous years and anticipated sales marketing quotas which resulted in an annual production volume forecasts. allocated to each maple syrup business. The main objective of the policy is to adjust the supply of maple syrup in response to Producers of maple syrup in Québec are required to operate within consumer demand, and more specifically, to stabilize selling prices the framework provided for by the Marketing Act. Pursuant to the for producers and, ultimately, the buying price for consumers, foster Marketing Act, producers, including producers of maple syrup, investments in the maple industry and maintain a steady number of can take collective and organized control over the production maple producing businesses in operation, regardless of their size. and marketing of their products (i.e. a joint plan). Moreover, the Marketing Act empowers the marketing board responsible for The FPAQ Strategic Reserve administering a joint plan, that is the FPAQ in the case of maple In 2002, the FPAQ set up a strategic maple syrup reserve in order to syrup, with the functions and role otherwise granted to the Régie mitigate production fluctuations imputable to weather conditions des marchés agricoles et alimentaires du Québec, the governing and prevent such fluctuations from causing maple syrup prices body created by the Government of Québec to regulate, among to spike or drop significantly. The reserve was initially established other things, the agricultural and food markets in Québec. As part to set aside a production quantity equivalent to half of the then of its regulating and organizing functions, the FPAQ may establish annual demand. Each year, the FPAQ may organize a sale of a arrangements to maintain fair prices for all producers and may portion of its accumulated reserve. This allows bottlers to respond manage production surpluses and their storage to offer security of to supply shortages in the event of a poor harvest or unplanned supply and price stability of maple syrup. growth and demand. As at December 31, 2017, the FPAQ had 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS20 over 95 million pounds of bulk maple syrup, including 21 million Storage Facilities and Distribution Centres pounds of processing/industrial grade maple syrup, in its strategic LBMT uses a distribution centre in Richmond, British Columbia and reserve, which represents a little over half of the annual global retail owns a bulk maple syrup storage facility in St-Robert-Bellarmin, consumption. Québec. Regime Outside of Québec In addition, during the year, Decacer entered into a ten-year Outside of Québec, the maple syrup industry is generally organized lease of a 35,000 square foot facility in Degelis that will be used through producer-based organizations or associations, which as a bulk maple syrup storage facility. The lease is effective as of promote maple syrup in general and its industry and serve as the November 1, 2018. official voice for maple syrup producers with the public. Products Authorized Buyer Status and Relationship with the FPAQ LBMT’s products are comprised of the following: bottled maple LBMTC and Decacer are authorized buyers with the FPAQ. An syrup, bulk maple syrup, maple sugar and flakes and ancillary or authorized buyer is authorized to receive maple syrup in bulk (i.e. derived maple products. in barrels) directly from Québec maple syrup producers. LBMTC and Decacer are both active members of the MIC, which represents Bottled maple syrup is packaged in a variety of ways and sizes, approximately sixty authorized buyers, in negotiating the Marketing including bottles, plastic jugs and the traditional cans. Bottled Agreement with the FPAQ. Of the sixty authorized buyers, six are maple syrup is available in all commercial grades and in organic major players and represent over 85% of the volume purchased and non-organic varieties. The majority of the maple syrup is through the FPAQ, two of which are LBMTC and Decacer. purchased from Québec producers and is bottled at one of LBMT’s bottling plants. LBMT’s bottled maple syrup is sold under a variety LBMT has relationships with more than 1,400 maple syrup producers, of brands, including Uncle Luke’s™, L.B. Maple Treat™, Great mainly in Québec and Vermont. Most of these producers sell 100% Northern™, Decacer and Highland Sugarworks™. of their production to LBMT. Through its strong relationship with such producers, LBMT was able to develop a leading position in Bulk maple syrup is mainly sold in containers of 4L or 17L, barrels certified organic maple syrup. Operating Facilities and totes in size to foodservice retailers as well as other wholesalers. Bulk maple syrup is also sold for industrial use for bottling or for use in food production, and privately under the L.B. Maple Treat™ LBMT currently operates three plants in Québec, namely, in Granby, brand. Dégelis and in St-Honoré-de-Shenley, and one in Websterville, Vermont, and twelve operating lines allocated amongst the four Maple derived products include maple blended syrup, maple plants, and including one can-filling line in St-Ferdinand, Québec, butter, maple cookies, maple taffy and other maple candies, which is outsourced by LBMT to a third party. LBMT is the owner of popcorn, teas and coffees. Maple products are mainly sold under the St-Honoré and Degelis facilities. the L.B. Maple Treat™ and Highland Sugarworks™ brands. The Granby and Websterville facilities are both subject to a lease Operations which will expire on October 31, 2019 and August 25, 2021, LBMT employs a total of approximately 200 employees in its respectively. On August 1, 2018, the Company announced its facilities in Québec and Vermont. Approximately 60 of LBMT’s intention to relocate its Granby operation to a new built for purpose employees, namely in the LBMT division in Granby, Québec, state of the art leased property also in Granby. The relocation is not are under a collective bargaining agreement, which is currently expected to occur until late fiscal 2019 or beginning of fiscal 2020. scheduled to expire in 2023. Compared to the current facility, the new site will improve the overall storage and distribution capabilities, allow the operations to better Maple syrup cost represents more than 80% of the costs of sales for align production flows and install a new high capacity bottling line. the Maple products segment. As a result of this decision, approximately $4.5 million will be spent on return on investment capital investment, which will meet our Maple syrup production and bottling is a low-risk process from the normal threshold of a payback of less than five years. Monies will standpoint of food safety and quality assurance processes. This be spent towards new equipment and leasehold improvements, of being said, world food standards are extremely important to us. which, approximately $0.5 was spent in fiscal 2018. Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS 21 LBMT’s bottling plants are certified as follows: HACCP, BRC, Kosher, in these estimates may result in small gains or losses on hedged Halal, QAI and Ecocert Canada certified organic, Non Genetically transactions. As an example, a customer may be taking more or less Modified Organism (“Non GMO”) & Aliments du Québec and CFIA sugar than determined under its contract and small gains or losses inspected. LBMT is subject to numerous audits and certification may be incurred as a result on the hedged transactions. bodies where it continues to exceed performance requirements. The Company mitigates the impact of the above by reviewing on a daily basis the total hedged position to determine that, in total, USE OF FINANCIAL DERIVATIVES FOR HEDGING all sugar transactions are hedged. The Company also prepares a Sugar hedged transaction report by terminal periods to determine that there are no straddles within each terminal period. In the event that In order to protect itself against fluctuations in the world raw sugar a straddle position exists due to circumstances discussed above, the market, the Company follows a rigorous hedging program for all Company will immediately correct the straddle and record any gain purchases of raw cane sugar and sales of refined sugar. or loss incurred in correcting the straddled position. In addition, if a customer is late in taking delivery of its “priced” sugar, and if The #11 world raw sugar market is only traded on the ICE, which the Company needs to roll forward the un-drawn quantity to the trades in U.S. dollars. One can trade sugar futures forward for a following terminal period, the Company can invoice the customer period of three years against four specific terminals per year for all costs incurred in rolling forward the un-drawn volume. (March, May, July and October). The terminal values are used to determine the price settlement upon the receipt of a raw sugar The Board of Directors authorized the Company to have a trading vessel or the delivery of sugar to the Company’s customers. The book to trade outright sugar futures, options, spreads and ICE rules are strict and are governed by the New York Board of white-raw differentials to a limit of 25,000 metric tonnes. It was also Trade. Any amount owed, due to the movement of the commodity agreed that a report on all activities would be reviewed quarterly being traded, has to be settled in cash the following day (margin at each Board meeting and that all trading book activities would call payments/receipts). be discontinued if trading losses of $250,000 were accumulated in any given year. Any mark-to-market gains or losses on any open For the purchasing of raw sugar, the Company enters into long-term positions of the trading book at year end, as well as gains or losses supply contracts with reputable raw sugar suppliers (the “Seller”). on any liquidated positions of the trading book are recognized in These long-term agreements will, amongst other things, specify the Company’s adjusted earnings. the yearly volume (in metric tonnes) to be purchased, the delivery period of each vessel, the terminal against which the sugar will be Beet Sugar priced, and the freight rate to be charged for each delivery. The As noted, the Company purchases sugar beets from the Growers price of raw sugar will be determined later by the Seller, based under a fixed price formula plus a scale incentive when raw sugar upon the delivery period. The delivery period will correspond to values exceed a certain price level. Except for sales to the U.S., the terminal against which the sugar will be priced. under the export quota, to HFCS-substitutable accounts, and for other export opportunities, all other sales are made using the same The selling of refined sugar by the Company is also done under the formula as cane sugar, following the #11 world raw sugar price. #11 world raw sugar market. When a sales contract is negotiated with a customer, the sales contract will determine the period of the The Board of Directors authorized the Company to hedge forward contract, the expected delivery period against specific terminals up to 70% of the Taber sales to be made under the raw sugar formula and the refining margin and freight rate to be charged over and as long as a beet sugar contract was signed with the Growers for above the value of the sugar. The price of the sugar is not yet those years. This was done to allow the Company to benefit from determined but needs to be fixed by the customer prior to delivery. a sudden rise in the raw sugar market. Any gains earned (if a sales The customer will make the decision to fix the price of the sugar contract is entered at a lower raw value) or losses incurred (if a sales when he feels the sugar market is favourable against the sugar contract is entered at a higher raw value) when those positions are terminal, as per the anticipated delivery period. unwound, are recognized in the period when that quantity of beet sugar is delivered. This is referred to as the Taber pre-hedge. Inefficiencies could occur and small gains or losses could be incurred on hedged transactions. Every year, the Company estimates sales The Company does not have any volume under the pre-hedge patterns against the receipt of sugar deliveries. Any discrepancies program for fiscal 2019. 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS22 Natural Gas Foreign Exchange The Board of Directors of Lantic approved an energy hedging Sugar segment policy to mitigate the overall price risks in the purchase of natural Raw sugar costs for all sales contracts are based on the U.S. dollar. gas. The Company also buys natural gas in U.S. dollars. In addition, sugar export sales and some Canadian sugar sales are denominated The Company purchases between 3.0 million gigajoules and in U.S. dollars. 3.5 million gigajoules of natural gas per year for use in its refining operations. To protect against large and unforeseen fluctuations, In order to protect itself against the movement of the Canadian the Company can hedge forward up to 90% of its estimated usage dollar versus the U.S. dollar, the Company, on a daily basis, over the next 12 months and lower percentages of its estimated reconciles all of its exposure to the U.S. dollar and will hedge the usage on a longer term basis. The Company will hedge close to net position against various forward months, estimated from the its maximum level allowed if natural gas prices are below a certain date of the various transactions. percentage of the prior year’s average price and therefore lock in year-over-year savings. Maple products segment These gas hedges are unwound in the months that the commodity dollars or in Euro. In order to mitigate against the movement of the is used in the operations, at which time any gains or losses incurred Canadian dollar versus the U.S. dollars and Euro, LBMT enters into are then recognized for the determination of adjusted gross foreign exchange hedging contracts with certain customers. These Certain export sales of maple syrup are denominated in U.S. margins and earnings. Variation Margins (Margin Calls) foreign exchange hedging contracts are unwound when the money is received from the customer, at which time any gains or losses incurred are then recognized for the determination of adjusted For all hedged sugar positions on the futures market, the Company gross margins and earnings. Foreign exchange gains or losses on must settle with the commodity broker on the following day any any unhedged sales contracts are recorded when realized. gains or losses incurred on the net hedged position, based on the trading values at closing of the day. These daily requirements are called “margin calls.” When sugar prices are on the rise, the Company’s raw sugar suppliers will normally price in advance large quantities of sugar to benefit from these higher prices. On the other hand, the Company’s customers will only price forward small quantities, hoping for a downward correction in the marketplace. This will result in the Company having a “short” paper position. As the price of sugar continues to rise, the Company has to pay margin calls on a regular basis. These margin calls are paid back to the Company when the price of sugar declines or upon receipt or delivery of sugar. Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS23 SELECTED FINANCIAL INFORMATION The following is a summary of selected financial information of Rogers’ consolidated results for the 2018, 2017 and 2016 fiscal years. The Company’s fiscal year ends on the Saturday closest to the end of September. All references to 2018, 2017 and 2016 represent the fiscal years and fourth quarter ended September 29, 2018, September 30, 2017 and October 1, 2016. The financial results for fiscal 2018 include those of Decacer since its acquisition on November 18, 2017 and the financial results for fiscal 2017 include those of LBMTC since its acquisition on August 5, 2017. The Company’s audited consolidated financial statements were prepared under IFRS and the Company’s functional and reporting currency is the Canadian dollar. (In thousands of dollars, except volume and per share information) Total volume Fourth Quarter Fiscal Year 2018 2017 2018 2017 2016 Sugar (metric tonnes) 200,147 183,397 719,875 694,465 675,224 Maple syrup (‘000 pounds) Total revenues Gross margin Results from operating activities (“EBIT”) Net finance costs Income tax expense Net earnings Net earnings per share: Basic Diluted Dividends per share 10,549 $ 5,764 $ 211,807 192,984 29,255 18,231 4,735 3,863 9,633 0.09 0.09 0.09 22,631 10,138 3,360 2,764 4,014 0.04 0.04 0.09 45,119 $ 805,201 130,853 84,100 17,132 18,239 48,729 0.46 0.43 0.36 5,764 $ 682,517 77,298 41,031 10,218 8,907 21,906 0.23 0.22 0.36 n/a $ 564,411 128,223 98,598 9,612 23,407 65,579 0.70 0.64 0.36 CONSOLIDATED RESULTS OF OPERATIONS the fourth quarter of fiscal 2018 and year-to-date, respectively, for Total revenues the mark-to-market of derivative financial instruments as explained below (See “Adjusted results” section). In fiscal 2017, a mark-to- Revenues for the current quarter amounted to $211.8 million, market loss of $5.4 million and $26.0 million was recorded for the an increase of $18.8 million versus the comparable quarter last fourth quarter and year-to-date, respectively, resulting in gross year. Year-to-date, revenues were $805.2 million compared margins of $22.6 million and $77.3 million for their respective to $682.5 million for fiscal 2017, representing an increase of period. $122.7 million. The improvement for both periods is mainly attributable to increase in the Maple products segment revenues Results from operating activities (“EBIT”) as a result of the Decacer acquisition and a full year of LBMTC EBIT is defined as earnings before interest and taxes. For the fourth results. The positive contribution from the maple products segment quarter of fiscal 2018, EBIT amounted to $18.2 million compared was somewhat reduced by a decrease in revenues from the sugar to $10.1 million last year. As mentioned above, the gross margin segment, due mostly to a decrease in #11 raw sugar values, partially comparison does not reflect the economic results from operating offset by higher sales volume. Gross margin activities which were positively impacted by $1.9 million due to the quarter-over-quarter variation in mark-to-market of derivative financial instruments. The Sugar and Maple products segments Gross margin of $29.3 million for the quarter and $130.9 million both contributed positively to the EBIT for the current quarter, year-to-date does not reflect the economic margin of the Company, when compared to the same quarter last year when excluding the as it includes a loss of $3.5 million and a gain of $4.5 million for mark-to-market of derivative financial instruments. With regards to 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 24 the maple products segment, the EBIT increased by $2.8 million segment contributed an additional $11.0 million in EBIT, when as a result of a full quarter of operations for LBMTC and Decacer, excluding the impact of the mark-to-market variation. In addition, while the sugar segment improved by $3.4 million due mainly LBMT’s acquisition costs for the full year of fiscal 2017 represented to an increase in sales volume and a reduction in administration $2.5 million in additional administration and selling expenses, which and selling expenses since the Company incurred $1.9 million in was a non-recurring cost in fiscal 2017. Finally, the sugar segment’s acquisition costs in fiscal 2017 relating to the transaction to acquire EBIT was $0.9 million lower than fiscal 2017, when excluding the LBMTC. impact of the mark-to-market variation and the non-recurring costs, due mainly to additional distribution costs. Fiscal 2018 results from operating activities increased from $41.0 million to $84.1 million, a $43.1 million improvement versus Net finance costs last fiscal year. Most of the positive variance when compared Net finance costs consisted of interest paid under the revolving to fiscal 2017 is explained by the mark-to-market variation of credit facility, as well as interest expense on the convertible derivative financial instruments, which resulted in an increase of unsecured subordinated debentures and other interest. It also $30.5 million in EBIT. With the benefits of having the LBMTC for the includes a mark-to-market gain or loss on the interest swap full year and Decacer since its acquisition date, the maple products agreements. The net finance costs breakdown is as follows: (In thousands of dollars) Interest expense on convertible unsecured subordinated debentures Interest on revolving credit facility Amortization of deferred financing fees Other interest expense Amortization of transition balances and net change in fair value of interest rate swap agreements Net finance costs Fourth Quarter Fiscal Year 2018 $ 2,072 1,280 329 1,182 (128) 4,735 2017 $ 1,469 1,245 209 521 (84) 3,360 2018 $ 7,691 5,374 1,422 3,177 2017 $ 5,813 3,474 781 521 (532) 17,132 (371) 10,218 The interest expense on the convertible unsecured subordinated The interest on the revolving credit facility for the current quarter debentures increased by approximately $0.6 million, for the was comparable to the same period last year. Year-to-date, interest current quarter and by $1.9 million, year-to-date, when compared expense for fiscal 2018 was $1.9 million higher than fiscal 2017 to the same periods last year. The additional interest expense in due mainly to the additional drawdown as a result of the LBMTC fiscal 2018 is mostly explained by the issuance of the Sixth series and Decacer acquisitions. The increase in interest rates also had a 5.0% convertible unsecured subordinated debentures (“Sixth negative impact in the current year when compared to last fiscal series debentures”) on July 28, 2017, following the acquisition year. of LBMTC. In fiscal 2018, the Fifth series 5.75% convertible unsecured subordinated debentures (“Fifth series debentures”) The other interest expense pertains mainly to interest payable were repaid on March 28, 2018 using a portion of the funds raised to the FPAQ on syrup purchases, in accordance with its payment on the same day from the issuance of the Seventh series 4.75% terms. The variation quarter-over-quarter and year-over-year is as convertible unsecured subordinated debentures (“Seventh series a result of the timing in the acquisitions of LBMTC and Decacer. debentures”). Increased borrowings throughout fiscal 2018 more than offset the reduction in interest rate on the Sixth and Seventh The issuance of the Sixth and Seventh series debentures as well as series debentures. Accretion expense on the equity component additional drawdown under the revolving credit facility also had a of the two convertible unsecured subordinated debentures also negative impact on the amortization of deferred financing costs for contributed to the increase when compared to the same periods the quarter and year-to-date. last year. Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS 25 Starting on October 2, 2016, interest rate swap agreements were in the current quarter and year-to-date, the Company removed designated as effective cash flow hedging instruments and as a a gain of $0.1 million and $0.5 million, respectively from other result, mark-to-market adjustments are now recorded in other comprehensive income and recorded a gain of the same amount comprehensive income. The transitional balances, representing in net finance costs. For the comparative periods of fiscal 2017, the the mark-to-market value recorded as of October 1, 2016, will Company recorded a mark-to-market gain of $0.1 million for the be subsequently removed from other comprehensive income fourth quarter and of $0.4 million for the full year. The transitional when each of the fixed interest rate tranches will be liquidated, balance relating to interest rate swap agreements will be fully in other words, when the fixed interest rate is paid. As a result, depleted in fiscal 2020. See “Adjusted results” section. Taxation The income tax expense (recovery) is as follows: (In thousands of dollars) Current Deferred Income tax expense Fourth Quarter Fiscal Year 2018 $ 3,091 772 3,863 2017 $ (2,353) 5,117 2,764 2018 $ 17,967 272 18,239 2017 $ 13,198 (4,291) 8,907 The variation in current and deferred tax expense, quarter-over- instruments somewhat offset by a slightly lower contribution from quarter and year-over-year, is consistent with the increase in the Sugar segment, additional distribution costs, net finance costs earnings before taxes in fiscal 2018. and acquisition costs. Deferred income taxes reflect temporary differences, which result Adjusted results primarily from the difference between depreciation claimed for IIn the normal course of business, the Company uses derivative tax purposes and depreciation amounts recognized for financial financial instruments consisting of sugar futures, foreign exchange reporting purposes, employee future benefits and derivative forward contracts, natural gas futures and interest rate swaps. For financial instruments. Deferred income tax assets and liabilities fiscal 2016 and prior years, all derivative financial instruments were are measured using the enacted or substantively enacted tax rates marked-to-market at each reporting date, with the unrealized anticipated to apply to income in the years in which temporary gains/losses charged to the consolidated statement of earnings. As differences are expected to be realized or reversed. The effect of a of October 2, 2016, the Company adopted all the requirements of change in income tax rates on future income taxes is recognized in IFRS 9 (2014) Financial Instruments. As a result, the Company has income in the period in which the change occurs. designated as effective cash flow hedging instruments its natural Net earnings gas futures and its interest rate swap agreements entered into in order to protect itself against natural gas prices and interest rate Net earnings for the current quarter were $9.6 million compared to fluctuations as cash flow hedges. Derivative financial instruments $4.0 million for fiscal 2017. The increase in net earnings is mostly pertaining to sugar futures and foreign exchange forward contracts explained by the after-tax contribution of the Sugar and Maple continue to be marked-to-market at each reporting date and are products segments, positive variations in the mark-to-market of charged to the consolidated statement of earnings. In addition, derivative financial instruments and in acquisitions costs in fiscal the derivative financial instruments pertaining to foreign exchange 2018. Net earnings were somewhat off-set by the after tax impact forward contracts on maple syrup sales were marked-to-market on an increase in net finance costs. as at September 29, 2018 and also charged to the consolidated statement of earnings. The unrealized gains/losses related to Year-to-date, net earnings amounted to $48.7 million, a $26.8 million natural gas futures and interest rate swaps are accounted for in increase versus the comparative period last year. The increase is other comprehensive income. The amount recognized in other also explained by the after-tax contribution of the Maple products comprehensive income is removed and included in net earnings segment and a gain on the mark-to-market of derivative financial under the same line item in the consolidated statement of earnings 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 26 and comprehensive income as the hedged item, in the same contracts has been delivered. As at September 29, 2018, there period that the hedged cash flows affect net earnings, reducing were no embedded derivatives outstanding. earnings volatility related to the movements of the valuation of these derivatives hedging instruments. The transitional marked-to- Management believes that the Company’s financial results are market balances outstanding as of October 1, 2016 are amortized more meaningful to management, investors, analysts and any over time based on their settlements until all existing natural other interested parties when financial results are adjusted by gas futures and all existing interest rate swaps agreements have the gains/losses from financial derivative instruments and from expired. embedded derivatives. These adjusted financial results provide a more complete understanding of factors and trends affecting our The Company sells refined sugar to some clients in U.S. dollars. business. This measurement is a non-GAAP measurement. See Prior to October 1, 2016, these sales contracts were viewed as “Non-GAAP measures” section. having an embedded derivative if the functional currency of the customer was not U.S. dollars, the embedded derivative being the Management uses the non-GAAP adjusted results of the operating source currency of the transaction. The embedded derivatives were company to measure and to evaluate the performance of the marked-to-market at each reporting date, with the unrealized gains/ business through its adjusted gross margin, adjusted EBIT and losses charged to the consolidated statement of earnings with a adjusted net earnings. In addition, management believes that these corresponding offsetting amount charged to the consolidated measures are important to our investors and parties evaluating our statement of financial position. As of October 2, 2016, the U.S. performance and comparing such performance to past results. dollars of these sales contract were no longer considered as being Management also uses adjusted gross margin, adjusted EBITDA, an embedded derivative as it was determined that the U.S. dollar Maple products segment Adjusted EBITDA, adjusted EBIT and is commonly used in Canada. This change in estimate was applied adjusted net earnings when discussing results with the Board of prospectively, as a result, only the embedded derivatives relating Directors, analysts, investors, banks and other interested parties. to sales contracts outstanding as of October 1, 2016 continued to See “Non-GAAP measures” section. be marked-to-market every quarter until all the volume on these The results of operations would therefore need to be adjusted by the following: Income (loss) Fourth Quarter Fiscal 2018 Fourth Quarter Fiscal 2017 (In thousands of dollars) Mark-to-market on: Sugar futures contracts Foreign exchange forward contracts Embedded derivatives Total mark-to-market adjustment on derivatives Cumulative timing differences Adjustment to cost of sales Amortization of transitional balance to cost of sales and changes in fair value of expired contracts for cash flow hedges Total adjustment to costs of sales (1) (2) Sugar $ Maple Products $ (1,896) 290 — (1,606) (3,134) (4,740) 582 (4,158) — 660 — 660 (11) 649 — 649 Total $ (1,896) 950 — (946) (3,145) (4,091) 582 (3,509) Sugar $ (1,313) (1,206) 272 (2,247) (4,172) (6,419) 852 (5,567) Maple Products $ — 164 — 164 — 164 — 164 Total $ (1,313) (1,042) 272 (2,083) (4,172) (6,255) 852 (5,403) (1) See “Non-GAAP measures” section. (2) See “Adjusted results” within the consolidated results of operation section and “Segmented information” section. Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS 27 Income (loss) (In thousands of dollars) Fiscal 2018 Sugar $ Maple Products $ Total $ Sugar $ Mark-to-market on: Sugar futures contracts Foreign exchange forward contracts Embedded derivatives (3,154) — (3,154) 231 51 1,263 1,494 — 51 Total mark-to-market adjustment on derivatives (2,872) 1,263 (1,609) Cumulative timing differences Adjustment to cost of sales Amortization of transitional balance to cost of sales and changes in fair value of expired contracts for cash flow hedges Total adjustment to costs of sales (1) (2) 3,076 309 204 1,572 2,715 2,919 — 1,572 3,385 1,776 2,715 4,491 (9,311) (1,025) 254 (10,082) (19,061) (29,143) 3,018 (26,125) (1) See “Non-GAAP measures” section. (2) See “Adjusted results” within the consolidated results of operation section and “Segmented information” section. Fiscal 2017 Maple Products $ — 164 — 164 — 164 — 164 Total $ (9,311) (861) 254 (9,918) (19,061) (28,979) 3,018 (25,961) The fluctuations in mark-to-market adjustment on derivatives are liquidated, in other words, when the natural gas is used. As a result, due to the price movements in #11 world raw sugar and foreign in fiscal 2018, the Company removed a gain of $0.6 million and exchange variations. See “Non-GAAP measures” section. $2.7 million from other comprehensive income and recorded a gain of the same amount in cost of sales for the fourth quarter and year- Cumulative timing differences, as a result of mark-to-market gains to-date, respectively. The transitional balance relating to natural or losses, are recognized by the Company only when sugar is sold gas futures will be fully depleted in fiscal 2020. See “Non-GAAP to a customer. The gains or losses on sugar and related foreign measures” section. exchange paper transactions are largely offset by corresponding gains or losses from the physical transactions, namely sale and The above described adjustments are added or deducted to the purchase contracts with customers and suppliers. See “Non-GAAP mark-to-market results to arrive at the total adjustment to cost of measures” section. sales. For the fourth quarter of the current year, the total cost of sales adjustment is a loss of $3.5 million versus a loss of $5.4 million As previously mentioned, starting on October 2, 2016, natural to be added to the consolidated results for the comparable quarter gas futures were designated as an effective cash flow hedging last year. Year-to-date, the total cost of sales adjustment is a gain of instrument and as a result, mark-to-market adjustments are $4.5 million to be deducted from the consolidated results compared now recorded in other comprehensive income. The transitional to a loss of $26.0 million to be added to the consolidated results balances, representing the mark-to-market value recorded as for the comparable period last year. See “Non-GAAP measures” of October 1, 2016, will be subsequently removed from other section comprehensive income when the natural gas futures will be 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 28 Segmented information Following the acquisition of LBMT, the Company has two distinct segments, namely, refined sugar and by-products, together referred to as the “Sugar” segment and maple syrup and derived products, together referred to as the “Maple products” segment. The following is a table showing the key results by segments: Consolidated results Fourth Quarter Fiscal 2018 Fourth Quarter Fiscal 2017 (In thousands of dollars) Revenues Gross margin Administration and selling expenses Distribution costs Results from operating activities Non-GAAP results: Total adjustment to the cost of sales (1) (2) Adjusted Gross Margin (1) Adjusted results from operating activities (1) Depreciation of property, plant and equipment and amortization of intangible assets Sugar Segment Acquisition costs (1) Maple Segment non-recurring costs (1) Adjusted EBITDA (1) Additional information: Addition to property, plant and equipment and intangible assets Sugar $ Maple Products $ Total $ Sugar $ Maple Products $ Total $ 161,040 50,767 211,807 166,318 26,666 192,984 29,255 19,041 21,640 4,751 2,908 13,981 4,158 25,798 18,139 7,615 2,215 1,150 4,250 6,966 4,058 18,231 (649) 3,509 6,966 3,601 32,764 21,740 3,431 1,165 4,596 — — — (4) — (4) 21,570 4,762 26,332 19,942 7,400 2,451 9,190 5,567 24,608 14,757 3,298 1,887 — 3,590 1,948 694 948 (164) 3,426 784 491 — 1,076 2,351 22,631 9,348 3,145 10,138 5,403 28,034 15,541 3,789 1,887 1,076 22,293 (1) See “Non-GAAP measures” section. (2) See “Adjusted results” within the consolidated results of operation section and “Segmented information” section. 10,894 608 11,502 6,660 64 6,724 Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS Consolidated results Fiscal Year 2018 Fiscal Year 2017 29 (In thousands of dollars) Revenues Gross margin Administration and selling expenses Distribution costs Results from operating activities Non-GAAP results: Depreciation of property, plant and equipment and amortization of intangible assets Sugar Segment Acquisition costs (1) Maple Segment non-recurring costs (1) Adjusted EBITDA (1) Additional information: Addition to property, plant and equipment and intangible assets Sugar $ Maple Products $ Total $ Sugar $ Maple Products $ Total $ 601,958 203,243 805,201 655,851 26,666 682,517 102,578 28,275 130,853 21,070 11,001 10,760 3,922 70,748 13,352 32,071 14,682 84,100 73,708 23,655 9,970 40,083 26,125 99,833 66,208 13,105 2,517 — 3,590 1,948 694 948 77,298 25,603 10,664 41,031 (164) 25,961 3,426 103,259 784 66,992 491 — 1,076 2,351 13,596 2,517 1,076 84,181 13,495 4,979 18,474 — — — — 1,859 1,859 81,324 18,618 99,942 81,830 Total adjustment to the cost of sales (1) (2) (2,919) (1,572) (4,491) Adjusted Gross Margin (1) 99,659 26,703 126,362 Adjusted results from operating activities (1) 67,829 11,780 79,609 23,352 1,792 25,144 17,306 64 17,370 (1) See “Non-GAAP measures” section. (2) See “Adjusted results” within the consolidated results of operation section and “Segmented information” section. Results from operation by segment Sugar Revenues Volume (MT) Revenues ($000’s) Fourth Quarter Fiscal Year 2018 200,147 161,040 2017 183,397 166,318 2018 719,875 601,958 2017 694,465 655,851 The total Canadian nutritive sweetener market, which includes increase of approximately 25,400 metric tonnes above fiscal 2017 both refined sugar and HFCS, increased by approximately 1.5% in volume. fiscal 2018 while the per capita sugar consumption remained stable during the year. The industrial market segment increased by approximately 5,100 metric tonnes and approximately 400 metric tonnes for The Company’s total sugar deliveries for the fourth quarter of the last quarter of fiscal 2018 and year-to-date, respectively. The fiscal 2018 were very strong and increased by approximately 9% improvement in volume for the fourth quarter is mostly due to or approximately 16,700 metric tonnes versus the comparable timing, which more than offset the lag in volume that was reported period last year, with improvements in all categories versus the for the first nine months of the current fiscal year and as a result, the fourth quarter last year. The improvement year-over-year was not as industrial volume ended fiscal 2018 slightly above last fiscal year. pronounced as a percentage but still finished with a commendable 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 30 Total consumer volume also had a solid fourth quarter with an Finally, the export volume increased by approximately 4,500 metric increase of approximately 1,700 metric tonnes when compared to tonnes and approximately 11,300 metric tonnes for the current the same period last year as a result of additional retail promotional quarter and year-to-date, respectively, when compared to the same activities in the last quarter of the current year. Overall, the periods last year. Variation for both periods is attributable to timing consumer volume ended the year approximately 400 metric tonnes in sales deliveries to Mexico, as well as additional U.S. high tier lower than the last twelve months of fiscal 2017. opportunistic sales versus last year’s comparative periods. The liquid market continued to deliver higher volume when The decrease in revenues for the fourth quarter of fiscal 2018 and compared to the prior year with the strongest increase quarter- year-to-date versus the comparable periods last year is mainly over-quarter in fiscal 2018. For the current quarter, volume grew explained by a decrease in the weighted average raw sugar values by approximately 5,400 metric tonnes, raising the fiscal 2018 liquid in Canadian dollars, since the cost of raw sugar for all domestic volume by approximately 14,100 metric tonnes above last year. sales is passed on to the Company’s customers which more than The increase for the quarter and year-to-date is due mainly to the offset the increase in revenues generated by the additional volume recapture of some business temporarily lost to HFCS in fiscal 2017 for both periods. and to additional demand from existing customers. Gross margin Two major factors impact gross margins: the selling margin of the products and operating costs. Gross margin Fourth Quarter Fiscal Year (In thousands of dollars, except per metric tonne information) Gross margin Total adjustment to cost of sales (1) (2) Adjusted gross margin Gross margin per metric tonne Adjusted gross margin per metric tonne Included in Gross margin: 2018 $ 21,640 4,158 25,798 108.12 128.90 2017 $ 19,041 5,567 24,608 103.82 134.18 2018 $ 102,578 (2,919) 99,659 142.49 138.44 2017 $ 73,708 26,125 99,833 106.14 143.76 Depreciation of property, plant and equipment 3,252 3,129 12,813 12,466 (1) See “Non-GAAP measures” section. (2) See “Adjusted results” within the consolidated results of operation section and “Segmented information” section. Gross margin of $21.6 million for the quarter and $102.6 million Adjusted gross margin for the quarter was $25.8 million compared year-to-date does not reflect the economic margin of the to $24.6 million for the same quarter last year, representing an sugar segment, as it includes a loss of $4.2 million and a gain increase of $1.2 million. The increase is mainly driven by higher of $2.9 million for the fourth quarter of fiscal 2018 and year-to- volume and an increase in by-products revenues. However, these date, respectively, for the mark-to-market of derivative financial positive variations were somewhat offset by lower #11 raw sugar instruments as explained above. In fiscal 2017, a mark-to-market values when compared to last year, which had a negative impact on loss of $5.6 million and $26.1 million was recorded for the fourth Taber’s domestic sales gross margin rate and higher maintenance quarter and year-to-date, respectively, resulting in gross margins of costs in Montreal and Taber. The current quarter’s adjusted gross $19.0 million and $73.7 million for their respective periods. These margin rate was $128.90 per metric tonne as compared to $134.18 mark-to-market gains and losses must be deducted from or added per metric tonne in fiscal 2017, a decrease of $5.28 per metric to the gross margin in order to arrive to adjusted gross margin tonne. This decrease is mostly explained by the lower #11 raw results, as explained above. sugar prices, the unfavorable sales mix with the strongest volume increase in industrial, liquid and opportunistic export sales and the We will therefore comment on adjusted gross margin results. additional maintenance costs. Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS 31 Year-to-date, adjusted gross margin of $99.7 million includes gross margin rate of $138.44 per metric tonne includes a gain of a non-cash pension plan income of $1.5 million recorded as a $2.05 per metric tonne for the non-cash pension plan income, result of the approval by the Alberta Treasury Board and Finance explained above, thus reducing the adjusted gross margin rate of an amendment to the Alberta hourly pension plan. Excluding to $136.39 per metric tonne as compared to $143.76 for fiscal this non-cash income, adjusted gross margin was $98.2 million or 2017, a decrease of $7.37 per metric tonne. As it was the case for $1.7 million lower than last year. The decrease is mainly explained the quarter, the lower #11 raw sugar values during the year, the by lower #11 raw sugar prices, which had the biggest impact in the unfavorable sales mix and additional maintenance expenses had a second half of the current year, as well as additional maintenance negative impact on adjusted gross margin per metric tonne when costs in the last quarter of fiscal 2018. The year-to-date adjusted compared to last year. Other expenses (In thousands of dollars) Administration and selling expenses Distribution costs Included in Administration and selling expenses: Fourth Quarter Fiscal Year 2018 $ 4,751 2,908 2017 $ 7,400 2,451 2018 $ 21,070 10,760 2017 $ 23,655 9,970 Amortization of intangible assets 179 169 682 639 Administration and selling expenses for the fourth quarter of Distribution expenses for the quarter and year-to-date were fiscal 2018 and year-to-date were $2.6 million lower than both approximately $0.5 million and $0.8 million higher, respectively, comparable periods last year, mainly due to a charge of $1.9 million than the comparable periods due to higher volume transferred to and $2.5 million in fiscal 2017 for the quarter and year-to-date, the Toronto distribution center, higher freight rates and additional respectively, relating to the acquisition of LBMTC. In addition, for storage costs in Taber. the current quarter, employee benefits were lower when compared to the fourth quarter of fiscal 2017. Results from operating activities Fourth Quarter Fiscal Year (In thousands of dollars) Results from operating activities Adjusted results from operating activities (1) (1) See “Non-GAAP measures” section. 2018 $ 13,981 18,139 2017 $ 9,190 14,757 2018 $ 70,748 67,829 2017 $ 40,083 66,208 The results from operating activities for fiscal 2018 of $14.0 million In addition, the acquisition of LBMTC has resulted in expenses that and $70.7 million for the fourth quarter and year-to-date, do not reflect the economic performance of the operation of the respectively, do not reflect the adjusted results from operating Sugar Segment. Finally, non-cash depreciation and amortization activities of the Sugar segment, as they include gains and losses expense also had a negative impact on the results from operating from the mark-to-market of derivative financial instruments, as well activities. As such Management believes that the Sugar segment’s as timing differences in the recognition of any gains and losses on financial results are more meaningful to management, investors, the liquidation of derivative instruments. analysts, and any other interested parties when financial results are adjusted for the above mentioned items. 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 32 Adjusted EBITDA The results of operations would therefore need to be adjusted by the following: Adjusted EBITDA (In thousands of dollars) Results from operating activities Total adjustment to cost of sales (1) (2) Adjusted results from operating activities Depreciation of property, plant and equipment and amortization of intangible assets Sugar Segment Acquisition costs (1) Adjusted EBITDA (1) Fourth Quarter Fiscal Year 2018 $ 13,981 4,158 18,139 3,431 — 2017 $ 9,190 5,567 14,757 3,298 1,887 21,570 19,942 2018 $ 70,748 (2,919) 67,829 13,495 — 81,324 2017 $ 40,083 26,125 66,208 13,105 2,517 81,830 (1) See “Non-GAAP measures” section. (2) See “Adjusted results” within the consolidated results of operation section and “Segmented information” section. Adjusted EBITDA for the fourth quarter amounted to $21.6 million, $81.8 million, a $0.5 million decrease when compared to fiscal 2017. which represented an increase of $1.6 million versus the last The decrease is mostly explained by an increase in distribution quarter of fiscal 2017. The increase is explained by higher costs of $0.8 million, somewhat offset by an increase in adjusted adjusted gross margins of $1.3 million and lower administration gross margin of $0.2 million and a decrease of $0.1 million in and selling expenses of $0.8 million, excluding depreciation and administration and selling expenses, the latter two items, excluding amortization expense and Acquisition costs, somewhat offset by depreciation and amortization expense and Acquisition costs, as higher distribution costs of $0.5 million, as explained above. Year- explained above. to-date, adjusted EBITDA amounted to $81.3 million compared to Maple products Results for the current year include Decacer’s results since its acquisition on November 18, 2017. Results for fiscal 2017 represent results generated by LBMTC since its acquisition on August 5, 2017. Revenues Fourth Quarter Fiscal Year Volume (‘000 pounds) Revenues ($000’s) 2018 10,549 50,767 2017 5,764 26,666 2018 45,119 203,243 2017 5,764 26,666 Revenues for the fourth quarter and year-to-date amounted to $50.8 million and $203.2 million, respectively, compared to $26.7 million for both periods last year. Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS 33 Gross margin Two major factors impact gross margins: the selling margin of the products and operating costs. Gross margin Fourth Quarter Fiscal Year (In thousands of dollars, except adjusted gross margin rate information) Gross margin Total adjustment to cost of sales (1) (2) Adjusted gross margin Gross margin percentage Adjusted gross margin percentage Included in Gross margin: 2018 $ 7,615 (649) 6,966 15.0% 13.7% 2017 $ 3,590 (164) 3,426 13.5% 12.8% 2018 $ 28,275 (1,572) 26,703 13.9% 13.1% 2017 $ 3,590 (164) 3,426 13.5% 12.8% Depreciation of property, plant and equipment 309 139 1,479 139 (1) See “Non-GAAP measures” section. (2) See “Adjusted results” within the consolidated operating results section and “Segmented information” section. Gross margin of $7.6 million and $28.3 million for the quarter and year-to-date does not reflect the economic margin of the Maple products segment, as it includes a gain of $0.6 million and $1.6 million, respectively, for the mark-to-market of derivative financial instruments on foreign exchange contracts. We will therefore comment on adjusted gross margin results. Adjusted gross margin for the current quarter was $7.0 million, representing an adjusted gross margin percentage of 13.7% while year-to- date adjusted gross margin amounted to $26.7 million or 13.1% of revenues. However, included in cost of sales for the first quarter of fiscal 2018, was an amount of $0.3 million due to an increase in value of the finished goods inventory at the date of acquisition of Decacer. Under IFRS, all inventories of finished goods upon acquisition are valued at the estimated selling price less the sum of the costs of disposal, and a reasonable profit allowance for the selling effort of the acquirer which results in lower selling margins when the acquired inventory is sold. Without this adjustment, adjusted gross margin for fiscal 2018 would have been $27.0 million or 13.3% of revenues. Fiscal 2017 results only represents approximately eight weeks of operations of LBMTC since its acquisition date on August 5, 2017. Other expenses Other expenses (In thousands of dollars) Administration and selling expenses Distribution costs Included in Administration and selling expenses: Fourth Quarter Fiscal Year 2018 $ 2,215 1,150 2017 $ 1,948 694 2018 $ 11,001 3,922 2017 $ 1,948 694 Amortization of intangible assets 856 352 3,500 352 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 34 Administration and selling expenses amounted to $2.2 million and $11.0 million for the current quarter and year-to-date, respectively, the latter includes non-recurring costs of $0.9 million and consulting fees and other costs totalling $0.7 million associated with acquisition of Decacer in the first quarter of the current year. This compares to $1.9 million for the quarter and year-to-date of fiscal 2017, which included $0.4 million in acquisition costs and non-recurring items. Distribution expenses were $1.2 million for the fourth quarter of fiscal 2018 and $3.9 million year-to-date, compared to $0.7 million for both periods last year. Results from operating activities Results from operating activities Fourth Quarter Fiscal Year (In thousands of dollars) Results from operating activities Adjusted results from operating activities (1) (1) See “Non-GAAP measures” section. 2018 $ 4,250 3,601 2017 $ 948 784 2018 $ 13,352 11,780 2017 $ 948 784 The results from operating activities for fiscal 2018 of $4.3 million and $13.4 million for the fourth quarter and year-to-date, respectively, do not reflect the adjusted results from operating activities of the Maple products segment, as they include gains and losses from the mark- to-market of derivative financial instruments, as well as timing differences in the recognition of any gains and losses on the liquidation of derivative instruments. In addition, the acquisitions of LBMTC and Decacer resulted in expenses that do not reflect the economic performance of the operation of the Maple products segment. Finally, non-cash depreciation and amortization expense also had a negative impact on the results from operating activities. As such Management believes that the Maple products segment’s financial results are more meaningful to management, investors, analysts, and any other interested parties when financial results are adjusted for the above mentioned items. Adjusted results The results of operations would therefore need to be adjusted by the following: Adjusted results (In thousands of dollars) Results from operating activities Total adjustment to cost of sales (1) (2) Fourth Quarter Fiscal Year 2018 $ 4,250 (649) 2017 $ 948 (164) Adjusted results from operating activities 3,601 784 Non-recurring expenses: Acquisition costs incurred Other one-time non-recurring items Finished goods value at the estimated selling price less disposal costs as of the acquisition date Depreciation and amortization LBMT Adjusted EBITDA (1) (2) — (4) — 1,165 4,762 211 195 670 491 2,351 (1) See “Non-GAAP measures” section. (2) See “Adjusted results” within the consolidated operating results section and “Segmented information” section. Other non-recurring items mainly include severance costs expensed to date. 2018 $ 13,352 (1,572) 11,780 675 923 261 4,979 18,618 2017 $ 948 (164) 784 211 195 670 491 2,351 Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS 35 Consolidated results The reconciliation of the Adjusted gross margin, adjusted results from operating activities and adjusted EBITDA by segment as well as the consolidated Adjusted net earnings is as follows. Results were explained above in each segment. Consolidated results Fourth Quarter Fiscal 2018 Fourth Quarter Fiscal 2017 (In thousands of dollars) Gross margin Total adjustment to the cost of sales (1) (2) Adjusted Gross Margin (1) Results from operating activities Total adjustment to the cost of sales (1) (2) Sugar $ Maple Products $ Total $ 21,640 7,615 29,255 4,158 25,798 13,981 4,158 (649) 3,509 6,966 4,250 32,764 18,231 (649) 3,509 Sugar $ 19,041 5,567 24,608 9,190 5,567 Adjusted results from operating activities (1) 18,139 3,601 21,740 14,757 Depreciation of property, plant and equipment and amortization of intangible assets Sugar Segment Acquisition costs (1) Maple Segment non-recurring costs (1) 3,431 1,165 4,596 — — — (4) — (4) 3,298 1,887 — Adjusted EBITDA (1) 21,570 4,762 26,332 19,942 Net earnings as per financial statements Total adjustment to the cost of sales (1) (2) Amortization of transitional balance to net finance costs (1) (2) Income taxes on above adjustments Adjusted net earnings (1) Net earnings per share basic, as per financial statements Adjustment for the above Adjusted net earnings per share basic (1) 9,633 3,509 (128) (892) 12,122 0.09 0.03 0.12 (1) See “Non-GAAP measures” section. (2) See “Adjusted results” within the consolidated operating results section and “Segmented information” section. Maple Products $ Total $ 3,590 22,631 (164) 3,426 948 (164) 784 491 — 1,076 2,351 5,403 28,034 10,138 5,403 15,541 3,789 1,887 1,076 22,293 4,014 5,403 (84) (1,395) 7,938 0.04 0.04 0.08 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 36 Consolidated results (In thousands of dollars) Fiscal 2018 Maple Products $ Sugar $ Total $ Gross margin 102,578 28,275 130,853 Total adjustment to the cost of sales (1) (2) (2,919) (1,572) (4,491) Adjusted Gross Margin (1) 99,659 26,703 126,362 Results from operating activities 70,748 13,352 84,100 Total adjustment to the cost of sales (1) (2) (2,919) (1,572) (4,491) Adjusted results from operating activities (1) 67,829 11,780 79,609 Depreciation of property, plant and equipment and amortization of intangible assets Sugar Segment Acquisition costs (1) Maple Segment non-recurring costs (1) 13,495 4,979 18,474 — — — — 1,859 1,859 Sugar $ 73,708 26,125 99,833 40,083 26,125 66,208 13,105 2,517 — Adjusted EBITDA (1) 81,324 18,618 99,942 81,830 Net earnings as per financial statements Total adjustment to the cost of sales (1) (2) Amortization of transitional balance to net finance costs (1) (2) Income taxes on above adjustments Adjusted net earnings (1) Net earnings per share basic, as per financial statements Adjustment for the above Adjusted net earnings per share basic (1) 48,729 (4,491) (532) 1,326 45,032 0.46 (0.03) 0.43 (1) See “Non-GAAP measures” section. (2) See “Adjusted results” within the consolidated operating results section and “Segmented information” section. Fiscal 2017 Maple Products $ 3,590 (164) Total $ 77,298 25,961 3,426 103,259 948 (164) 784 491 — 1,076 2,351 41,031 25,961 66,992 13,596 2,517 1,076 84,181 21,906 25,961 (371) (6,782) 40,714 0.23 0.19 0.42 Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS 37 Summary of Quarterly Results The following is a summary of selected financial information of the consolidated financial statements and non-GAAP measures of the Company for each of the quarters of fiscal 2018 and 2017: QUARTERS 2018 2017 (In thousands of dollars, except for volume and per share information) First Second Third Fourth First Second Third Fourth Sugar Volume (MT) 174,144 163,253 182,331 200,147 168,376 168,723 173,969 183,397 Maple products volume (‘000 pounds) Total revenues Gross margin EBIT Net earnings 11,191 12,725 10,654 10,549 $ $ $ $ — $ — $ — $ 5,764 $ 204,883 189,455 199,056 211,807 159,604 163,566 166,363 192,984 43,113 27,055 31,430 29,255 28,176 16,605 9,886 22,631 31,685 14,888 19,296 18,231 20,216 7,586 11,294 9,633 Gross margin rate per MT (1) 206.88 126.51 113.04 108.12 Gross margin percentage (2) 14.4% 12.1% 14.3% 15.0% 20,596 13,552 167.34 — 8,784 4,788 98.42 — 1,513 10,138 (448) 4,014 56.83 103.82 — 13.5% Per share Net earnings Basic Diluted Non-GAAP Measures 0.19 0.18 0.07 0.07 0.11 0.10 0.09 0.09 0.14 0.14 0.05 0.05 — — 0.04 0.04 Adjusted gross margin 37,303 28,607 27,687 32,764 29,115 23,267 22,843 28,034 Adjusted EBIT 25,875 16,440 15,553 21,740 21,535 15,446 14,470 15,541 Adjusted net earnings 15,848 8,617 8,445 12,122 14,118 9,628 9,030 7,938 Adjusted gross margin rate per MT (1) Adjusted gross margin percentage (2) Adjusted net earnings per share 179.19 134.66 113.37 128.90 172.92 137.90 131.31 134.18 12.4% 12.5% 13.9% 13.7% — — — 12.8% Basic Diluted 0.15 0.14 0.08 0.07 0.08 0.08 0.12 0.11 0.15 0.14 0.10 0.10 0.10 0.10 0.08 0.08 (1) Gross margin rate per MT and Adjusted gross margin rate per MT pertains to the Sugar segment only. (2) Gross margin percentage and Adjusted gross margin percentage pertains to the Maple products segment only. 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. The increase in revenues for the fourth quarter of fiscal 2018 is explained by the benefit from the LBMT acquisition since August 5, 2017 and the Decacer acquisition on November 18, 2017. The timing of both acquisitions also had an impact on the Maple products segment volume. 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 38 Financial condition Liquidity (In thousands of dollars) 2018 2017* 2016 Total assets 870,209 835,474 585,198 Total non-current liabilities 382,136 344,130 214,685 $ $ $ * Includes adjustment of prior year purchase price allocation (see Consolidated Financial Statements - Note 4, Business combinations and Note 16, Goodwill). Cash flow generated by Lantic is paid to Rogers by way of dividends and return of capital on the common shares and by the payment of interest on the subordinated notes of Lantic held by Rogers, after taking a reasonable reserve for capital expenditures, debt reimbursement and working capital. The cash received by Rogers is used to pay administrative expenses, interest on the convertible debentures, income taxes and dividends to its shareholders. Lantic had no restrictions on distributions of cash arising from the The increase in total assets in the current fiscal year is due mainly compliance of financial covenants for the year. to the acquisition of Decacer’s long-term assets in November 2017 totalling $34.7 million. The increase in total asset between fiscal (In thousands of dollars) 2016 and 2017 is mainly explained by the acquisition of LBMTC, 2018 2017* $ $ representing $254.1 million. Non-current liabilities for fiscal 2018 also increased during the current year with the issuance of the Seventh series debentures for a total amount of $97.8 million less the repayment of the $60.0 million Fifth series debentures. In addition, the long-term portion of the revolving credit facility was higher for the current year than in fiscal 2017 due to increase borrowings as a result of the Decacer acquisition. Finally, deferred tax liabilities were $5.7 million higher than the prior fiscal year. Somewhat offsetting the negative variance in long-term liabilities is a reduction in employee benefits liabilities of $7.7 million due mainly to a change in pension actuarial assumptions as at September 29, 2018. Non-current liabilities for fiscal 2017 increased when compared to fiscal 2016 as a result of the additional drawdown under the revolving credit facility to repay the Fourth series debentures as well as to partially fund the LBMT acquisition. In addition, the Sixth series debentures were issued on July 28, 2017, therefore increasing the overall non-current liabilities compounded by the fact that the Fourth series debentures were presented as current in fiscal 2016. Somewhat reducing the negative variance is a decrease in the employee benefits balance of $13.8 million also due mostly to a change in pension actuarial assumptions as of last year end. Cash flow from operating activities 52,912 52,037 Cash flow (used in) from financing activities (1,555) 147,272 Cash flow used in investing activities (66,429) (183,485) Effect of changes in exchange rate on cash 140 (37) Net (decrease) increase in cash and cash equivalents (14,932) 15,787 * Includes adjustment of prior year purchase price allocation (see Consolidated Financial Statements - Note 4, Business combinations and Note 16, Goodwill). Cash flow from operating activities was $52.9 million in fiscal 2018, as opposed to $52.0 million in fiscal 2017, an increase of $0.9 million. Cash flow from operating activities increased due to a higher EBIT of $43.1 million and lower income taxes paid of $4.2 million. However, it was almost all reduced due to a negative working capital variation of $36.0 million, mostly attributable to lower trade and other payables, higher negative changes in fair value of financial instruments of $7.4 million and higher interest paid of $4.9 million. It should be noted that the acquisition of the working capital of Decacer is shown in investing activities and therefore, only the working capital variation between the acquisition date and September 29, 2018 is presented as part of the cash flow On an annual basis, a goodwill impairment calculation is performed from operating activities. with the aim of ensuring that the fair value of the Company’s operating segments is more than their respective carrying value. There was no impairment in fiscal 2018 analysis or for any of the previous two years. Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS 39 The negative variation in cash flow used in financing activities of in fiscal 2017 of $166.2 million. The year-over-year variation $148.8 million is mainly attributable to a reduction of the revolving associated with acquisitions resulted in a positive variance of credit facility of $108.0 million, no issuance of common shares in $123.4 million. Somewhat reducing this variation is greater capital fiscal 2018 as opposed to $66.5 million in fiscal 2017 and increased spending during the current year as a result of various major dividend payments of $4.2 million. In addition, the Company projects undertaken and an increased plan spending during the purchased and cancelled common shares for a total cash outflow year, resulting in an increase of $6.4 million. of $4.0 million. Somewhat reducing the negative variance is the movement year-over-year of convertible debentures, for which In order to provide additional information, the Company believes the issuance, net of repayment had a total positive impact of it is appropriate to measure free cash flow that is generated by the $28.0 million and an increase in bank overdraft of $5.5 million. operations of the Company. Free cash flow is defined as cash flow Finally, payments of financing fees had a positive impact on cash from operations excluding changes in non-cash working capital, flow from financing activities of $0.4 million. mark-to-market and derivative timing adjustments and financial instruments’ non-cash amounts, funds received or paid from the The cash outflow used in investing activities decreased compared issue or purchase of shares and capital expenditures, excluding to fiscal 2017 by $117.1 million due mainly to the acquisition operational excellence capital expenditures. Free cash flow is a of Decacer for $42.1 million and a purchase price payment of non-GAAP measure. $0.7 million in fiscal 2018. This compares to the LBMTC acquisition Free cash flow is as follows: (In thousands of dollars) Fourth Quarter 2018 $ 2017* $ 2018 $ Fiscal Year 2017* $ 2016 $ Cash flow from operations 57,991 65,861 52,912 52,037 66,672 Adjustments: Changes in non-cash working capital (43,877) (52,628) 12,764 (23,192) 27,703 Mark-to-market and derivative timing adjustments Amortization of transitional balances Financial instruments non-cash amount 4,091 (710) 2,610 Capital expenditures and intangible assets (11,818) Operational excellence capital expenditures Stock options exercised Purchase and cancellation of shares Deferred financing charges Free cash flow (1) Declared dividends 4,149 — (2,151) — 10,285 9,450 6,255 (936) (3,829) (8,760) 1,038 93 — (469) 6,625 9,517 (1,776) (3,247) 7,645 28,979 (3,389) (32,257) — 278 (2,155) (23,655) (17,303) (15,156) 7,394 — (3,963) (272) 47,802 37,971 3,344 521 — (629) 40,646 34,896 835 — (727) (90) 44,825 33,796 (1) See “Non-GAAP measures” section. * Includes adjustment of prior year purchase price allocation (see Consolidated Financial Statements - Note 4, Business combinations and Note 16, Goodwill). 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 40 Free cash flow for the fourth quarter of 2018 was $10.3 million During the fourth quarter and full year of fiscal 2018, Rogers compared to $6.6 million for the same period year, an increase of purchased and cancelled a total of 400,000 common shares and $3.7 million. The higher free cash flow is mainly explained by an 736,900 common shares, respectively, under the normal course increase in adjusted EBITDA (See “Non-GAAP measures” section issuer bid (“NCIB”) for a total cash consideration of $2.2 million in the MD&A) of $6.4 million and a decrease in deferred financing and $4.0 million, respectively. charges payment of $0.5 million. This positive variance was somewhat offset by purchase and cancellation of shares totalling In fiscal 2017, an amount of $0.1 million and $0.5 million was $2.2 million and higher interest paid of $1.1 million. received during the fourth quarter and year-to-date, respectively, following the exercise of share options by certain executives of the Free cash flow for fiscal 2018 was $7.2 million higher than the Company. There was no exercise of options in fiscal 2018. previous year mainly explained by an increase in adjusted EBITDA (See “Non-GAAP measures” section in the MD&A) of $15.4 million, Financing charges are paid when a new debt financing is completed a decrease in income taxes paid of $4.2 million and lower deferred and such charges are deferred and amortized over the term of that financing charges paid of $0.4 million. However, these variations debt. The cash used in the year to pay for such fees is therefore not were somewhat offset by higher interest paid of $4.9 million, the available and as a result is deducted from free cash flow. In fiscal purchase and cancellation of shares, as opposed to issuance of 2018, an amount of $0.3 million was paid to amend the revolving shares following the exercise of share options, for a total negative credit facility as opposed to $0.5 million and $0.6 million for the last variance of $4.5 million, higher capital and intangible spending, net quarter of fiscal 2017 and last fiscal year, respectively. of operational excellence capital of $2.3 million and higher pension plan contribution of $1.1 million. The Company declared a quarterly dividend of 9.0 cents per common share, resulting in an amount payable of $9.5 million for Operational excellence capital expenditures are $3.1 million and the quarter and of $38.0 million for the current year. This compares $4.1 million higher for the quarter and year-to-date, respectively, to $9.5 million for the fourth quarter last year and $34.9 million when compared to the same periods last fiscal year. This year’s for the year. The year-to-date increase is due to the issuance of operational excellence capital expenditures comprised of various common shares in July 2017 for the acquisition of LBMTC. projects. In fiscal 2018, $3.9 million was spent on an energy saving project at the Vancouver refinery that will be completed in the Changes in non-cash operating working capital represent year- first half of fiscal 2019 for a total of approximately $5.1 million. In over-year movements in current assets, such as accounts receivable addition, $1.1 million was spent on new packaging equipment that and inventories, and current liabilities, such as accounts payables. will bring retail packaging innovation to our product offering and Movements in these accounts are due mainly to timing in the will help reduce co-packaging costs. An energy saving project at collection of receivables, receipts of raw sugar and payment the Montréal refinery of approximately $3.3 million started in fiscal of liabilities. Increases or decreases in such accounts are due to 2017 and was completed by the end of the second quarter of the timing issues and therefore do not constitute free cash flow. Such current fiscal year. Another energy saving project at the Montréal increases or decreases are financed from available cash or from the refinery was undertaken in fiscal 2018 and should be completed in Company’s available credit facility of $265.0 million. Increases or the first half of fiscal 2019 for a total capital spend of $0.5 million. decreases in bank indebtedness are also due to timing issues from The palletizing station installation in Taber was completed the above and therefore do not constitute available free cash flow. during the current fiscal year for a total capital of approximately $1.2 million. Free cash flow is not reduced by operational The combined impact of the mark-to-market, financial instruments excellence capital expenditures, as these projects are not necessary non-cash amount and amortization of transitional balances of $6.0 for the operation of the plants, but are undertaken because of the million and $2.6 million for the current quarter and fiscal year, substantial operational savings that are realized once the projects respectively do not represent cash items as these contracts will be are completed. settled when the physical transactions occur, which is the reason for the adjustment to free cash flow. Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS 41 Contractual obligations The following table identifies the outstanding contractual obligations of the Company as at year-end, and the effects such obligations are expected to have on liquidity and cash flow over the next several years: (In thousands of dollars) Revolving credit facility Interest on convertible debentures Interest based on swap agreement Finance lease obligations Operating leases Purchase obligations Other long-term liabilities Total $ 172,000 25,594 5,505 121 8,665 Less than 1 year $ 12,000 3,759 1,620 55 2,581 100,816 100,677 773 773 Derivative financial instruments (31,846) (56,267) Purchase obligations (in MT) Purchase obligations (in ‘000 pounds) 281,628 1,337,000 12,812 65,198 479,000 12,812 1 to 3 years 4 to 5 years After 5 years $ — 7,518 2,839 66 3,024 139 — 9,210 22,796 858,000 — $ 160,000 7,518 1,046 — 2,104 — — 15,211 185,879 — — $ — 6,799 — — 956 — — — 7,755 — — During the current year, the Company issued a total of $97.8 million On May 18, 2018, the Company canceled an amount of 4.75% Seventh series debentures in order to repay the Fifth series $50.0 million that was available to be drawn under the revolving debentures of $60.0 million and a portion of the revolving credit credit facility which was made available on April 28, 2017 under the facility. In fiscal 2017, the Company issued $57.5 million 5.0% accordion feature (“Accordion Borrowings”), which had a maturity Sixth series debentures in order to partially fund the acquisition of date of December 31, 2018. LBMTC. The Sixth and Seventh series debentures, which mature in December 2024 and June 2025, respectively, have been excluded On May 28, 2018, the Company exercised its option to extend from the above table due to the holders’ conversion option and the maturity date of its revolving credit facility to June 28, 2023 the Company’s option to satisfy the obligations at redemption or under the same terms and conditions of the amended credit maturity in shares. Interest has been included in the above table to agreement entered into on December 20, 2017. As a result of the date of maturity. the amended revolving credit facility, the Second Additional Accordion Borrowings, the Additional Accordion Borrowings and In fiscal 2013, Lantic entered into a five-year credit agreement of the cancellation of the Accordion Borrowings, the Company has a $150.0 million effective June 28, 2013, replacing the $200.0 million total of $265.0 million of available working capital from which it can credit agreement that expired on the same date. On August 3, borrow at prime rate, LIBOR rate or under bankers’ acceptances, 2017, the Company amended its existing revolving credit facility plus 20 to 250 basis points, based on achieving certain financial to partially fund the acquisition of LBMTC. The available credit ratios. As at September 29, 2018, a total of $407.8 million have was increased by $75.0 million by drawing additional funds under been pledged as security for the revolving credit facility, compared the accordion feature embedded in the revolving credit facility to $417.9 million as at September 30, 2017, including trade (“Additional Accordion Borrowings”). Then, on December 20, receivables, inventories and property, plant and equipment. 2017, the Company amended, once again, its existing revolving credit facility thereby increasing its available credit by $40.0 million At September 29, 2018, a total of $172.0 million had been borrowed by drawing additional funds under the accordion feature (“Second under this facility, of which, $12.0 million was presented as current. Additional Accordion Borrowings”) to partially fund the Decacer acquisition. 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 42 In order to fix the interest rate on a substantial portion of the expected drawdown of the revolving credit facility, the Company enters into interest rate swap agreements. Since June 28, 2013, a number of interest rate swap agreements were put in place. The following table provides the outstanding swap agreements as at September 29, 2018 as well as their respective value, interest rate and time period: Fiscal year contracted Date Total value Fiscal 2014 Fiscal 2015 Fiscal 2017 Fiscal 2017 Fiscal 2017 June 30, 2014 to June 28, 2019 – 2.09% June 28, 2018 to June 28, 2020 – 1.959% May 29, 2017 to June 28, 2022 – 1.454% September 1, 2017 to June 28, 2022 – 1.946% June 29, 2020 to June 29, 2022 – 1.733% $ 10,000 30,000 20,000 30,000 30,000 The interest payments that will be incurred on the future borrowings to its forward refined sugar sales. The Company attempts to related to this swap agreement are reflected in the contractual meet this objective by entering into futures contracts to reduce obligations table above. its exposure. Such financial instruments are used to manage the Company’s exposure to variability in fair value attributable to the Finance and operating lease obligations relate mainly to the firm commitment purchase price of raw sugar. leasing of various mobile equipment, the premises of the blending operations in Toronto and the Maple products segment operations The Company has hedged all of its exposure to raw sugar price risk in Granby, Québec, in British Columbia and in Vermont. movement through March 2021. Purchase obligations represent all open purchase orders as at At September 29, 2018, the Company had a net short sugar position year-end and approximately $43.5 million for sugar beets that will of $0.4 million in net contract amounts with a current net negative be harvested and processed in fiscal 2019 but exclude any raw sugar contract value of $0.8 million. This short position represents the priced against futures contracts. LBMT has $19.3 million remaining offset of a smaller volume of sugar priced with customers than to pay related to an agreement to purchase approximately purchases priced from suppliers. $38.2 million (12.8 million pounds) of maple syrup from the FPAQ. In order to secure bulk syrup purchases, the Company issued letters The Company uses futures contracts and swaps to help manage of guarantee amounting to $16.0 million in favor of the FPAQ. The its natural gas costs. At September 29, 2018, the Company had letters of guarantee expire on March 31, 2019. $38.9 million in natural gas derivatives, with a current contract value A significant portion of the Company’s sales are made under fixed- of $34.5 million. price, forward-sales contracts, which extend up to three years. The The Company’s activities, which result in exposure to fluctuations Company also contracts to purchase raw cane sugar substantially in foreign exchange rates, consist of the purchasing of raw sugar, in advance of the time it delivers the refined sugar produced from the selling of refined sugar and Maple products and the purchasing the purchase. To mitigate its exposure to future price changes, the of natural gas. The Company manages this exposure by creating Company attempts to manage the volume of refined sugar sales offsetting positions through the use of financial instruments. These contracted for future delivery in relation to the volume of raw cane instruments include forward contracts, which are commitments to sugar contracted for future delivery, when feasible. buy or sell at a future date, and may be settled in cash. The Company uses derivative instruments to manage exposures The credit risk associated with foreign exchange contracts arises to changes in raw sugar prices, natural gas prices and foreign from the possibility that counterparties to a foreign exchange exchange. The Company’s objective for holding derivatives is to contract in which the Company has an unrealized gain, fail to minimize risk using the most efficient methods to eliminate or perform according to the terms of the contract. The credit risk is reduce the impacts of these exposures. much less than the notional principal amount, being limited at any time to the change in foreign exchange rates attributable to the To reduce price risk, the Company’s risk management policy is to principal amount. manage the forward pricing of purchases of raw sugar in relation Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS 43 Forward foreign exchange contracts have maturities of less than As mentioned above, the Company had been actively working three years and relate mostly to the U.S. currency, and from time on solutions to reduce the air emissions footprint of the Taber to time, the Euro currency. The counterparties to these contracts facility. During the current fiscal year, the Company completed are major Canadian financial institutions. The Company does not the engineering and project design to upgrade the Taber beet anticipate any material adverse effect on its financial position factory to be fully compliant with the new air emissions regulations resulting from its involvement in these types of contracts, nor does by the start of the fiscal 2020 beet harvesting season (crop 2019). it anticipate non-performance by the counterparties. This solution is expected to require between $8.0 million and $10.0 million in capital expenditures The facility obtained from At September 29, 2018, the Company had a net $69.9 million in Alberta Environment and Parks a variance for non-compliance of air foreign currency forward contracts with a current contract value of emission standards valid until May 2019. $66.7 million. Future commitments of approximately $19.6 million have been As part of its normal business practice, the Company also enters approved for completing capital expenditures presently in progress, into multi-year supply agreements with raw sugar processors for including the Taber air emission project. raw cane sugar. Contract terms will state the quantity and estimated delivery schedule of raw sugar. The price is determined at specified The Company also has funding obligations related to its employee periods of time before such raw sugar is delivered based upon future benefit plans, which include defined benefit pension plans. the value of raw sugar as traded on the ICE #11 world raw sugar As at September 29, 2018, all of the Company’s registered defined market. At September 29, 2018, the Company had commitments benefit pension plans were in a deficit position. The Company to purchase a total of 1,337,000 metric tonnes of raw sugar, of performed actuarial evaluations for two of its three remaining which approximately 316,000 metric tonnes had been priced, for a pension plans as of December 31, 2016 and January 1, 2017. total dollar commitment of $120.8 million. The Company has no other off-balance sheet arrangements. Board and Finance approved an amendment to the Alberta Hourly In the first quarter of the current fiscal year, the Alberta Treasury Capital resources Plan. The result of this amendment is the elimination of the reserve for future supplements, and investment earnings accumulated As mentioned above, Lantic entered into a five-year credit thereon, effective January 1, 2017. The Company recognized the agreement of $150.0 million effective June 28, 2013, which has impact of this amendment during its current fiscal year, which been amended in fiscal 2017 and 2018 to increase its borrowing reduced total pension plan expense by approximately $1.5 million. capacity by requesting the Additional Accordion borrowings and the Second Additional Accordion Borrowings, which brought the The Company monitors its pension plan assets closely and follows total available credit to $265.0 million. In addition, the credit facility strict guidelines to ensure that pension fund investment portfolios was also amended in the current year to extend its maturity to are diversified in line with industry best practices. Nonetheless, June 28, 2023. At September 29, 2018, $172.0 million had been pension fund assets are not immune to market fluctuations and, drawn from the working capital facility, $5.5 million was drawn as as a result, the Company may be required to make additional bank overdraft and $2.1 million in cash was also available. cash contributions in the future. In fiscal 2018, cash contributions to defined benefit pension plans increased by approximately The Taber beet operation requires seasonal working capital in the $0.6 million to $3.9 million. In total, the Company expects to incur first half of the fiscal year, when inventory levels are high and a cash contributions of approximately $3.7 million for fiscal 2019 substantial portion of the payments due to the Growers is made. relating to employee defined benefit pension plans. For more LBMT also has seasonal working capital requirements. Although information regarding the Company’s employee benefits, please the syrup inventory is received during the third quarter of the fiscal refer to Note 22 of the audited consolidated financial statements. year, its payment terms with the FPAQ requires cash payment in the first half of the fiscal year. The Company has sufficient cash and Cash requirements for working capital and other capital availability under its line of credit to meet such requirements. expenditures are expected to be paid from available cash resources and funds generated from operations. Management believes that the unused credit under the revolving facility is adequate to meet any future cash requirements. 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 44 OUTSTANDING SECURITIES series debentures issued represents $97.75 million and may be On May 22, 2018, the Company received approval from the Toronto converted at the option of the holder at a conversion price of $8.85 Stock Exchange to proceed with a NCIB. Under the NCIB program, per share (representing 11,045,197 common shares) at any time the Company may purchase up to 1,500,000 common shares. The prior to maturity, and cannot be redeemed prior to June 30, 2021. NCIB program commenced on May 24, 2018 and may continue to On or after June 30, 2021and prior to June 30, 2023, the Seventh May 23, 2019. series debentures may be redeemed by the Company only if the weighted average trading price of the share, for 20 consecutive In addition, the Company has entered into an automatic share trading days, is at least 125% of the conversion price of $8.85. purchase agreement with Scotia Capital Inc. in connection with the Subsequent to June 30, 2023, the Seventh series debentures are NCIB. Under the agreement, Scotia may acquire, at its discretion, redeemable at a price equal to the principal amount thereof plus common shares on the Company’s behalf during certain “black- accrued and unpaid interest. out” periods, subject to certain parameters as to price and number of shares. Following the issuance of the Seventh series debentures on March 28 and April 3, 2018, the Company used a portion of the During the current year, the Company purchased a total of 736,900 funds to repay the Fifth series debentures totalling $60.0 million common shares, for a total cash consideration of $4.0 million. All at a price equal to the principal amount thereof plus accrued and shares purchased were cancelled. In addition, during the second unpaid interest as of March 28, 2018. The remaining funds from the quarter of the current year, some holders of the Fifth series issuance of the Seventh series debentures were used to reduce a debentures converted a total of $10 thousands into 1,388 common portion of the amount drawn under revolving credit facility. shares. On July 28, 2017, a public offering was completed consisting of 5.0% Sixth series debentures, maturing December 31, 2024, subscription receipts converted to 11,730,000 common shares on with interest payable semi-annually in arrears on June 30 and August 5, 2017 upon closing of the LBMTC acquisition for gross December 31 of each year, starting December 31, 2018. The Sixth On July 28, 2017, the Company issued $57.5 million of sixth series proceeds of $69.2 million. series debentures may be converted at the option of the holder at a conversion price of $8.26 per share (representing 6,961,259 In addition, in fiscal 2017, a total of 96,500 common shares common shares) at any time prior to maturity, and cannot be were issued pursuant to the exercise of share options by certain redeemed prior to December 31, 2020. On or after December 31, executives for a total cash consideration of $0.5 million. Moreover, 2020 and prior to December 31, 2022, the sixth series debentures some holders of the Fourth series debentures converted an amount may be redeemed by the Company only if the weighted average of $0.4 million into 66,922 common shares. trading price of the share, for 20 consecutive trading days, is at least As a result of the above movement, a total of 105,008,070 shares 31, 2022, the Sixth series debentures are redeemable at a price were outstanding as at September 29, 2018 and November 21, equal to the principal amount thereof plus accrued and unpaid 2018. interest. 125% of the conversion price of $8.26. Subsequent to December During the second quarter of fiscal 2017, further to a Special The Fourth series debentures of $49.6 million were repaid by using Resolution approved at the shareholders’ meeting of February 1, the Accordion borrowings under the Company’s revolving credit 2017, the Company reduced the stated capital by $100.0 million facility on May 1, 2017. and the contributed surplus was increased by the same amount of $100.0 million. On July 1, 2005, the Company reserved and set aside for issuance a total of 850,000 units to be allocated to key personnel. On January On March 28, 2018, the Company issued $85.0 million of 4.75% 1, 2011, the 450,000 options outstanding under the unit option Seventh series debentures, maturing June 30, 2025, with interest plan were transferred to a share option plan (the “Share Option payable semi-annually in arrears on June 30 and December Plan”) on a one-for-one basis. Between July 2005 and March 2012, 31 of each year, starting June 30, 2018. Then, on April 3, 2018, all these options were allocated at different times to executives of the Company issued an additional $12.8 million Seventh series the Company. In fiscal 2015, the number of options for common debentures pursuant to the exercise in full of the over-allotment shares set aside to be allocated to key personnel was increased option granted by the Company. The total amount of the Seventh from 450,000 to 4,000,000 common shares. On May 21, 2015, Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS 45 850,000 share options were granted to the new President and CEO CRITICAL ACCOUNTING ESTIMATES of Lantic at a price of $4.59 per common share, representing the The preparation of the Company’s audited consolidated financial average market price for the five business days before the granting statements in conformity with IFRS requires us to make estimates of the options. On December 5, 2016, the Company granted a total and judgements that affect the reported amounts of assets and of 360,000 share options to certain executives at an exercise price liabilities, net revenue and expenses, and the related disclosures. of $6.51 under the share option plan. On December 4, 2017, a Such estimates include the valuation of goodwill, intangible total of 1,065,322 share options were granted at a price of $6.23 assets, identified assets and liabilities acquired in business per common share to certain executives and senior managers. combinations, other long-lived assets, income taxes, the provision These shares are exercisable to a maximum of twenty percent per for asbestos removal and pension obligations. These estimates year, starting after the first anniversary date of the granting of the and assumptions are based on management’s best estimates and options and will expire after a term of ten years. Upon termination, judgments. Management evaluates its estimates and assumptions resignation, retirement, death or long-term disability, all shares on an ongoing basis using historical experience, knowledge of granted under the Share Option Plan not vested are forfeited. economics and market factors, and various other assumptions that management believe to be reasonable under the circumstances. In addition, during the first quarter of the current year, a Performance Management adjusts such estimates and assumptions when facts Share Unit plan (“PSU”) was created and on December 4, 2017, a and circumstances dictate. Actual results could differ from these total of 224,761 PSUs were granted to executives. In addition, an estimates. Changes in those estimates and assumptions are aggregate of 10,291 PSUs were allocated as a result of the dividend recognized in the period in which the estimates are revised. Refer paid during the past three quarters. Therefore, an aggregate amount to note 2 (d) to the audited consolidated financial statements for of 235,052 PSUs are outstanding as at September 29, 2018. These more detail. PSUs will vest at the end of the 2017-2020 Performance Cycle based on the achievement of total shareholder returns set by the Human Resources and Compensation Committee (“HRCC”) and CHANGES IN ACCOUNTING PRINCIPLES AND the Board of Directors of the Company. If the level of achievement PRACTICES NOT YET ADOPTED of total shareholder returns is within the specified range, the value A number of new standards, and amendments to standards and to be paid-out to each participant will be equal to the result of: interpretations, are not yet effective and have not been applied the number of PSUs granted to the participant which have vested, in preparing these audited consolidated financial statements. New multiplied by the volume weighted average closing price of the standards and amendments to standards and interpretations that Common Shares on the Toronto Stock Exchange (the “TSX”) for are currently under review include: the five trading days immediately preceding the day on which the Company shall pay the value to the participant under the PSU Plan. • IFRS 15, Revenue from Contracts with Customers: If the level of achievement of total shareholder returns is below the On May 28, 2014 the IASB issued IFRS 15 Revenue from minimum threshold, the PSU will be forfeited without any payments Contracts with Customers. IFRS 15 will replace IAS 11 made. Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction In addition, during the first quarter of fiscal 2017, a Share of Real Estate, IFRIC 18 Transfer of Assets from Customers, and Appreciation Right (“SARs”) was created under the existing Share SIC 31 Revenue – Barter Transactions Involving Advertising Option Plan. On December 5, 2016, a total of 125,000 SARs were Services. The new standard is effective for years beginning on or issued to an executive at an exercise price of $6.51. These SARs are after January 1, 2018. Earlier application is permitted. exercisable twenty percent per year, starting on the first anniversary date of the granting of the SARs and will expire after a term of The standard contains a single model that applies to contracts ten years. Upon termination, resignation, retirement, death or with customers and two approaches to recognizing revenue: long-term disability, all SARs granted under the Share Option Plan at a point in time or over time. The model features a contract- not vested are forfeited. based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and During fiscal 2018, 60,000 share options were forfeited at a price of judgmental thresholds have been introduced, which may affect $6.23 following the departure of a senior manager. the amount and/or timing of revenue recognized. 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 46 The new standard applies to contracts with customers. It does their respective annual period for which they become applicable. not apply to insurance contracts, financial instruments or lease The extent of the impact of adoption of these new standards, contracts, which fall in the scope of other IFRSs. and amendments to standards and interpretations, has not yet been determined, except for IFRS 2, IFRIC 22 and the Annual The Company will adopt IFRS 15 in its consolidated financial Improvements to IFRS Standards (2014-2016) Cycle, all of whom, statements for the year beginning on September 30, 2018. the Company does not expect the amendments to have a material The Company does not expect the standard to have a material impact on the consolidated financial statements. Refer to note 3 (s) impact on the consolidated financial statements. to the audited consolidated financial statements for more detail. • IFRS 16, Leases: On January 13, 2016 the IASB issued IFRS 16 Leases. The new ENVIRONMENT standard is effective for annual periods beginning on or after The Company’s policy is to meet all applicable government January 1, 2019. Earlier application is permitted for entities that requirements with respect to environmental matters. Except for the apply IFRS 15 Revenue from Contracts with Customers at or non-compliance of air emission standards in Taber, management before the date of initial adoption of IFRS 16. IFRS 16 will replace believes that the Company is in compliance in all material respects IAS 17, Leases. with environmental laws and regulations and maintains an open dialogue with regulators and the Government with respect to This standard introduces a single lessee accounting model and awareness and adoption of new standards. requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset As mentioned above, the Company had been actively working is of low value. A lessee is required to recognize a right-of-use on solutions to reduce the air emissions footprint of the Taber asset representing its right to use the underlying asset and a facility. During the current fiscal year, the Company completed lease liability representing its obligation to make lease payments. the engineering and project design to upgrade the Taber beet factory to be fully compliant with the new air emissions regulations This standard substantially carries forward the lessor accounting by the start of the fiscal 2020 beet harvesting season (crop 2019). requirements of IAS 17, while requiring enhanced disclosures to This solution is expected to require between $8.0 million and be provided by the lessors. Other areas of the lease accounting $10.0 million in capital expenditures The Taber factory obtained model have been impacted, including the definition of a lease. from Alberta Environment and Parks a variance for non-compliance Transitional provisions have been provided. of air emission standards valid until May 2019. The Company intends to adopt IFRS 16 in its consolidated With respect to potential environmental remediation of our financial statements for the annual period beginning on properties, which could occur in the event of a building demolition September 29, 2019. The Company has started reviewing the or a sale, it is worth noting that the Vancouver facility has a lengthy impact of the adoption of IFRS 16 and expects that certain of history of industrial use, and fill materials have been used on the the existing leases will require to be recognized as assets and property in the normal course of business. No assurance can be liabilities. However, the extent of the impact of adoption of given that material expenditures will not be required in connection the standard on the consolidated financial statements of the with contamination from such industrial use or fill materials. Company has not yet been quantified. Similarly, the Montréal facility has a lengthy history of industrial use. Additional new standards, and amendments to standards and Contamination has been identified on a vacant property acquired interpretations, include: IFRS 2, Classification and Measurement in 2001, and the Company has been advised that additional soil of Share-based Payment Transactions, Annual Improvements to and ground water contamination is likely to be present. Given the IFRS Standards (2014-2016) Cycle, IFRIC 22, Foreign Currency industrial use of the property, and the fact that the Company does Transactions and Advance Consideration, IFRIC 23 Uncertainty over not intend to change the use of that property in the future, the Income Tax Treatments, Annual Improvements to IFRS Standards Company does not anticipate any material expenditures being (2015-2017) Cycle and Amendments to References to the required in the short term to deal with this contamination, unless Conceptual Framework in IFRS Standards. The Company intends off-property impacts are discovered. The Company has recorded a to adopt these new standards, and amendments to standards and provision under asset retirement obligations for this purpose and interpretations, in its consolidated financial statements in each of the provision is expected to be sufficient. Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS47 In fiscal 2017, the Company demolished a building structure on There can be no assurance that management of the Corporation and the Montréal refinery property. Some contaminated soils were then Lantic will be able to fully realize some or all of the expected benefits detected on a portion of the now vacant section of this removed of the acquisition of LBMT. The ability to realize these anticipated structure, which was fully remediated in fiscal 2018. In addition, in benefits will depend in part on successfully consolidating functions fiscal 2018, $0.6 million was spent to remove some asbestos at its and integrating operations, procedures and personnel in a timely Vancouver and Taber location. and efficient manner, as well as on Rogers’ and Lantic’s ability to realize growth opportunities and potential operational gains Although the Company is not aware of any specific problems at from integrating LBMT with the Company’s and Lantic’s existing its Toronto distribution centre, its Taber plant and any of the LBMT business following the acquisition. Even if Rogers and Lantic are properties, no assurance can be given that expenditures will not able to integrate these businesses and operations successfully, this be required to deal with known or unknown contamination at the integration may not result in the realization of the full benefits of property or other facilities or offices currently or formerly owned, the growth opportunities the Company and Lantic currently expect used or controlled by Lantic. RISK FACTORS within the anticipated time frame or at all. There is a risk that some or all of the expected benefits will fail to materialize, or may not occur within the time periods anticipated by management. The realization of some or all of such benefits may be affected by a The Company’s business and operations are substantially affected number of factors, such as, but not limited to, weather impact by many factors, including prevailing margins on refined sugar on supply, access to markets, consumer attitudes towards natural and its ability to market sugar and maple products competitively, sweeteners, many of which are beyond the control of the Company. sourcing of raw material supplies, weather conditions, operating All of these factors could cause dilution to the Company’s earnings costs and government programs and regulations. per share, decrease or delay the anticipated accretive effect of the acquisition of LBMT or cause a decrease in the market price of the Dependence Upon Lantic RSI Shares. Rogers is entirely dependent upon the operations and assets of Lantic through its ownership of securities of this company. Unexpected Costs or Liabilities Related to the Acquisition Accordingly, interest payments to debenture holders and dividends Although the Company has conducted due diligence in connection to shareholders will be dependent upon the ability of Lantic and/or with the acquisitions of LBMTC and Decacer, an unavoidable level LBMT to pay its interest obligations under the subordinated notes of risk remains regarding any undisclosed or unknown liabilities and to declare and pay dividends on or return capital in respect of, or issues concerning, LBMT and its business. Following the of the common shares. The terms of Lantic’s bank and other acquisition, the Company may discover that it has acquired indebtedness may restrict its ability to pay dividends and make substantial undisclosed liabilities. Lantic will not be able to fully other distributions on its shares or make payments of principal claim indemnification from the sellers of LBMTC or Decacer, as or interest on subordinated debt, including debt which may be both Purchase Agreements contain indemnification limitations held, directly or indirectly, by Rogers, in certain circumstances. In applicable to them. Alternatively, Lantic sought insurance to cover addition, Lantic may defer payment of interest on the subordinated any potential liability under the Purchase Agreement of LBMTC and notes at any given time for a period of up to 18 months. subscribed to the representation and warranties insurance (“RWI”) Policy, with coverage of up to $16.0 million and a deductible of $1.6 Integration Related Risks and Operational Gains million, half of which will be assumed by the previous shareholders The Acquisitions of LBMTC and Decacer are the only acquisitions of LBMTC. Although Lantic has subscribed to the RWI Policy which the Corporation has concluded in recent history. To effectively provides for a $16.0 million coverage, the RWI Policy is subject integrate LBMT into its own business and operations, the Company to certain exclusions. In addition, there may be circumstances must establish appropriate operational, administrative, finance, for which the insurer may elect to limit such coverage or refuse management systems and controls and marketing functions relating to indemnify Lantic or situations for which the coverage provided to such business and operations. This will require substantial under the RWI Policy may not be sufficient or applicable and Lantic attention from management. This diversion of management may have to seek indemnifications from the previous shareholders attention, as well as any other difficulties which the Company may of LBMTC. The existence of any undisclosed liabilities and Lantic’s encounter in completing the transition and integration process, inability to claim indemnification from the previous shareholders including difficulties in retaining key employees of LBMT, could of LBMTC or the provider of the RWI Policy could have a material have a material adverse impact on the Company. There can be no adverse effect on the Company. assurance that the Company will be successful in integrating the business and operations of LBMT. 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS48 No Assurance of Future Performance A relatively high world raw sugar price and/or low price of corn Historic and current performance of the business of the Company will also reduce the competitive position of liquid sugar in Canada and LBMT may not be indicative of success in future periods. The as compared to HFCS which could result in the loss of HFCS future performance of the business after the acquisition may be substitutable business for Lantic. influenced by economic downturns and other factors beyond the control of the Company. As a result of these factors, the operations Security of Raw Sugar Supply and financial performance of the Company, including LBMT, may There are over 185 million metric tonnes of sugar produced be negatively affected, which may adversely affect the Company’s worldwide. Of this, more than 55 million metric tonnes of raw cane financial results. sugar is traded on the world market. The Company, through its cane refining plants, buys approximately 0.6 million metric tonnes of raw Fluctuations in Margins and Foreign Exchange sugar per year. Even though worldwide raw sugar supply is much The Company’s profitability is principally affected by its margins larger than the Company’s yearly requirements, concentration of on domestic refined sugar sales. In turn, this price is affected supply in certain countries like Brazil, combined with an increase in by a variety of market factors such as competition, government cane refining operations in certain countries, may create tightness regulations and foreign trade policies. The Company, through in raw sugar availability at certain times of the year. To prevent the Canadian-specific quota, normally sells approximately 10,300 any raw sugar supply shortage, the Company normally enters into metric tonnes of refined sugar per year in the U.S. and to Mexico long-term supply contracts with reputable suppliers. For raw sugar and also sells beet pulp to export customers in U.S. dollars. The supply not under contract, significant premiums may be paid on Company’s Taber sugar sales in Canada are priced against the the purchase of raw sugar on a nearby basis, which may negatively #11 world raw sugar market, which trades in U.S. dollars, while the impact adjusted gross margins. sugar derived from the sugar beets is paid for in Canadian dollars to the Growers. Fluctuations in the value of the Canadian dollar will The availability of sugar beets to be processed in Taber, Alberta impact the profitability of these sales. Except for these sales, which is dependent on a supply contract with the Growers, and on the currently can only be supplied by the Company’s Taber beet plant, Growers planting the necessary acreage every year. In the event and sales to the U.S. under other announced specific quotas, most that sufficient acreage is not planted in a certain year, or that the sales are in Canada and have little exposure to foreign exchange Company and the Growers cannot agree on a supply contract, movements. Fluctuations in Raw Sugar Prices sugar beets might not be available for processing, thus requiring transfer of products from the Company’s cane refineries to the Prairie market, normally supplied by Taber. This would increase Raw sugar prices are not a major determinant of the profitability of the Company’s distribution costs and may have an impact on the the Company’s cane sugar operations, as the price at which sugar adjusted gross margin rate per metric tonne sold. is both purchased and sold is related to the #11 world raw sugar price and all transactions are hedged. In a market where world raw Weather and Other Factors Related to Production sugar is tight due to lower production, significant premiums may be Sugar beets, as is the case with most other crops, are affected charged on nearby deliveries which would have a negative impact by weather conditions during the growing season. Additionally, on the adjusted gross margins of the cane operations. The #11 weather conditions during the processing season could affect the world raw sugar price can, however, impact the profitability of the Company’s sugar extraction from beets stored for processing. A Company’s beet operations. Sugar derived from beets is purchased significant reduction in the quantity or quality of sugar beets at a fixed price, plus an incentive when sugar prices rise over a harvested due to adverse weather conditions, disease or other certain level, and the selling price of domestic refined sugar rises factors could result in decreased production, with negative financial or falls in relation to the #11 world raw sugar price. consequences to Lantic. Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS49 Regulatory Regime Governing the Purchase and adjust its resale pricing to take into account market fluctuations due Sale of Maple Syrup in Québec to supply and demand. LBMT’s incapacity to adjust its resale prices Producers of maple syrup in Québec are required to operate within upward to take into account any increase in consumer demand may the framework provided for by the Marketing Act. Pursuant to the affect the financial outlook of the Corporation. Marketing Act, producers, including producers of maple syrup, can take collective and organized control over the production Pursuant to the Marketing Agreement, authorized buyers must buy and marketing of their products (i.e. a joint plan). Moreover, the Maple products from the FPAQ in barrels corresponding to the Marketing Act empowers the marketing board responsible for “anticipated volume”. The anticipated volume must be realistic and administering a joint plan, that is the FPAQ in the case of maple in line with volumes purchased in previous years. The refusal from syrup, with the functions and role otherwise granted to the Régie the FPAQ to accept the anticipated volume set forth by LBMT or des marchés agricoles et alimentaires du Québec, the governing the failure by LBMT to properly estimate the anticipated volume for body created by the Government of Québec to regulate, among a given year may affect the ability for LBMT to increase its reselling other things, the agricultural and food markets in Québec. As part capacity and may have an adverse effect on the Corporation’s of its regulating and organizing functions, the FPAQ may establish future consolidated revenues. arrangements to maintain fair prices for all producers and may manage production surpluses and their storage to stabilize the Production of Maple Syrup Being Seasonal and pricing of maple syrup. Subject to Climate Change The production of maple syrup takes place over a period of 6 to 8 Pursuant to the Sales Agency Regulation, the FPAQ is responsible weeks during the months of March and April of each year. Maple for the marketing of bulk maple syrup in Québec. Therefore, syrup production is intimately tied to the weather as sap only any container that contains 5L or more of maple syrup must be flows when temperatures rise above freezing level during the day marketed through the FPAQ as the exclusive selling agent for and drop below it during the night, such temperature difference the producers. Bulk maple syrup may be sold to the FPAQ or to creating enough pressure to push sap out of the maple tree. Given “authorized buyers” accredited by the FPAQ. In Québec, 85% the sensitivity of temperature in the process of harvesting maple of the total production of maple syrup is sold to the FPAQ or the sap, climate change and global warming may have a material authorized buyers, leaving only approximately 15% of the total impact on such process as the maple syrup production season production being sold directly by the producers to consumers or may become shorter. Reducing the production season for maple grocery stores. LBMTC and Decacer are an authorized buyer with syrup may also have an impact on the level of production. Such the FPAQ. The authorized buyer status is renewed on an annual phenomenon may be witnessed in Québec as well as in the New basis. There is no certainty that LBMTC and Decacer will be able to England states, such as Vermont and Maine, where substantially all maintain its status as an authorized buyer with the FPAQ. Failure by of the world maple syrup is produced. LBMTC, Decacer, the Corporation or Lantic to remain an authorized buyer with the FPAQ will likely affect the capacity to fully supply the In 2002, the FPAQ set up a strategic maple syrup reserve in order to resale of maple syrup or Maple products and therefore the financial mitigate production fluctuations imputable to weather conditions results of the Corporation. and prevent such fluctuations from causing maple syrup prices to spike or drop significantly. The reserve was initially established The FPAQ, in its capacity as bargaining and sales agent for the to set aside a production quantity equivalent to half of the then producers of maple syrup in Québec as well as the body empowered annual demand. Each year, the FPAQ may organize a sale of a to regulate and organize the production and marketing of maple portion of its accumulated reserve. There can be no assurance that syrup, and the bulk buyers of maple syrup, represented by the MIC LBMT will have access to some of such reserve to offset decreases entered into the Marketing Agreement, which is expected to be in production due to weather conditions or that such reserve will renewed on an annual basis. Pursuant to the Marketing Agreement, be sufficient to cover a gap in the production in any given year. authorized buyers must pay a minimum price to the FPAQ for any Any decrease in production or incapacity to purchase additional maple syrup purchased from the producers. As a result, LBMT’s reserves from the FPAQ may affect LBMT’s supply of its sales of ability to negotiate the purchase price of maple syrup is limited. maple syrup and other Maple products and, ultimately, its financial Moreover, the minimum purchase price that is applicable to the results. authorized buyers with the FPAQ also restricts LBMT’s ability to 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS50 Competition need to anticipate and meet these trends and developments in For the Sugar segment, the Company faces domestic competition a competitive environment on a timely basis. The failure of LBMT from Redpath Sugar Ltd. and smaller regional distributors of both to anticipate, identify and react to shifting consumer and retail foreign and domestic refined sugar. Differences in proximity to customer trends and preferences through successful innovation and various geographic areas within Canada and elsewhere result in enhanced production capability could adversely result in reduced differences in freight and shipping costs, which in turn affect pricing demand for its products, which could in turn affect the financial and competitiveness in general. performance of the Company. There is also no guarantee that the current favourable market trends will continue in the future. In addition to sugar, the overall sweetener market also includes: corn-based sweeteners, such as HFCS, an alternative liquid Growth of LBMT’s Business Relying Substantially on Exports sweetener, which can be substituted for liquid sugar in soft drinks The size of the global wholesale market for maple syrup is currently and certain other applications; and non-nutritive, high intensity estimated at $750 million, the United States being by far the world’s sweeteners such as aspartame, sucralose and stevia. Differences in largest importer, followed by Japan and Germany. Despite the functional properties and prices have tended to define the use of increase of sales of maple products that the Canadian market has these various sweeteners. For example, HFCS is limited to certain experienced in recent years, the potential for growth of this industry applications where a liquid sweetener can be used. Non-nutritive largely relies on the international market. Moreover, over the last sweeteners are not interchangeable in all applications. The few years, Vermont and Maine have increased their production of substitution of other sweeteners for sugar has occurred in certain maple syrup and have now become competitors of Québec, which products, such as soft drinks. We are not able to predict the however remains the largest producer and exporter of maple syrup availability, development or potential use of these sweeteners and in the world. While LBMT continues to develop its selling efforts their possible impact on the operations of the Company. outside of Canada, including through forming new partnerships For the Maple products segment, LBMT is among the largest likely face high competition from other bottlers and distributers, branded and private label maple syrup bottling and distributing including from other Canadian and U.S. companies, for its share companies in the world. LBMT has two major competitors in the of the international market. Such growing competition and the market and also competes against a multitude of smaller bottlers incapacity for LBMT to further develop its selling efforts outside in countries where the maple syrup market is undeveloped, it will and distributing companies. of Canada could adversely affect the Company’s capacity to grow LBMT’s business and its future results. Furthermore, an incapacity to A large majority of LBMT’s revenues are made under the private attract increased attention on maple products or a sudden lack of label line. The Corporation anticipates that for a foreseeable future, interest for such products from customers outside of North America LBMT’s relationship with its top private label customers will continue may affect the Company’s future results. to be key and will continue to have a material impact on its sales. Although the Corporation considers that the relationship with its Operating Costs top private label customers is excellent, the loss of, or a decrease Natural gas represents an important cost in our refining operations. in the amount of business from, such customers, or any default in Our Taber beet factory includes primary agricultural processing payment on their part could significantly reduce LBMT’s sales and and refining. As a result, Taber uses more energy in its operations harm the Company’s operating and financial results. than the cane facilities in Vancouver and Montréal, principally as Consumer Habits May Change a result of the need to heat the cossettes (sliced sugar beets) to evaporate water from juices containing sugar, and to dry wet beet The maple products market, both national and international, has pulp. Changes in the costs and sources of energy may affect the experienced some important changes over the last few years financial results of the Company’s operations. In addition, all natural as maple products are becoming better known and consumer gas purchased is priced in U.S. dollars. Therefore, fluctuations in preferences and consumption patterns have shifted to more natural the Canadian/U.S. dollar exchange rate will also impact the cost products. Maple syrup has typically been used, principally in North of energy. The Company hedges a portion of its natural gas America, as a natural alternative to traditional sweeteners and has price exposure through the use of natural gas contracts to lessen been served on morning meals, such as pancakes, waffles and the impact of fluctuations in the price of natural gas. Provincial other breakfast bakeries for decades. The offer of maple products application of some form of carbon tax has been increasingly has recently expanded to include, among others, maple butter and important across Canada and for some provinces with carbon tax, maple sugar, flakes and taffy. As a result of evolving customer trends rates have been increasing, which could increase the overall energy and the development of new maple products continues, LBMT will costs for the Company. Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS51 Government Regulations and Foreign Trade Policies outdated quota rules for SCPs. If the USMCA is implemented, it will with regards to Sugar provide Canada a combined 19,200 metric tonnes of new access In July 1995, Revenue Canada made a preliminary determination, consisting of two separate tariff rate quotas; one for 9,600 metric followed by a final determination in October 1995, that there tonnes of Canadian origin refined beet sugar and a second for was dumping of refined sugar from the United States, Denmark, 9,600 metric tonnes of SCPs, with more flexible rules to allow full Germany, the United Kingdom, the Netherlands and the Republic quota utilization. As the only producer of Canadian origin sugar, the of Korea into Canada, and that subsidized refined sugar was Company’s Canadian-specific sugar quota will increase from 10,300 being imported into Canada from the European Union (“EU”). metric tonnes to 19,900 metric tonnes once the USMCA is in place. The Canadian International Trade Tribunal (“CITT”) conducted It is too early to determine how the SCP quota allocation will be an inquiry and on November 6, 1995 ruled that the dumping of administered within the Canadian refined sugar industry. refined sugar from the United States, Denmark, Germany, the United Kingdom and the Netherlands as well as the subsidizing The legal text of the USMCA agreement has yet to be finalized, from the EU was threatening material injury to the Canadian sugar however the goal remains to finalize and sign the agreement before industry. The ruling resulted in the imposition of protective duties December 1, 2018 when the new elected Mexican President takes on these unfairly traded imports. office. It is still unknown whether the U.S. Congress will support the deal following the democratic win in the House of Representatives. Under Canadian laws, these duties must be reviewed every five If the agreement is signed as expected December 1, 2018 and years. On October 30, 2015, the CITT concluded its fourth review receives Congressional support, it could be implemented in late of the 1995 finding and issued its decision to continue the finding 2019 or early 2020. against dumped and subsidized sugar from the U.S. and EU for another five years. New CITT practice is to initiate reviews later than The CETA entered into force provisionally on September 21, 2017. in previous reviews so it is likely that the current duties will remain Over 90% of CETA, including tariff reductions and new quotas, in place as late as July 2021 and could be further extended for went into effect upon provisional implementation. another five years depending on the outcome of the review. Provisional implementation of the CETA is expected to have financial The duties on imports of U.S. and EU refined sugar are important benefits from exports of SCPs which should contribute to the long to Lantic and to the Canadian refined sugar industry in general term prosperity of Canada’s sugar industry. The SCP volume is set because they protect the market from the adverse effect of at 30,000 metric tonnes annually from 2018 through 2021 and unfairly traded imports from these sources. The government is increasing in 5 year increments to reach 51,840 metric tonnes support and trade distorting attributes of the U.S. and EU sugar over 15 years. The quota is allocated 90% to Canadian refiners on regimes continue to generate surplus refined sugar production an equal share basis. Canada’s sugar industry has yet to benefit and exports that threaten the Canadian sugar market. However, from the new access to the EU given the October 1, 2017 removal there is no assurance that the CITT determination in the next review of EU domestic sugar quotas which has generated substantial will continue the duty protection for a further five years. It is also surplus sugar supplies and reduced market prices. Regardless, possible that an interim review could be conducted prior to 2020 the Company is committed to ensure maximum utilization of this if there is a material change in circumstances related to the CITT new export opportunity in a well-developed market which will finding. be beneficial to the Company in the future. The Canadian Sugar Institute is also closely monitoring developments with respect to Negotiations towards a new NAFTA agreement were launched in the UK Brexit on future market access opportunities for SCPs. August 2017 with seven official rounds concluding in June 2018 when the U.S. imposed tariffs on steel and aluminum and tri-lateral On February 4, 2016, Canada was among the 12 participating NAFTA talks broke down. On July 31, 2018, the U.S. and Mexico countries of the Trans-Pacific Partnership (“TPP”) to sign an began bilateral talks focussed on auto rules but ultimately produced agreement to liberalize trade in the region. The other TPP countries a bilateral agreement in principle across a much broader range of included Australia, Brunei Darussalam, Chile, Japan, Malaysia, issues. On September 30, 2018, the three countries announced Mexico, New Zealand, Peru, Singapore, the United States, and they had reached a new deal: USMCA. Vietnam. On January 23, 2017 the U.S. President signed an executive order to withdraw the U.S. from the 12 nation TPP trade Throughout these negotiations, the Canadian Sugar Institute (“CSI”) deal. advanced Canada’s sugar industry interest in securing improved U.S. market access for Canadian sugar and SCPs and addressing 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 52 Beginning in May 2017, Ministers from the TPP countries continued bilateral negotiations may result in substantial new duty-free imports to meet to work towards a TPP11 agreement without the U.S. from these countries, while not providing offsetting export market to build on the TPP negotiated outcomes and advance trade opportunities. The Canada-Mercosur free trade negotiations are an liberalization and economic integration in the Asia Pacific region. example (includes Argentina, Brazil, Paraguay and Uruguay). The On January 23, 2018, the 11 countries concluded negotiations real potential for significant, long-term export gains is via a global on the Comprehensive and Progressive Agreement (“CPTPP”) agreement through the World Trade Organization (“WTO”). The followed by the signing on March 8, 2018. Canada’s legislation to WTO agriculture negotiations have not advanced since they stalled implement the agreement received Royal Assent on October 25, in July 2008, however like-minded WTO members including Canada 2018 and Canada is now among the six countries (Mexico, Japan, are actively collaborating to find ways to strengthen and modernize Singapore, New Zealand, Canada and Australia) that have ratified the WTO to ensure there remains a strong rules-based multilateral the agreement which is the minimum needed to allow the CPTPP to trading system in the face of rising global protectionism. Reaffirming enter into force, now expected on December 30, 2018. the critical value of a modernized WTO along with growing regional integration through comprehensive and ambitious FTAs such as the The CPTPP countries are diverse in terms of sugar policies and CETA and CPTPP provide the best near to medium term prospect trade but collectively may provide an opportunity to advance trade of improved export opportunity for the Canadian sugar industry. in refined sugar and SCPs. Lantic and the other Canadian sugar All of these agreements involve significant input from the CSI and refiner may benefit from new access for SCPs in Japan, and also the Canadian sugar refiners to ensure the long-term stability of the to Malaysia and Vietnam when they ratify the agreement, and may Canadian refined sugar industry and its ability to support a vibrant have a more competitive opportunity to supply these markets in food processing industry in Canada. the absence of the United States. Much technical work remains to determine specific product opportunities and import quota Foreign Trade Policies with regards to Maple products procedures into Japan before the Company can ascertain any LBMT’s international operations are also subject to inherent risks, whether financial benefits will result from the CPTPP in fiscal 2019 including change in the free flow of food products between or subsequent years. countries, fluctuations in currency values, discriminatory fiscal policies, unexpected changes in local regulations and laws and the Canada now has free trade agreements in force with 13 countries, uncertainty of enforcement of remedies in foreign jurisdictions. In however, few beyond the NAFTA (or new USMCA), CETA and addition, foreign jurisdictions, including the United States, LBMT’s potentially the CPTPP offer significant market potential for Canadian current and expected largest market, could impose tariffs, quotas, sugar and sugar-containing products (“SCPs”). There are a number trade barriers and other similar restrictions on LBMT’s international of reasons why these free trade agreements (“FTAs”) have not sales and subsidize competing agricultural products. provided Lantic with meaningful export gains. In many cases, the FTA country is not a logical export market, such as Jordan which is On May 31, 2018, the United States announced the imposition distant from Canada and closer to European suppliers or Colombia of tariffs on imports of certain steel and aluminum products from that is a large surplus sugar producer and exporter relative to Canada (at the rates of 25% and 10%, respectively). In response to Canada. FTAs with countries such as Honduras, Peru and Panama the U.S. tariffs and following consultations with Canadians, on July 1, are also not significant markets for high quality Canadian sugar 2018, Canada imposed countermeasures (surtaxes) against C$16.6 and negotiated outcomes provide for minimal tariff rate quota billion in imports of steel, aluminum, and other products from the quantities. Other more recent FTAs, including with the Republic U.S., representing the value of 2017 Canadian exports affected by of Korea and the Ukraine, excluded refined sugar from tariff the U.S. tariffs. Imports of steel products face a 20% tariff while improvements. “Rules of origin” in almost all FTAs limit Canadian aluminum and other products including certain food products face sugar benefits to beet sugar grown in Canada and processed at the a 10% tariff. Maple syrup is among a wide range of food products Taber beet factory. Some limited opportunities under the Canada- facing the Canadian retaliatory 10% tariff. Canada views the U.S. Costa Rica FTA are available for both refined beet and cane sugar. tariffs on steel and aluminum as unjustified and illegal and this is why Canada responded with a reciprocal, dollar for dollar response. The CSI will continue to monitor Canada’s exploratory discussions Canada and other countries are also challenging the US steel and and formal negotiations for any meaningful developments that aluminum tariffs using the WTO dispute settlement process. It is may be of value to Canada’s sugar industry while also monitoring hoped that with reaching an updated NAFTA (USMCA) agreement potential threats. The Company continues to remain concerned that there may be the potential to remove these reciprocal tariffs in that the inclusion of refined sugar in Canada’s various regional and the foreseeable future. Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS53 All of these risks could result in increased costs or decreased emissions, contamination and spills of substances. Except for revenues, either of which could have a material adverse effect the non-compliance of air emission standards discussed above, on LBMT’s financial condition and results of operations. The management believes that the Company is in compliance in implementation of CETA removes the duties on imported maple all material respects with environmental laws and regulations. syrup which could benefit the Company in additional export However, these regulations have become progressively more volume to the EU. Employee Relations The majority of the Lantic’s operations are unionized. stringent and the Company anticipates this trend will continue, potentially resulting in the incurrence of material costs to achieve and maintain compliance. As mentioned above, the Company had been actively working During the fiscal year, a five-year labour agreement, expiring in on solutions to reduce the air emissions footprint of the Taber 2023, was reached with the unionized employees of the Vancouver facility. During the current fiscal year, the Company completed refinery. The new agreement was agreed at competitive rates. the engineering and project design to upgrade the Taber beet factory to be fully compliant with the new air emissions regulations The Toronto warehouse bargaining agreement expired at the end by the start of the fiscal 2020 beet harvesting season (crop of June 2018 and negotiations began during the fourth quarter 2019). This solution is expected to require between $8.0 million of fiscal 2018. There can be no assurance that a new agreement and $10.0 million in capital expenditures The Taber beet factory will be reached or that the terms of such future agreement will be obtained from Alberta Environment and Parks a variance for similar to the terms of the current agreement. non-compliance of air emission standards valid until May 2019. LBMT’s bottling plant in Granby, Québec is under a collective Violation of these regulations can result in fines or other penalties, bargaining agreement, which is currently scheduled to expire in which in certain circumstances can include clean-up costs. As May 2023. well, liability to characterize and clean up or otherwise deal with contamination on or from properties owned, used or controlled Strikes or lock-outs in future years could restrict the ability of by the Company currently or in the past can be imposed by the Company to service its customers in the affected regions, environmental regulators or other third parties. No assurance can consequently affecting the Company’s revenues. be given that any such liabilities will not be material. Food Safety and Consumer Health Income Tax Matters The Company is subject to risks that affect the food industry in The income of the Company must be computed and is taxed in general, including risks posed by accidental contamination, accordance with Canadian tax laws, all of which may be changed product tampering, consumer product liability, and the potential in a manner that could adversely affect the amount of dividends. costs and disruptions of a product recall. The Company actively There can be no assurance that taxation authorities will accept the manages these risks by maintaining strict and rigorous controls and tax positions adopted by the Company including the determination processes in its manufacturing facilities and distribution systems of the amounts of federal and provincial income which could and by maintaining prudent levels of insurance. materially adversely affect dividends. The Company’s facilities are subject to audit by federal health The current corporate structure involves a significant amount of agencies in Canada and similar institutions outside of Canada. inter-company or similar debt, generating substantial interest The Company also performs its own audits designed to ensure expense, which reduces earnings and therefore income tax payable compliance with its internal standards, which are generally at, or at Lantic and LBMT’s level. There can be no assurance that taxation higher than, regulatory agency standards in order to mitigate the authorities will not seek to challenge the amount of interest risks related to food safety. Environmental Matters expense deducted. If such a challenge were to succeed against Lantic, it could materially adversely affect the amount of cash transferred to Rogers for dividend payment. Management believes The operations of the Company are subject to environmental that the interest expense inherent in the structure is supportable regulations imposed by federal, provincial and municipal and reasonable in light of the terms of the debt owed by Lantic to governments in Canada, including those relating to the Rogers and LBMT to Lantic. treatment and disposal of waste water and cooling water, air 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 54 Management and Operation of Lantic achieved in fiscal 2018. We will continue to monitor natural gas The Board of Directors of Lantic is currently controlled by Lantic market dynamics with the objective of maintaining competitive Capital, an affiliate of Belkorp Industries. As a result, holders of costs and minimizing natural gas cost variances. shares have limited say in matters affecting the operations of Lantic; if such holders are in disagreement with the decisions of the Board The Sugar segment’s capital expenditures for fiscal 2019 are of Directors of Lantic, they have limited recourse. The control expected to increase compared to fiscal 2018 as the Company will exercised by Lantic Capital over the Board of Directors of Lantic undertake the capital project in Taber to be fully compliant with air may make it more difficult for others to attempt to gain control of emission standards by fiscal 2020, with spending ranging between or influence the activities of Lantic and the Company. $6.5 million and $8.5 million left to be spent on this specific project OUTLOOK Sugar next year, as approximately $1.5 million was spent in fiscal 2018. The remaining capital spend for the Sugar segment is expected to be similar to fiscal 2018, including a high proportion of return on investment capital expenditures. After achieving excellent growth in fiscal 2018, we expect total The harvest and beet slicing campaign started mid-September. volume for fiscal 2019 to be comparable to fiscal 2018. This year’s growing conditions were good and resulted in a solid Looking at each segment, we expect the industrial market segment in fiscal 2018. If current harvesting conditions continue and no to slightly decrease, mainly due to timing in deliveries of existing significant beet storage issues arise, we expect that the current customers as a result of strong demand and increased sales volume crop should derive approximately 125,000 metric tonnes of refined in the last fiscal year. sugar, which is comparable to fiscal 2018’s production volume, crop but did not reach the record yield per acre that was achieved even though an additional 1,000 acres were planted. The consumer volume for next year is expected to be comparable to fiscal 2018. Maple products The liquid market segment should continue to be strong and is amounted to $18.6 million, short of management’s expectations of expected to benefit from growth with existing and some new $19.9 million. Given the lower than anticipated results from fiscal customers which should more than offset the anticipated decrease 2018, management believes it is prudent to reduce expectations in industrial volume. In addition, we have extended for an additional with regards to the Maple products segment Adjusted EBITDA two years the supply contract with a Western HFCS substitutable for fiscal 2019 by approximately the same value of the fiscal 2018 The Maple products segment Adjusted EBITDA for fiscal 2018 bottler up to fiscal 2021. shortfall and therefore, expects that Adjusted EBITDA should be approximately $21.0 million, excluding non-recurring costs of As for the export segment, the total volume is anticipated to approximately $1.1 million. Although the current year’s result did not decrease slightly for opportunistic high tier sales to the U.S. given meet our expectations, primary due to certain loss of sales earlier the recent rise in the #11 world raw sugar values. The Company this year and due to the delays in implementing the operational will continue to aggressively pursue any additional export sales optimization of the Maple products asset footprint, management that would be beneficial to the overall results. It is also worth remains positive on the future outlook for this segment as the maple commenting that the Company does not anticipate that the syrup market growth remains strong and as such, with a sales team additional Canada specific quota of 9,600 metric tonnes granted that is now fully organized, we are positive that we can capture and under the USMCA would take effect in fiscal 2019 and therefore, participate in the market growth. should not have any impact on the overall export volume for next year. In addition, the long-term contract with a Mexican customer In addition, the optimization of the Maple products segment was also extended for an additional two years up to fiscal 2021. footprint as well as the re-alignment of some of the production lines will be tackled in fiscal 2019 due to the more complex nature More than 65% of fiscal 2019’s natural gas requirements have of the analysis that was undertaken, which resulted in a two-phase been hedged at average prices comparable to those realized in approach to the project. The first phase of the project was approved fiscal 2018. Some futures positions for fiscal 2020 to 2024 have during the third quarter of fiscal 2018, being the relocation from the also been taken. Some of these positions are at prices higher than current leased bottling facility in Granby to a new built for purpose current market value, but are at the same or better levels than those state of the art leased property. This move will allow us to better Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS55 align production flow and install a new high capacity bottling The operational analysis at other bottling sites, with a focus on line. The completion of the first phase is expected to occur at the developing a more specialized and efficient asset footprint, end of fiscal 2019, early fiscal 2020. As a result of this decision, is continuing with the aim of completing the overall plan of the approximately $4.5 million will be spent on return on investment second phase in the next few months. capital expenditures, of which, approximately $4.0 million remains to be spent in fiscal 2019 in new equipment and leasehold The business continues to work through the identified integration improvements. Capital spending on the first phase is expected to plans. While the timing and outcome of each initiative has changed meet our normal threshold of a payback of less than five years. since our initial forecast, our original overall integration gains are However, approximately $1.1 million will be spent in fiscal 2019 as achievable albeit over a modestly longer time horizon. non-recurring costs, mostly attributable to lease payments for two locations, moving costs and other additional miscellaneous costs. Operational savings from the move to a new Granby facility are expected in fiscal 2020. 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS56 RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying consolidated financial statements of Rogers Sugar Inc. and all the information in this annual report pertaining to the Corporation are the responsibility of the Administrator and have been approved by the Board of Directors. The consolidated financial statements have been prepared by the Administrator in accordance with International Financial Reporting Standards by applying the detailed accounting policies set out in the notes to the financial statements. The Administrator is of the opinion that the consolidated financial statements were prepared based on reasonable and material criteria and using justifiable and reasonable estimates. The Administrator has prepared the financial information presented elsewhere in the annual report and has ensured that it is consistent with the financial statements of the Corporation. The Administrator maintains systems of internal accounting and administrative controls of high quality, consistent with reasonable cost. Such systems are designed to provide reasonable assurance that the financial information is relevant, reliable and accurate and that the Corporation’s assets are appropriately accounted for and adequately safeguarded. The Board of Directors is responsible for ensuring that the Administrator fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements of the Corporation. The Board carries out this responsibility through its Audit Committee. The Audit Committee is appointed by the Board and all of its members are outside and unrelated directors. The committee meets with the Administrator, as well as external auditors, to discuss internal controls over the financial reporting process, auditing matters and financial reporting issues, to satisfy itself that each party is properly discharging its responsibilities and to review the annual report, the financial statements and the external auditors’ report. The committee reports its findings to the Board for consideration when approving the financial statements for issuance to the Shareholders. The committee also considers, for review by the Board and approval by the Shareholders, the engagement or re-appointment of the external auditors. The consolidated financial statements of the Corporation have been audited by KPMG LLP, the external auditors, in accordance with Canadian generally accepted auditing standards on behalf of the Shareholders. KPMG LLP has full and free access to the Audit Committee. John Holliday, Manon Lacroix, President and Chief Executive Officer Vice President Finance, Chief Financial Officer and Secretary Lantic Inc., Administrator Lantic Inc., Administrator November 21, 2018 Rogers Sugar Inc.MANAGEMENT’S DISCUSSION & ANALYSIS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of dollars except as noted and per share amounts) 57 INDEPENDENT AUDITORS’ REPORT To the Shareholders of Rogers Sugar Inc. We have audited the accompanying consolidated financial statements of Rogers Sugar Inc., which comprise the consolidated statements of financial position as at September 29, 2018 and September 30, 2017, the consolidated statements of earnings and comprehensive income, changes in shareholders’ equity and cash flows for the years ended September 29, 2018 and September 30, 2017, and notes, comprising a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the prepara- tion of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial state- ments. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by Management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Rogers Sugar Inc. as at September 29, 2018 and September 30, 2017, and of its consolidated financial performance and its consolidated cash flows for the years ended September 29, 2018 and September 30, 2017 in accordance with International Financial Reporting Standards. November 21, 2018 Montréal, Canada * CPA auditor, CA, public accountancy permit No. A109612 2018 Annual Report 58 CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (In thousands of dollars except per share amounts) Consolidated statements of earnings Revenues (note 34) Cost of sales Gross margin Administration and selling expenses Distribution expenses Results from operating activities Finance income (note 6) Finance costs (note 6) Net finance costs (note 6) Earnings before income taxes Income tax expense (recovery) (note 7): Current Deferred Net earnings Net earnings per share (note 29): Basic Diluted For the years ended September 29, 2018 September 30, 2017 $ 805,201 674,348 130,853 32,071 14,682 46,753 84,100 (532) 17,664 17,132 66,968 17,967 272 18,239 48,729 0.46 0.43 $ 682,517 605,219 77,298 25,603 10,664 36,267 41,031 (371) 10,589 10,218 30,813 13,198 (4,291) 8,907 21,906 0.23 0.22 Consolidated statements of comprehensive income Net earnings Other comprehensive (loss) income: Items that are or may be reclassified subsequently to net earnings: Cash flow hedges (note 11) Income tax on other comprehensive (loss) income (note 7) Foreign currency translation differences Items that will not be reclassified to net earnings: Defined benefit actuarial gains (note 22) Income tax on other comprehensive income (note 7) Other comprehensive income Net earnings and comprehensive income for the year For the years ended September 29, 2018 $ 48,729 September 30, 2017 $ 21,906 (32) 9 506 483 6,643 (1,763) 4,880 5,363 54,092 401 (106) (192) 103 15,866 (4,182) 11,684 11,787 33,693 The accompanying notes are an integral part of these consolidated financial statements. (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In thousands of dollars) 59 September 29, 2018 $ September 30, 2017* $ ASSETS Current assets: Cash Restricted cash (note 8) Trade and other receivables (note 9) Income taxes receivable Inventories (note 10) Prepaid expenses Derivative financial instruments (note 11) Total current assets Non-current assets: Restricted cash (note 8) Property, plant and equipment (note 12) Intangible assets (note 13) Other assets (note 14) Deferred tax assets (note 15) Derivative financial instruments (note 11) Goodwill (note 16) Total non-current assets Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Bank overdraft Revolving credit facility (note 17) Trade and other payables (note 18) Income taxes payable Provisions (note 20) Finance lease obligations (note 21) Derivative financial instruments (note 11) Current portion of other long-term liabilities (note 19) Total current liabilities Non-current liabilities: Revolving credit facility (note 17) Employee benefits (note 22) Provisions (note 20) Derivative financial instruments (note 11) Finance lease obligations (note 21) Convertible unsecured subordinated debentures (note 23) Deferred tax liabilities (note 15) Other long-term liabilities (note 19) Total non-current liabilities Total liabilities Shareholders’ equity: Share capital (note 24) Contributed surplus Equity portion of convertible unsecured subordinated debentures (note 23) Deficit Accumulated other comprehensive income Total shareholders’ equity Commitments (notes 26 and 27) Contingencies (note 28) Total liabilities and shareholders’ equity 2,101 846 81,736 — 179,325 5,304 4,011 273,323 — 208,899 38,947 985 12,976 2,072 333,007 596,886 870,209 5,469 12,000 113,777 3,506 1,006 50 1,847 773 138,428 160,000 31,494 1,199 2,720 64 142,421 44,238 — 382,136 520,564 100,639 300,436 5,085 (63,171) 6,656 349,645 870,209 * Includes adjustment of prior year purchase price allocation (see Note 4, Business combinations and Note 16, Goodwill). The accompanying notes are an integral part of these consolidated financial statements. 17,033 4,201 80,032 1,174 172,542 2,892 93 277,967 631 190,700 30,874 982 15,048 2,323 316,949 557,507 835,474 — 20,000 125,294 — 478 48 6,665 4,703 157,188 150,000 39,169 1,753 2,381 114 111,544 38,581 588 344,130 501,318 101,335 300,247 3,141 (71,860) 1,293 334,156 835,474 (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 60 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (In thousands of dollars except number of shares) 8 1 0 2 , 9 2 r e b m e t p e S d e d n e r a e y e h t r o F i n g e r o f y c n e r r u c l d e t a u m u c c A l d e t a u m u c c A e e y o p m e l n o n a g i d e z i l a e r n u l d e t a u m u c c A y t i u q E f o n o i t r o p t i c fi e D s e c n e r e f f i d i n a g e g d e h s n a p l s e r u t n e b e d l s u p r u s s e r a h s s e r a h s n o i t a l s n a r t w o fl h s a c t fi e n e b l e b i t r e v n o c d e t u b i r t n o C n o m m o C f o r e b m u N $ l a t o T 6 5 1 4 3 3 , $ $ ) 0 6 8 1 7 , ( ) 2 9 1 ( 9 2 7 8 4 , 9 2 7 8 4 , ) 1 7 9 7 3 , ( ) 1 7 9 7 3 , ( ) 3 6 9 3 , ( ) 7 5 2 3 , ( 9 8 1 0 1 — ) 3 2 ( 2 3 1 3 , 6 0 5 0 8 8 4 , — — 8 8 1 1 , — — — — 5 4 6 9 4 3 , ) 1 7 1 3 6 , ( — — — — — — — — — 6 0 5 4 1 3 $ 5 9 2 — — — — — — — ) 3 2 ( — — 2 7 2 $ $ $ $ 0 9 1 , 1 1 4 1 , 3 7 4 2 , 0 0 3 5 3 3 , 1 0 1 2 8 5 , 3 4 7 5 0 1 , 7 1 0 2 , 0 3 r e b m e t p e S , e c n a a B l — — — — — — — — — 0 8 8 , 4 — — — — — — — — ) 8 8 1 , 1 ( 2 3 1 , 3 — — — 9 8 1 — — — — — — — — — ) 6 0 7 ( 0 1 — — — — — — — r a e y e h t r o f i s g n n r a e t e N ) 4 2 e t o n ( s d n e d v D i i ) 0 0 9 , 6 3 7 ( ) 4 2 e t o n ( s e r a h s f o n o i t a l l e c n a c d n a e s a h c r u P — ) 5 2 e t o n ( n o i t a s n e p m o c d e s a b - e r a h S — — — — — 8 8 3 , 1 s e r a h s n o m m o c o t n i s e r u t n e b e d l e b i t r e v n o c f o n o i s r e v n o C ) 4 2 d n a 3 2 s e t o n ( l e b i t r e v n o c f o e s a h c r u p e R ) 3 2 e t o n ( s e r u t n e b e d ) 1 1 e t o n ( x a t f o t e n , s e g d e h w o fl h s a C ) 3 2 e t o n ( x a t f o t e n , s e r u t n e b e d l e b i t r e v n o c f o e c n a u s s I , s n a g i l a i r a u t c a t fi e n e b d e n fi e D ) 2 2 e t o n ( x a t f o t e n s n o i t a r e p o n g e r o i f f o n o i t a l s n a r T 0 7 0 , 6 5 8 0 , 5 6 3 4 , 0 0 3 9 3 6 , 0 0 1 0 7 0 , 8 0 0 5 0 1 , 8 1 0 2 , 9 2 r e b m e t p e S , e c n a a B l . s t n e m e t a t s l i a c n a n fi d e t a d i l o s n o c e s e h t f o t r a p l a r g e t n i n a e r a i s e t o n g n y n a p m o c c a e h T (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 1 0 2 , 0 3 r e b m e t p e S d e d n e r a e y e h t r o F n o i t a l s n a r t s e c n e r e f f i d i n a g e g d e h s n a p l w o fl h s a c t fi e n e b i n g e r o f y c n e r r u c l d e t a u m u c c A l d e t a u m u c c A e e y o p m e l i n a g n o ) s s o l ( d e z i l a e r n u l d e t a u m u c c A y t i u q E f o n o i t r o p l e b i t r e v n o c s e r u t n e b e d l s u p r u s s e r a h s s e r a h s d e t u b i r t n o C n o m m o C f o r e b m u N CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (CONTINUED) (In thousands of dollars except number of shares) 61 $ l a t o T $ t i c fi e D 3 5 5 , 5 6 2 ) 0 7 8 , 8 5 ( 6 0 9 , 1 2 6 0 9 , 1 2 ) 6 9 8 , 4 3 ( ) 6 9 8 , 4 3 ( 1 2 5 5 3 4 — 3 5 9 , 1 4 7 5 9 2 3 2 8 , 6 6 ) 2 9 1 ( 4 8 6 , 1 1 — — — — — — — — — 6 5 1 , 4 3 3 ) 0 6 8 , 1 7 ( $ — — — — — — — — — — — ) 2 9 1 ( ) 2 9 1 ( $ — — — — — — — — — 5 9 2 — — 5 9 2 $ $ $ $ ) 4 9 4 , 0 1 ( 8 8 1 , 1 1 0 2 , 0 0 2 8 2 5 , 3 3 1 0 6 1 , 0 5 8 , 3 9 6 1 0 2 , 1 r e b o t c O , e c n a a B l — — r a e y e h t r o f i s g n n r a e t e N ) 4 2 e t o n ( s d n e d v D i i 0 0 5 , 6 9 ) 5 2 d n a 4 2 s e t o n ( d e s i c r e x e s n o i t p o k c o t S — — — — — — — — — 4 8 6 , 1 1 — 0 9 1 , 1 — — — — 3 5 9 , 1 — — — — — — — — ) 8 2 ( — — — — 9 4 5 5 3 4 — 0 0 0 , 0 0 1 ) 0 0 0 , 0 0 1 ( — — 2 2 9 , 6 6 — 4 7 — — — — — — — — — — — 3 2 8 , 6 6 0 0 0 , 0 3 7 , 1 1 s e r a h s n o m m o c o t n i s e r u t n e b e d l e b i t r e v n o c f o n o i s r e v n o C ) 4 2 s e t o n ( ) 3 2 e t o n ( x a t f o t e n , s e r u t n e b e d l e b i t r e v n o c f o e c n a u s s I ) 4 2 e t o n ( l a t i p a c d e t a t s f o n o i t c u d e R f o t e n , s e r a h s n o m m o c f o e c n a u s s I ) 4 2 e t o n ( s t s o c e c n a u s s i ) 5 2 e t o n ( n o i t a s n e p m o c d e s a b - e r a h S ) 1 1 e t o n ( x a t f o t e n , s e g d e h w o fl h s a C , s n a g i l a i r a u t c a t fi e n e b d e n fi e D ) 2 2 e t o n ( x a t f o t e n s n o i t a r e p o n g e r o i f f o n o i t a l s n a r T 1 4 1 , 3 7 4 2 , 0 0 3 5 3 3 , 1 0 1 2 8 5 , 3 4 7 , 5 0 1 7 1 0 2 , 0 3 r e b m e t p e S , e c n a a B l . s t n e m e t a t s l i a c n a n fi d e t a d i l o s n o c e s e h t f o t r a p l a r g e t n i n a e r a i s e t o n g n y n a p m o c c a e h T (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 62 CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars) For the years ended September 29, 2018 $ September 30, 2017* $ Cash flows from (used in) operating activities: Net earnings Adjustments for: Depreciation of property, plant and equipment (note 5) Amortization of intangible assets (note 5) Changes in fair value of derivative financial instruments included in cost of sales Income tax expense (note 7) Pension contributions Pension expense Net finance costs (note 6) Loss on disposal of property, plant and equipment (note 12) Share-based compensation – equity settled (note 25) Share-based compensation – cash settled (note 25) Other Changes in: Trade and other receivables Inventories Prepaid expenses Trade and other payables Provisions (note 20) Cash generated from operating activities: Interest paid Income taxes paid Net cash flows from operating activities Cash flows (used in) from financing activities: Dividends paid Increase in bank overdraft Increase in revolving credit facility (note 17) Issuance of convertible debentures, net of underwriting fees and issuances costs of $4.5 million (2017 - $2.7 million) (note 23) Repurchase of convertible debentures (note 23) Issuance of common shares, net of underwriting fees and issuance costs of $3.2 million (note 24) Purchase and cancellation of shares (note 24) Payment of financing fees (note 14) Stock options exercised (note 25) Net cash flows from (used in) financing activities Cash flows used in investing activities: Business combination, net of cash acquired and prior year adjustments (note 4) Payment of purchase price payable Additions to property, plant and equipment, net of proceeds on disposal Additions to intangible assets (note 13) Net cash used in investing activities Effect of changes in exchange rate on cash Net (decrease) increase in cash Cash, beginning of year Cash, end of year 48,729 14,716 3,758 (7,645) 18,239 (8,435) 7,403 17,132 — 189 (5) (21) 94,060 2,205 8,962 (2,315) (20,866) (750) (12,764) 81,296 (14,952) (13,432) 52,912 (38,037) 5,469 2,000 93,238 (59,990) — (3,963) (272) — (1,555) (42,084) (690) (23,271) (384) (66,429) 140 (14,932) 17,033 2,101 * Includes adjustment of prior year purchase price allocation (see Note 4, Business combinations and Note 16, Goodwill). Supplemental cash flow information (note 30). The accompanying notes are an integral part of these consolidated financial statements. 21,906 13,022 574 (278) 8,907 (7,324) 9,426 10,218 1 74 15 8 56,549 5,613 16,422 429 1,491 (763) 23,192 79,741 (10,024) (17,680) 52,037 (33,826) — 110,000 54,786 (49,565) 65,985 — (629) 521 147,272 (166,182) — (17,046) (257) (183,485) (37) 15,787 1,246 17,033 (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 63 1. REPORTING ENTITY Rogers Sugar Inc. (“Rogers” or the “Company”) is a company domiciled in Canada, incorporated under the Canada Business Corporations Act. The head office of Rogers is located at 123 Rogers Street, Vancouver, British Columbia, V6B 3V2. The consolidated financial statements of Rogers as at September 29, 2018 and September 30, 2017 comprise Rogers and the directly and indirectly controlled subsidiaries, Lantic Inc. (“Lantic”) and L.B. Maple Treat Corporation (“LBMT”), (together referred to as the “Company”). The principal business activities of the Company are the refining, packaging and marketing of sugar and maple products. The Company’s fiscal quarters end on the Saturday closest to the end of December, March, June and September. All references to 2018 and 2017 represent the years ended September 29, 2018 and September 30, 2017. 2. BASIS OF PREPARATION (a) Statement of compliance: These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These consolidated financial statements were authorized for issue by the Board of Directors on November 21, 2018. (b) Basis of measurement: These consolidated financial statements have been prepared on the historical cost basis except for the following material items in the consolidated statements of financial position: (i) derivative financial instruments are measured at fair value; (ii) cash-settled share appreciation rights and cash-settled performance share units are measured at fair value; (iii) the defined benefit liability is recognized as the net total of the present value of the defined benefit obligation less the total of the fair value of the plan assets and the unrecognized past service costs; and (iv) assets and liabilities acquired in business combinations are measured at fair value at acquisition date. (c) Functional and presentation currency: These consolidated financial statements are presented in Canadian dollars, since it is the Company’s functional currency. All financial information presented in Canadian dollars has been rounded to the nearest thousands, except as noted and per share amounts. (d) Use of estimates and judgements: The preparation of these consolidated financial statements, in conformity with IFRS, requires management to make judgements, estimates and assumptions about future events that affect the application of accounting policies and the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting years. The following is a summary of areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements: (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 64 2. BASIS OF MEASUREMENT (CONTINUED) (d) Use of estimates and judgements (continued): (i) Embedded derivatives: As at October 2, 2016, embedded derivatives, which related to the foreign exchange component of certain sales contracts denominated in U.S. currency, were no longer separated from the host contract as it was determined that the U.S. dollar is commonly used in Canada. This change in estimate was applied prospectively, as such, any contracts for which it was determined there was an embedded derivative and that needed to be separated from the host contract as of October 1, 2016 continued to be treated as such as a transitional step to meet the new interpretation. These contracts continued to be marked-to-market every quarter until all the volume on the contract was delivered. As at September 29, 2018, there were no embedded derivatives outstanding. (ii) Useful lives of property, plant and equipment: The Company reviews estimates of the useful lives of property, plant and equipment on an annual basis and adjusts depreciation on a prospective basis, if necessary. (iii) Goodwill impairment: The Company makes a number of estimates when calculating the recoverable amount of a cash-generating unit containing goodwill using discounted future cash flows or other valuation methods. These estimates take into account the control premium in determining the fair value less cost to sell. (iv) Asset impairment: The Company must assess the possibility that the carrying amounts of tangible and intangible assets may not be recoverable. Management is required to make subjective assessments, linking the possible loss of value of assets to future economic performance, and determine the amount of asset impairment that should be recognized, if any. (v) Income taxes: The calculation of income taxes requires judgement in interpreting tax rules and regulations. Deferred income tax assets are recorded to the extent that it is probable that there will be adequate income in the future against which they can be utilized. (vi) Pension plans: The cost of defined benefit pension plans is determined by means of actuarial valuations, which involve making assumptions about discount rates, future salary increases, mortality rates and the future increases in pensions. Because of the long-term nature of the plans, such estimates are subject to a high degree of uncertainty. (vii) Business combinations: Establishing the fair value of assets and liabilities, intangible assets and goodwill related to business combinations. (viii) Consolidation: See Note 3(a), Basis of consolidation. Reported amounts and note disclosures reflect the overall economic conditions that are most likely to occur and anticipated measures management intends to take. These estimates and assumptions are based on management’s best estimates and judgments. Actual results could differ from those estimates. The above estimates and assumptions are reviewed regularly. Revisions to accounting estimates are recognized in the period in which estimates are revised and in any future years affected. (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 65 3. SIGNIFICANT ACCOUNTING POLICIES (a) Basis of consolidation: (i) Subsidiaries: The consolidated financial statements include the Company and the subsidiary it controls, Lantic Inc. (“Lantic”) and its subsidiaries, L.B. Maple Treat Corporation (“LBMTC”), 9020-2292 Québec Inc. (“Decacer”) and Highland Sugarworks Inc. (“Highland”) (the latter three companies together referred to as “LBMT”. Control exists where the Company is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date control commences until the date that control ceases. The accounting policies of subsidiaries are aligned with the policies adopted by the Company. The Company owns 100% of the common shares of Lantic. Lantic Capital Inc., a wholly-owned subsidiary of Belkorp Industries Inc., owns the two outstanding Class C shares of Lantic. These Class C shares are non-voting, have no rights to return or risk of loss and are redeemable for a nominal value of one dollar each. The Class C shares entitle the holder to elect five of the seven directors of Lantic but have no other voting rights at any meetings of Lantic’s shareholders except as may be required by law. Notwithstanding Lantic Capital Inc.’s ability to elect five of the seven directors of Lantic, Lantic Capital Inc. receives no benefits or exposure to losses from its ownership of the Class C shares. As the Class C shares are non-dividend paying and redeemable for a nominal value of one dollar, there is no participation in future dividends or changes in value of Lantic resulting from the ownership of the Class C shares. There is also no management fee or other form of consideration attributable to the Class C shares. The determination of control involves a high degree of judgement. Based on all the facts and available information, management has concluded that the Company has control of Lantic. Inter-company balances and transactions, and any unrealized income and expenses arising from inter-company transactions, are eliminated in preparing the consolidated financial statements. (ii) Business combinations: Business combinations are accounted for using the acquisition method when control is transferred to the Company. The consideration transferred in the acquisition is generally measured at fair value of the assets transferred, and any debt and equity interests issued by the Company on the date control of the acquired company are obtained. The consideration transferred includes the fair value of any liability resulting from a contingent consideration arrangement. Contingent consideration classified as a liability that is a financial instrument is subsequently remeasured at fair value, with any resulting gain or loss recognized in the consolidated statements of earnings and comprehensive income. Acquisition-related costs, other than those associated with the issue of debt or equity securities, are expensed as incurred and are included in administration and selling expenses in the consolidated statements of earnings and comprehensive income. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are generally measured initially at their fair values at the acquisition date. The Company recognizes any non-controlling interest in an acquired company either at fair value or at the non-controlling interest’s proportionate share of the acquired company’s net identifiable assets. The excess of the consideration transferred over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred and non-controlling interest recognized is less than the fair value of the net assets of the business acquired, a purchase gain is recognized immediately in the consolidated statements of earnings and comprehensive income. (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 66 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (b) Foreign currency transactions: Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency at the exchange rate in effect at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated at the rate prevailing at the date that the fair value was determined. Foreign denominated non- monetary assets and liabilities that are measured at the historical costs are translated at the rate prevailing at the transaction date. Revenues and expenses denominated in foreign currencies are translated into the functional currency at the rate in effect on the dates they occur. Gains or losses resulting from these translations are recorded in net earnings of the period. (c) Foreign operations: The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on business combinations, are translated to Canadian dollars at exchange rates at the reporting date. The income and expenses of foreign operations are translated to Canadian dollars at the average exchange rate in effect during the reporting period. Foreign currency differences are recognized in other comprehensive income (loss) in the accumulated foreign currency translation differences account. When a foreign operation is disposed of in its entirety or partially such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. If the Company disposes of part of its interest in a subsidiary but retains control, then the relevant proportion of the cumulative amount is reattributed to non-controlling interest. When the Company disposes of only part of an associate or joint venture while retaining significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to income or loss. (d) Cash: Cash includes cash on hand, bank balances and bank overdraft when the latter forms an integral part of the Company’s cash management. (e) Inventories: Inventories are valued at the lower of cost and net realizable value. The cost of inventories is determined substantially on a first-in, first-out basis and includes expenditures incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. (f) Property, plant and equipment: Property, plant and equipment, with the exception of land, are recorded at cost less accumulated depreciation and any accumulated impairment losses. Land is carried at cost and is not depreciated. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and borrowing costs on qualifying assets. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment. When significant parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Construction-in-progress assets are capitalized during construction and depreciation commences when the asset is available for use. (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 67 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (f) Property, plant and equipment (continued): The cost of replacing a part of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property, plant and equipment are recognized in profit or loss as incurred. Gains and losses on disposal of items of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of the property, plant and equipment and are recognized in cost of sales for assets used in production and in administration and selling expenses for all other assets. Depreciation related to assets used in production is recorded in cost of sales while the depreciation of all other assets is recorded in administration and selling expenses. Depreciation is calculated on a straight-line basis, after taking into account residual values, over the estimated useful lives of each component of an item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Significant components of individual assets are assessed and, if a component has a useful life that is different from the remainder of that asset, then that component is depreciated separately. The estimated useful lives are as follows: Barrels Buildings Furniture and fixtures Machinery and equipment 6 years 20 to 60 years 5 to 10 years 5 to 40 years Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership by the end of the lease term. Depreciation methods, useful lives and residual values are reviewed at each financial year-end and depreciation is adjusted on a prospective basis, if necessary. (g) Intangible assets: (i) Goodwill: Goodwill is measured at the acquisition date as the fair value of the consideration transferred less the fair value of the net identifiable assets of the acquired company or business activities. Goodwill is not amortized and is carried at cost less accumulated impairment losses. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 68 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (g) Intangible assets (continued): (ii) Other intangible assets: Intangible assets that are acquired by the Company and have finite useful lives are initially measured at cost. Following initial recognition, intangible assets are measured at cost less accumulated amortization and accumulated impairment losses. Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in the specific asset to which it relates. All other expenditures are recognized in profit or loss as incurred. Amortization is calculated over the cost of the asset, less its residual value. Amortization is recognized in administrative expenses on a straight-line basis over the estimated useful lives of the intangible assets from the date that they are available for use, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Amortization of intangible assets not in service begins when they are ready for their intended use. The estimated useful lives are as follows: Software Customer relationships Other Brand names are not amortized as they are considered to have an indefinite life. 5 to 15 years 10 years 10 years Intangible assets with indefinite useful life are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. For intangible assets with finite life, useful lives and residual values are reviewed at each financial year-end and amortization is adjusted on a prospective basis, if necessary. (h) Leased assets: Leases for which the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and the leased assets are not recognized in the Company’s consolidated statements of financial position. (i) Impairment: Non-financial assets: The carrying amounts of the Company’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill, and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated yearly at the same time, at year-end, and whenever there is an indication that the asset might be impaired. (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 69 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (i) Impairment (continued): Non-financial assets (continued): For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”, or “CGU”). The Company’s corporate assets do not generate cash inflows. If there is an indication that a corporate asset may be impaired, then the recoverable amount is determined for the CGU to which the corporate asset belongs. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of a CGU are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amount of the other assets in the CGU on a pro rata basis. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or group of assets. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior years are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. (j) Employee benefits: (i) Pension benefit plans: The Company provides post-employment benefits through defined benefit and defined contribution plans. The Company also sponsors Supplemental Executive Retirement Plans (“SERP”), which are neither registered nor pre-funded. Finally, the Company sponsors defined benefit life insurance, disability plans and medical benefits for some retirees and employees. Defined contribution plans The Company’s obligations for contributions to employee defined contribution pension plans are recognized as employee benefit expense in profit or loss in the years during which services are rendered by employees. Defined benefit plans The Company maintains some contributory defined benefit plans that provide for pensions to employees based on years of service and the employee’s compensation. The Company’s net obligation in respect of defined benefit plans is calculated sepa rately for each plan by estimating the amount of future benefit that employees have earned in the current and prior years, discounting that amount and deducting the fair value of any plan assets. The discount rate is the yield at the reporting date on AA credit-rated bonds that have maturity dates approximating the terms of the Company’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The calculation of defined benefit obligations is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a potential asset for the Company, the recognized asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. To calculate the present value of economic benefits, consideration is given to any applicable minimum funding requirements. (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 70 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (j) Employee benefits (continued): (i) Pension benefit plans (continued): Defined benefit plans (continued) Re-measurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income. The Company determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognized in profit or loss. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in profit or loss. Costs related to plan settlements are recorded at the time the Company is committed to a settlement as a separate constructive obligation. Subsequent to the Company being committed to a settlement, the plan liability is measured at the expected settlement amount using settlement interest rates. (ii) Short-term employee benefits: Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under cash incentive if the Company has a present legal or constructive obligation to pay the amount as a result of past service provided by the employee, and the obligation can be estimated reliably. (iii) Share-based compensation: The Company has a Share Option Plan. Share-based payment awards are measured at fair value at the grant date, which is recognized as a personnel expense, with a corresponding increase in contributed surplus over the vesting period, which is normally five years. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service conditions are expected to be met. Any consideration paid by employees on exercise of share options is credited to share capital. (iv) Employee share purchase plan: The Company has an Employee Share Purchase Plan that is an equity-settled share-based payment with employees; the measurement is based on the grant-date fair value of the equity instrument granted. As such, the expense is recognized when the employee purchases the shares. (v) Cash-settled share appreciation rights: The Company’s Share Option Plan allows for the issuance of Share Appreciation Rights (“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. (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 71 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (j) Employee benefits (continued): (v) Cash-settled share appreciation rights (continued): 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 liability is settled, the fair value of the liability is remeasured, with any changes in fair value recognized in the consolidated statements of earnings and comprehensive income of the current year. (vi) Cash-settled performance share units: The Company implemented a Performance Share Units plan (“PSU”) entitling certain senior personnel to a cash payment. A liability is recognized in payables for the services acquired and is recorded at fair value based on the share price of the Company’s Common Shares with a corresponding expense recognized in administration and selling expenses. The amount recognized as an expense is adjusted to reflect the number of units for which the related service and performance conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the units of awards that do meet the related service and non-market performance conditions at the vesting date. At the end of each reporting period until the liability is settled, the fair value of the liability is re-measured, with any changes in fair value recognized in the consolidated statement of earnings. (vii) Termination benefits: Termination benefits are expensed at the earlier of when the Company can no longer withdraw the offer of those benefits and when the Company recognizes costs for a restructuring. If benefits are not expected to be fully settled within 12 months of the end of the reporting period, they are discounted. (k) Provisions: A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as finance costs. (i) Asset retirement obligation: The Company recognizes the estimated liability for future costs to be incurred in the remediation of site restoration in regards to asbestos removal and disposal of such asbestos to a landfill for hazardous waste, and for oil, chemical and other hazardous materials storage tanks, only when a present legal or constructive obligation has been determined and that such obligation can be estimated reliably. Upon initial recognition of the obligation, the corresponding costs are added to the carrying amount of the related items of property, plant and equipment and amortized as an expense over the economic life of the asset, or earlier if a specific plan of removal exists. This obligation is reduced every year by payments incurred during the year in relation to these items. The obligation might be increased by any required remediation to the owned assets that would be required through enacted legislation. (ii) Contingent liability: A contingent liability is a possible obligation that arises from past events and of which the existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not within the control of the Company, or a present obligation that arises from past events (and therefore exists), but is not recognized because it is not probable that a transfer or use of assets, provision of services, or any other transfer of economic benefits will be required to settle the obligation, or the amount of the obligation cannot be estimated reliably. (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 72 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (l) Financial instruments: (i) 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). The following summarizes the classification and measurement changes for the Company’s non-derivative and derivative financial assets and financial liabilities as a result of the adoption of IFRS 9 (2014). IAS 39 IFRS 9 (2014) Financial assets: Cash Restricted cash Loans and receivables Loans and receivables Trade and other receivables Loans and receivables Income taxes recoverable Loans and receivables Amortized cost Amortized cost Amortized cost Amortized cost Non-hedged derivative assets Fair value through profit and loss Fair value through profit or loss Financial liabilities: Revolving credit facility Other financial liabilities Trade and other payables Other financial liabilities Income taxes payable Other financial liabilities Finance lease obligations Other financial liabilities Amortized cost Amortized cost Amortized cost Amortized cost Convertible unsecured subordinated debentures Other financial liabilities Amortized cost Other long-term liabilities Fair value through profit and loss Fair value through profit or loss Non-hedged derivative liabilities Fair value through profit and loss Fair value through profit or loss With the adoption of IFRS 9 (2014), the Company’s natural gas futures and interest rate swap agreements were designated as being effective hedging instruments. 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. (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 73 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (l) Financial instruments (continued): (i) IFRS 9, Financial Instruments (continued): 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. Our significant accounting policies for financial instruments, derivative financial instruments, and hedging relationships have been aligned with IFRS 9 (2014). The adoption of IFRS 9 (2014) did not have a material impact on impairment at October 2, 2016. The Company initially recognizes financial instruments on the trade date at which the Company becomes a party to the contractual provisions of the instrument. Financial instruments are initially measured at fair value. In the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability are added to or deducted from the fair value. (ii) Financial assets: Financial assets are classified into the following categories: a. Financial assets measured at amortized cost: A financial asset is subsequently measured at amortized cost, using the effective interest method and net of any impairment loss, if: • The asset is held within a business model whose objectives is to hold assets in order to collect contractual cash flows; and • The contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely payments of principals and/or interest. The Company currently classifies its cash, trade accounts receivable, and certain other current assets as assets measured at amortized cost. The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. The Company recognizes loss allowances for expected credit losses on financial assets measured at amortized cost. The Company has a portfolio of trade receivables at the reporting date. The Company uses historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognized in income or loss and reflected in an allowance account against trade and other receivables. b. Financial assets measured at fair value: These assets are measured at fair value and changes therein, including any interest are recognized in profit or loss. The Company currently has no significant financial assets measured at fair value. (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 74 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (l) Financial instruments (continued): (iii) Financial liabilities: Financial liabilities are classified into the following categories: a. Financial liabilities measured at amortized cost: A financial liability is subsequently measured at amortized cost, using the effective interest method. The Company currently classifies and measures short-term borrowings, trade payables and accrued liabilities, finance lease obligations, and convertible unsecured subordinated debentures as financial liabilities measured at amortized cost. b. Financial liabilities measured at fair value: Financial liabilities at fair value are initially recognized at fair value and are re-measured at each reporting date with any changes therein recognized in net earnings. The Company currently has no significant financial liabilities measured at fair value except for other long-term liabilities. The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or expired. Financial assets and liabilities are offset and the net amount is presented in the consolidated statements of financial position when, and only when, the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. (iv) Fair values of financial instruments: Financial assets and liabilities measured at fair value use a fair value hierarchy to prioritize the inputs used in measuring fair value as follows: Level 1 - valuation based on observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 - valuation techniques based on inputs that are other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices); and Level 3 - valuation techniques with observable market inputs (involves assumptions and estimates by management of how market participants would price the asset or liability). a. Cash: The Company classifies its cash as amortized cost assets. Cash includes cash on hand, bank balances and bank overdraft when the latter forms an integral part of the Company’s cash management. b. Derivative financial instruments and hedging relationships: The Company enters into derivative financial instruments to hedge its market risk exposures. On initial designation of the hedge, the Company formally documents the relationship between the hedging instruments and hedged items, including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. The Company makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, whether the hedging instruments are expected to be effective in offsetting the changes in the fair value or cash flows of the respective hedged items throughout the period for which the hedge is designated. For a cash flow hedge of a forecasted transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect reported net earnings. (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 75 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (l) Financial instruments (continued): (iv) Fair values of financial instruments (continued): c. Embedded derivatives: Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics, risks of the host contract and the embedded derivative are not closely related; a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the combined instrument is not measured at fair value through profit or loss as described in note 2(d)(i). d. Other derivatives: When a derivative financial instrument, for example, sugar futures and at times options (“sugar contracts”), foreign exchange forward contracts and embedded derivatives is not designated in a qualifying hedge relationship, all changes in its fair value are recognized immediately in net earnings (marked-to-market). e. Compound financial instruments: The Company’s convertible unsecured subordinated debentures are accounted for as compound financial instruments. The liability component of a compound financial instrument is recognized initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognized initially as the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts. Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortized cost using the effective interest method. The equity component of a compound financial instrument is not re-measured subsequent to initial recognition. Interest, dividends, gains and losses relating to the financial liability are recognized in profit or loss. f. Financing charges: Financing charges, which reflect the cost to obtain new financing, are offset against the debt for which they were incurred and recognized in finance costs using the effective interest method. Financing charges for the revolving credit facility are recorded with other assets. g. Trade date: The Company recognizes and derecognizes purchases and sales of derivative contracts on the trade date. h. Share capital: Common shares Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares are recognized as a deduction from equity, net of any tax effects. Dividends to the equity holders are recorded in equity. Repurchase of share capital When share capital recognized as equity is repurchased for cancellation, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognized as a deduction from equity. The excess of the purchase price over the carrying amount of the shares is charged to deficit. (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 76 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (l) Financial instruments (continued): (v) Cash flow hedges: When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecasted transaction that could affect net earnings, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income and presented in accumulated other comprehensive income as part of equity. The amount recognized in other comprehensive income is removed and included in net earnings under the same line item in the consolidated statements of earnings and comprehensive income as the hedged item, in the same period that the hedged cash flows affect net earnings. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, or exercised, the hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognized in other comprehensive income remains in accumulated other comprehensive income until the forecasted transaction affects profit or loss. If forecasted transaction is no longer expected to occur, then the balance in accumulated other comprehensive income is recognized immediately in net earnings. When the hedged item is a non-financial asset, the amount recognized in other comprehensive income is transferred to net earnings in the same period that the hedged item affects net earnings. The Company has designated as hedging items 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. (m) Revenue recognition: Revenue is measured at the fair value of the consideration received or receivable and recognized at the time products are shipped to customers, at which time significant risks and rewards of ownership are transferred to the customers. Revenue is recorded net of all returns and allowances and excludes sales taxes. Sales incentives, including volume rebates provided to customers, are estimated based on contractual agreements and historical trends and are recognized at the time of sale as a reduction in revenue. Such rebates are primarily based on a combination of volume purchased and achievement of specified volume levels. (n) Lease payments: Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liabilities. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. (o) Finance income and finance costs: Finance income comprises interest income on funds invested and finance costs comprise interest expense on borrowings. Changes in the fair value of interest rate swaps are recorded initially in other comprehensive income since inception of the cash flow hedge and transferred to finance income and finance costs in the same period that the hedged cash flows affect net earnings. Interest expense is recorded using the effective interest method. (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 77 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (p) Income taxes: Income tax expense comprises current and deferred taxes. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable or recoverable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to taxes payable in respect of previous years. Deferred taxes are recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred taxes are not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred taxes are not recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred taxes are measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. In addition, the effect on deferred tax assets or liabilities of a change in tax rates is recognized in profit or loss in the period in which the enactment or substantive enactment takes place, except to the extent that it relates to an item recognized either in other comprehensive income or directly in equity in the current or in a previous period. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. (q) Earnings per share: The Company presents basic and diluted earnings per share (“EPS”) data for its common shares. Basic EPS is calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding, for the effects of all dilutive potential common shares from the conversion of the convertible debentures. (r) New standards and interpretations adopted: (i) IAS 7, Disclosure Initiative: On January 7, 2016 the IASB issued Disclosure Initiative (amendments to IAS 7). The amendments apply prospectively for annual periods beginning on or after January 1, 2017. Earlier application is permitted. The amendments require disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, includes both changes arising from cash flow and non-cash changes. The Company adopted the amendments to IAS 7 in its consolidated financial statements for the annual period beginning on October 1, 2017. The adoption of the standard did not have a material impact on the consolidated financial statements. (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 78 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (r) New standards and interpretations adopted (continued): (ii) IAS 12, Recognition of Deferred Tax Assets for Unrealized Losses: On January 19, 2016 the IASB issued Recognition of Deferred Tax Assets for Unrealized Losses (Amendments to IAS 12). The amendments apply retrospectively for annual periods beginning on or after January 1, 2017. Earlier application is permitted. The amendments clarify that the existence of a deductible temporary difference depends solely on a comparison of the carrying amount of an asset and its tax base at the end of the reporting period, and is not affected by possible future changes in the carrying amount or expected manner of recovery of the asset. The amendments also clarify the methodology to determine the future taxable profits used for assessing the utilization of deductible temporary differences. The Company adopted the amendments to IAS 12 in its consolidated financial statements for the annual period beginning on October 1, 2017. The adoption of the amendments did not have a material impact on the consolidated financial statements. (iii) Annual Improvements to IFRS Standards (2014-2016) Cycle: On December 8, 2016 the IASB issued narrow-scope amendments to three standards as part of its annual improvements process. Each of the amendments has its own specific transition requirements and effective date. Amendments were made to the following standard: • Clarification that IFRS 12, Disclosures of Interests in Other Entities also applies to interests that are classified as held for sale, held for distribution, or discontinued operations, effective retrospectively for annual periods beginning on or after January 1, 2017. The Company adopted the amendment in its consolidated financial statements for the annual period beginning October 1, 2017. The adoption of the amendments did not have a material impact on the consolidated financial statements. (s) New standards and interpretations not yet adopted: A number of new standards and amendments to standards and interpretations are not yet effective for the year ending September 29, 2018 and have not been applied in preparing these consolidated financial statements. New standards and amendments to standards and interpretations that are currently under review include: (i) IFRS 2, Classification and Measurement of Share-based Payment Transactions: On June 20, 2016, the IASB issued amendments to IFRS 2, Share-based Payment, clarifying how to account for certain types of share-based payment transactions. The amendments apply for annual periods beginning on or after January 1, 2018. As a practical simplification, the amendments can be applied prospectively. Retrospective, or early application is permitted if information is available without the use of hindsight. The amendments provide requirements on the accounting for: • • The effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; Share-based payment transactions with a net settlement feature for withholding tax obligations; and • A modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. The Company will adopt the amendments to IFRS 2 in its consolidated financial statements for the annual period beginning on September 30, 2018. The Company does not expect the amendments to have a material impact on the consolidated financial statements. (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 79 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (s) New standards and interpretations not yet adopted (continued): (ii) IFRS 15, Revenue from Contracts with Customers: On May 28, 2014 the IASB issued IFRS 15, Revenue from Contracts with Customers. IFRS 15 will replace IAS 11, Construction Contracts, IAS 18, Revenue, IFRIC 13, Customer Loyalty Programmes, IFRIC 15, Agreements for the Construction of Real Estate, IFRIC 18, Transfer of Assets from Customers, and SIC 31, Revenue – Barter Transactions Involving Advertising Services. The new standard is effective for years beginning on or after January 1, 2018. Earlier application is permitted. The standard contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. The new standard applies to contracts with customers. It does not apply to insurance contracts, financial instruments or lease contracts, which fall in the scope of other IFRSs. The Company will adopt IFRS 15 in its consolidated financial statements for the year beginning on September 30, 2018. The Company does not expect the standard to have a material impact on the consolidated financial statements. (iii) IFRIC 22, Foreign Currency Transactions and Advance Consideration: On December 8, 2016, the IASB issued IFRIC Interpretation 22, Foreign Currency Transactions and Advance Consideration. The Interpretation clarifies that the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. The Interpretation is applicable for annual periods beginning on or after January 1, 2018. Earlier application is permitted. The Company will adopt the Interpretation in its consolidated financial statements for the annual period beginning on September 30, 2018, as applicable. The Company does not expect the standard to have a material impact on the consolidated financial statements. (iv) Annual Improvements to IFRS Standards (2014-2016) Cycle: On December 8, 2016 the IASB issued narrow-scope amendments to three standards as part of its annual improvements process. Each of the amendments has its own specific transition requirements and effective date. Amendments were made to the following standard: • Removal of out-dated exemptions for first-time adopters under IFRS 1, First-time Adoption of International Financial Reporting Standards, effective for annual periods beginning on or after January 1, 2018; and • Clarification that the election to measure an associate or joint venture at fair value under IAS 28, Investments in Associates and Joint Ventures for investments held directly, or indirectly, through a venture capital or other qualifying entity can be made on an investment-by-investment basis. The amendments are effective retrospectively for annual periods beginning on or after January 1, 2018. The Company will adopt these amendments in its consolidated financial statements for the annual period beginning September 30, 2018. The Company does not expect the amendments to have a material impact on the consolidated financial statements. (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 80 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (s) New standards and interpretations not yet adopted (continued): (v) IFRS 16, Leases: On January 13, 2016 the IASB issued IFRS 16, Leases. The new standard is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted for entities that apply IFRS 15, Revenue from Contracts with Customers at or before the date of initial adoption of IFRS 16. IFRS 16 will replace IAS 17, Leases. This standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. This standard substantially carries forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures to be provided by the lessors. Other areas of the lease accounting model have been impacted, including the definition of a lease. Transitional provisions have been provided. The Company intends to adopt IFRS 16 in its consolidated financial statements for the annual period beginning on September 29, 2019. The Company has started reviewing the impact of the adoption of IFRS 16 and expects that certain of the existing leases will require to be recognized as assets and liabilities. However, the extent of the impact of adoption of the standard on the consolidated financial statements of the Company has not yet been quantified. (vi) IFRIC 23, Uncertainty over Income Tax Treatments: On June 7, 2017, the IASB issued IFRIC Interpretation 23, Uncertainty over Income Tax Treatments. The Interpretation provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The Interpretation is applicable for annual periods beginning on or after January 1, 2019. Earlier application is permitted. The Interpretation requires an entity to: • Contemplate whether uncertain tax treatments should be considered separately, or together as a group, based on which approach provides better predictions of the resolution; • Reflect an uncertainty in the amount of income tax payable (recoverable) if it is probable that it will pay (or recover) an amount for the uncertainty; and • Measure a tax uncertainty based on the most likely amount or expected value depending on whichever method better predicts the amount payable (recoverable). The Company intends to adopt the Interpretation in its consolidated financial statements for the annual period beginning on September 29, 2019. The extent of the impact of the adoption of the Interpretation has not yet been determined. (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 81 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (s) New standards and interpretations not yet adopted (continued): (vii) Annual Improvements to IFRS Standards (2015-2017) Cycle: On December 12, 2017 the IASB issued narrow-scope amendments to three standards as part of its annual improvements process. The amendments are effective on or after January 1, 2019, with early application permitted. Each of the amendments has its own specific transition requirements. Amendments were made to the following standards: • IFRS 3, Business Combinations and IFRS 11, Joint Arrangements – to clarify how a company accounts for increasing its interest in a joint operation that meets the definition of a business; • IAS 12, Income Taxes – to clarify that all income tax consequences of dividends are recognized consistently with the transactions that generated the distributable profits – i.e. in profit or loss, OCI, or equity; and • IAS 23, Borrowing Costs – to clarify that specific borrowings – i.e. funds borrowed specifically to finance the construction of a qualifying asset – should be transferred to the general borrowings pool once the construction of the qualifying asset has been completed. The Company intends to adopt these amendments in its consolidated financial statements for the annual period beginning on September 29, 2019. The extent of the impact of adoption of the amendments has not yet been determined. (viii) Amendments to References to the Conceptual Framework in IFRS Standards: On March 29, 2018 the IASB issued a revised version of its Conceptual Framework for Financial Reporting (the Framework), that underpins IFRS Standards. The IASB also issued Amendments to References to the Conceptual Framework in IFRS Standards (the Amendments) to update references in IFRS Standards to previous versions of the Conceptual Framework. Both documents are effective from January 1, 2020 with earlier application permitted. The Company does not intend to adopt the Amendments in its consolidated financial statements before the annual period beginning on October 4, 2020. The extent of the impact of the change has not yet been determined. 4. BUSINESS COMBINATIONS (a) Decacer transaction: On November 18, 2017, the Company acquired all of the issued and outstanding shares of Decacer for a total consideration of $43.0 million ($42.1 million net of cash acquired) (the “Decacer Transaction”). The Company financed the acquisition, including transaction costs, with a draw-down on the Company’s $265.0 million amended credit facility (see Note 17, Revolving credit facility). Decacer is a major bottler and distributor of branded and private label maple syrup and maple sugar based in Dégelis, Québec. (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 82 4. BUSINESS COMBINATIONS (CONTINUED) (a) Decacer transaction (continued): The Company has determined the fair value of the assets acquired and liabilities assumed based on management’s preliminary best estimate of their fair values and taking into account all relevant information available at that time. As of the reporting date, the Company had not yet completed the purchase price allocation over the identifiable net assets and goodwill. Information to confirm the fair value of certain assets and liabilities is still to be obtained. As the Company obtains more information, the allocation will be completed. The following table presents the purchase price allocation based on the best information available to the Company to date: Identifiable assets and liabilities assumed: Cash Trade and other receivables Inventories Prepaid expenses Property, plant and equipment Intangible assets Trade and other payables Income taxes payable Deferred tax liabilities Total net assets acquired Total consideration transferred Goodwill (note 16) Revolving credit facility Total consideration transferred 2018 $ 928 3,832 15,711 96 8,132 11,307 (8,311) (197) (4,544) 26,954 43,012 16,058 $ 43,012 43,012 The trade receivables comprise a gross amount of $3.8 million for which the full amount was expected to be collectable at the acquisition date. Goodwill is attributable primarily to expected synergies and assembled workforce, which were not recorded separately since they did not meet the recognition criteria for identifiable intangible assets. Goodwill and intangible assets recorded in connection with this acquisition are not deductible for tax purposes. The operating results of Decacer are included in the maple products segment. If the acquisition had occurred on October 1, 2017, the consolidated results of the Company would have included additional net sales of approximately $11.7 million and additional results from operating activities of approximately $0.3 million, based on management’s best estimates. In determining these estimated amounts, management assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition had occurred on October 1, 2017. Acquisition-related costs of $0.7 million for legal fees, due diligence costs and other fees have been expensed in relation to the above business combination. These costs have been recorded in administration and selling expenses in the consolidated statements of earnings and comprehensive income. (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 83 4. BUSINESS COMBINATIONS (CONTINUED) (b) LBMTC transaction – adjustment to provisional amounts of prior year: The September 30, 2017 consolidated financial statements included details of the Company’s LBMT business combination and set out provisional fair values relating to the consideration and net assets acquired. During fiscal 2018, as additional relevant information was obtained for the August 5, 2017 acquisition of all of the issued and outstanding shares of LBMT (“LBMT transaction”), the Company reassessed the provisional fair values and consideration transferred during the measurement period and adjusted the purchase price allocation as described in the table below. Changes to the total consideration reflect the finalization of standard closing and post-closing adjustments. The comparative information for the prior year presented in these consolidated financial statements has been revised as follows: Identifiable assets and liabilities assumed: Original Adjustments Reassesed fair values Cash Restricted cash Trade and other receivables Income taxes recoverable Inventories Prepaid expenses Property, plant and equipment Intangible assets Trade and other payables Income taxes payable Other long-term liabilities Derivative financial instruments Deferred tax liabilities Total net assets acquired Total consideration transferred Goodwill (Note 16) $ 210 10,883 16,951 882 109,224 687 8,163 23,875 (75,914) (718) (11,308) (769) (5,952) 76,214 169,490 93,276 $ — — (75) — (587) — (175) 5,500 (34) — — — (1,448) 3,181 (3,098) (6,279) $ 210 10,883 16,876 882 108,637 687 7,988 29,375 (75,948) (718) (11,308) (769) (7,400) 79,395 166,392 86,997 (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 84 5. DEPRECIATION AND AMORTIZATION EXPENSES Depreciation and amortization expenses were charged to the consolidated statements of earnings and comprehensive income as follows: Depreciation of property, plant and equipment: Cost of sales Administration and selling expenses Amortization of intangible assets: Administration and selling expenses Total depreciation and amortization expenses 6. FINANCE INCOME AND FINANCE COSTS Recognized in net earnings: Net change in fair value of interest rate swaps (note 11) Finance income Interest expense on convertible unsecured subordinated debentures, including accretion of $785 (2017 - $233) (note 23) Interest on revolving credit facility Amortization of deferred financing fees Other interest expense Finance costs Net finance costs recognized in net earnings For the years ended September 29, 2018 September 30, 2017 $ $ 14,292 424 14,716 3,758 18,474 12,605 417 13,022 574 13,596 For the years ended September 29, 2018 September 30, 2017 $ 532 532 7,691 5,374 1,422 3,177 17,664 17,132 $ 371 371 5,813 3,474 781 521 10,589 10,218 (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. INCOME TAX EXPENSE (RECOVERY) Current tax expense: Current period Deferred tax expense (recovery): Recognition and reversal of temporary differences Changes in tax rates Deferred tax expense (recovery) Total income tax expense Income tax recognized in other comprehensive income: 85 For the years ended September 29, 2018 September 30, 2017 $ $ 17,967 13,198 375 (103) 272 18,239 (4,599) 308 (4,291) 8,907 September 29, 2018 September 30, 2017 For the years ended Before tax Tax effect Net of tax Before tax Tax effect Net of tax $ (32) $ 9 $ (23) $ 401 $ (106) $ 295 Cash flow hedges Defined benefit actuarial gains 6,643 (1,763) 4,880 15,866 (4,182) 11,684 Reconciliation of effective tax rate: The provision for income taxes differs from the amount computed by applying the Canadian federal and provincial tax rates to earnings before provision for income taxes. The reasons for the difference and the related tax effects are as follows: Earnings before income taxes Income taxes using the Company’s statutory tax rate Changes due to the following items: Changes in tax rate Non-deductible expenses Other September 29, 2018 September 30, 2017 For the years ended % — 26.75 (0.15) 0.23 0.41 27.24 $ 66,968 17,914 (103) 156 272 18,239 % — 26.00 1.00 2.39 (0.48) 28.91 $ 30,813 8,011 308 736 (148) 8,907 (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 86 8. RESTRICTED CASH Restricted cash represents balances assumed by the Company as a result of having acquired all of the issued and outstanding shares of LBMT. They are as a result of: (a) On December 1, 2016, LBMT acquired all issued and outstanding Class A shares of Great Northern with $7.0 million cash consideration (which was placed in escrow), conditionally payable in quarterly installments contingent on achieving monthly and annual sales volume targets to a specific client for the twelve-month periods ending November 30, 2017 and November 30, 2018. The fair value of the contingent consideration was determined to be $6.6 million and was calculated using a probability-weighted expectation of the payment of the contingent consideration and a discount rate of 3.45% as at the acquisition date and September 30, 2017. As at September 29, 2018, cash held in an escrow account was $0.8 million (September 30, 2017 - $3.9 million) and the fair value of the contingent consideration payable was $0.8 million (September 30, 2017 - $4.5 million) (See Note 19, Other long-term liabilities). (b) On August 26, 2016, LBMT acquired all issued and outstanding common stock of Highland with $1.7 million (US $1.3 million) as a balance of purchase price payable. Fifty percent of the balance of purchase price payable was paid on August 26, 2017 and the remainder was paid on February 26, 2018. The fair value of the balance of purchase price payable, as at the acquisition date and September 30, 2017, was $1.7 million (US $1.3 million) and was calculated using a discount rate of 3.14%. Under the share purchase agreement, the amount of the balance of purchase price was placed in escrow pursuant to an escrow agreement and, as at September 29, 2018, cash held in an escrow account and the carrying value of the balance of the purchase price payable were nil (September 30, 2017 - $0.9 million and $0.8 million respectively) (See Note 19, Other long-term liabilities). 9. TRADE AND OTHER RECEIVABLES Trade receivables Less allowance for doubtful accounts Other receivables Initial margin deposits with commodity brokers September 29, 2018 September 30, 2017* $ 73,794 (373) 73,421 5,505 2,810 81,736 $ 72,103 (385) 71,718 4,334 3,980 80,032 *Includes adjustment of prior year purchase price allocation (see Note 4, Business combinations and Note 16, Goodwill). The Company grants credit to its customers in the ordinary course of business. Management believes that the Company’s exposure to credit risk and impairment losses related to trade and other receivables is limited due to the following reasons: – – There is a broad base of customers with dispersion across different market segments. Bad debt write-offs to total revenue have been less than 0.1% for each of the last five years (averaging less than $113 per year). Write-offs for fiscal 2018 were $0.2 million (September 30, 2017 – nominal). All bad debt write-offs are charged to administration and selling expenses. – Less than 2% of trade receivables are outstanding for more than 90 days, which is comparable to September 30, 2017, while over 79% are current (less than 30 days) as at September 29, 2018 (September 30, 2017 - 84%). Through general security agreements with its lenders, trade and other receivables have been granted as continuing collateral security for all present and future indebtedness to the current lenders. (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. INVENTORIES Raw inventory Work in progress Finished goods Packaging and operating supplies Spare parts and other 87 September 29, 2018 September 30, 2017* $ 113,134 10,460 32,491 156,085 11,074 12,166 179,325 $ 111,281 10,770 29,453 151,504 9,245 11,793 172,542 *Includes adjustment of prior year purchase price allocation (see Note 4, Business combinations and Note 16, Goodwill). Costs of sales expensed during the year were all inventorial items, except for fixed costs incurred in Taber, Alberta, after the beet slicing campaign, and mark-to-market adjustments of derivative financial instruments. As at September 29, 2018, inventories recognized as cost of goods sold amounted to $669.9 million (September 30, 2017 - $579.1 million). 11. FINANCIAL INSTRUMENTS Derivative financial instruments Fair value estimates are made as of a specific point in time, using available information about the financial instruments. These estimates are subjective in nature and may not be determined with precision. A three-tier fair value hierarchy prioritizes the inputs used in measuring the fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The fair value of derivative instruments is the estimated amount that the Company would receive or pay to terminate the instruments at the reporting date. The fair values have been determined by reference to prices available from the markets on which the instruments trade, subject to credit adjustments as applicable. The fair values of the sugar future contracts and options are measured using Level 1 inputs, using published quoted values for these commodities. The fair values for the natural gas futures contracts, foreign exchange forward contracts and interest rate swap contracts are measured using Level 2 inputs. The fair values for these derivative assets or liabil- ities are estimated using industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, natural gas prices, foreign exchange rates, and forward and spot prices for currencies. The fair values of the interest rate swap have been determined by using rates published on financial capital markets. The fair values of all derivative instruments approximate their carrying value and are recorded as separate line items on the consoli- dated statements of financial position. As at October 2, 2016, the Company’s natural gas futures and interest rate swap agreements were designated as cash flow hedges and qualified for hedge accounting. (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 88 11. FINANCIAL INSTRUMENTS (CONTINUED) Derivative financial instruments (continued) Details of recorded gains (losses) for the year, in marking-to-market all derivative financial instruments and embedded derivatives that are outstanding at year-end, are noted below. For sugar futures contracts (derivative financial instruments), the amounts noted below are netted with the variation margins paid or received to/from brokers at the end of the reporting period. Natural gas forwards and sugar futures have been marked-to-market using published quoted values for these commodities, while foreign exchange forward contracts have been marked-to-market using rates published by the financial institution, which is a counterparty to these contracts. The fair value of natural gas futures contracts, foreign exchange forward contracts and interest rate swap calculations includes a credit risk adjustment for the Company’s or counterparty’s credit, as appropriate. As at September 29, 2018 and September 30, 2017, the Company’s financial derivatives carrying values were as follows: Financial Assets Financial Liabilities Current Non-current Current Non-current September 29, 2018 September 29, 2018 Derivative financial instruments measured at fair value through profit or loss: Sugar futures contracts Foreign exchange forward contracts Derivative financial instruments designated as effective cash flow hedging instruments: Natural gas futures contracts Interest rate swaps $ 364 3,187 — 460 4,011 $ — 58 — 2,014 2,072 $ — — 1,847 — 1,847 $ 135 — 2,585 — 2,720 Derivative financial instruments measured at fair value through profit or loss: Sugar futures contracts Foreign exchange forward contracts Embedded derivatives Derivative financial instruments designated as effective cash flow hedging instruments: Natural gas futures contracts Interest rate swaps Financial Assets Financial Liabilities Current Non-current Current Non-current September 30, 2017 September 30, 2017 $ 93 — — — — 93 $ $ — 1,280 — — 1,043 2,323 — 2,712 74 3,826 53 6,665 $ 37 — — 2,344 — 2,381 (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 89 11. FINANCIAL INSTRUMENTS (CONTINUED) Derivative financial instruments (continued) Charged to cost of sales Unrealized (loss) gain Charged to finance income Other comprehensive (loss) gain Sept. 29, 2018 Sept. 30, 2017 Sept. 29, 2018 Sept. 30, 2017 Sept. 29, 2018 Sept. 30, 2017 For the years ended $ $ $ $ $ Derivative financial instruments measured at fair value through profit or loss: Sugar futures contracts Foreign exchange forward contracts Embedded derivatives Derivative financial instruments designated as effective cash flow hedging instruments: Natural gas futures contracts Interest rate swap (3,154) 1,494 51 9,311 (861) 254 2,715 — 3,018 — 1,106 (6,900) — — — — 532 532 — — — — 371 371 $ — — — — — — (979) 947 (32) (1,701) 2,102 401 The following table summarizes the Company’s hedging components of other comprehensive income (“OCI”) as at September 29, 2018 and September 30, 2017: September 29, 2018 September 30, 2017 Opening OCI Income taxes Natural gas futures contracts $ Interest rate swap $ (1,701) 2,102 451 (557) Opening OCI – net of income taxes (1,250) 1,545 Change in fair value of derivatives designated as cash flow hedges Amounts reclassified to net earnings Income taxes 1,736 (2,715) 262 1,479 (532) (253) Ending OCI – net of income taxes (1,967) 2,239 Natural gas futures contracts Total Interest rate swap $ 401 (106) 295 3,215 (3,247) 9 272 $ — — — $ — — — 1,317 (3,018) 451 2,473 (371) (557) (1,250) 1,545 Total $ — — — 3,790 (3,389) (106) 295 For the year ended September 29, 2018, the derivatives designated as cash flow hedges were considered to be fully effective and no ineffectiveness has been recognized in net earnings. Approximately $0.5 million of net gains presented in accumulated other comprehensive income are expected to be reclassified to net earnings within the next twelve months. (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 90 11. FINANCIAL INSTRUMENTS (CONTINUED) For its financial assets and liabilities measured at amortized cost as at September 29, 2018 and September 30, 2017, the Company has determined that the carrying value of its short-term financial assets and liabilities approximates their fair value because of the relatively short period to maturity of these instruments. The Company uses derivative financial instruments to manage its exposure to changes in raw sugar, foreign exchange, and natural gas prices. In addition, the Company entered into interest rate swap contracts to fix a portion of the Company’s exposure to floating interest rate debt on its short-term borrowings. The Company’s objective for holding derivatives is to minimize risk using the most efficient methods to eliminate or reduce the impacts of these exposures. (a) Raw sugar: The Company’s risk management policy is to manage the forward pricing of purchases of raw sugar in relation to its forward refined sugar sales to reduce price risk. The Company attempts to meet this objective by entering into futures contracts to reduce its exposure. Such financial instruments are used to manage the Company’s exposure to variability in fair value attributable to the committed purchase price of raw sugar. The pricing mechanisms of futures contracts and the respective forecasted raw sugar purchase transactions are the same. The Company's raw sugar futures contracts as well as the fair value of these contracts relating to purchases or sales of raw sugar as at September 29, 2018 and September 30, 2017 are as follows: September 29, 2018 September 30, 2017 Original futures contracts value Current contract value Fair value gain/(loss) Original futures contracts value Current contract value Fair value gain/(loss) (US$) (US$) (US$) (US$) (US$) (US$) 61,500 86,326 8,567 361 51,794 76,767 7,962 357 (9,706) (9,559) (605) (4) 114,184 103,927 (10,257) 75,166 18,114 56 72,290 17,765 54 (2,876) (349) (2) 156,754 136,880 (19,874) 207,520 194,036 (13,484) (56,761) (52,898) 3,863 (111,228) (103,311) (81,107) (66,426) 14,681 (73,971) (67,402) (19,167) (18,199) — — 968 — (22,808) (22,568) (18) (18) (157,035) (137,523) 19,512 (208,025) (193,299) Purchases 0 - 6 months 6 - 12 months 12 - 24 months Over 24 months Sales 0 - 6 months 6 -12 months 12 - 24 months Over 24 months Net position (281) (643) (362) (505) 737 Foreign exchange rate at the end of the period Net value (CA$) Margin call payment (receipt) at year-end Net asset (CA$) 1.2918 (468) 697 229 7,917 6,569 240 — 14,726 1,242 1.2476 1,550 (1,494) 56 (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 91 11. FINANCIAL INSTRUMENTS (CONTINUED) Derivative financial instruments (continued) (a) Raw sugar (continued): All sugar futures contracts are traded through a large exchange clearing house on the New York Intercontinental Exchange. Regulation of the U.S. futures industry is primarily self-regulation, with the role of the Federal Commodity Futures Trading Commission being principally an oversight role to determine that self-regulation is continuous and effective. The exchange clearing house used is one of the world’s largest capitalized financial institutions with excellent long-term credit ratings. Daily cash settlements are mandatory (margin calls) for resulting gains and/or losses from futures trading for each customer’s account. Due to the above, the Company does not anticipate a credit risk from the raw sugar futures derivative instruments. (b) Natural gas: The Company uses natural gas contracts to help manage its costs of natural gas. The Company monitors its positions and the credit ratings of its counterparties and does not anticipate losses due to counterparty’s non-performance. The Company's natural gas contracts as well as the fair value of these contracts relating to purchases of natural gas are as follows: September 29, 2018 September 30, 2017 Original futures contracts value Current contract value Fair value gain/(loss) Original futures contracts value Current contract value Fair value gain/(loss) (US$) (US$) (US$) (US$) (US$) (US$) 5,044 6,821 6,495 11,775 30,135 3,614 6,332 5,814 10,944 26,704 4,955 5,580 5,774 11,706 28,015 1,888 4,276 5,610 11,296 23,070 (1,430) (489) (681) (831) (3,431) 1.2918 (4,432) (3,067) (1,304) (164) (410) (4,945) 1.2476 (6,170) Purchases Less than 1 year 1 to 2 years 2 to 3 years 3 years and over Foreign exchange rate at the end of the period Net liability (CA$) The forecasted purchases of natural gas, the hedged items, are used for calculating the hedge ineffectiveness. No ineffectiveness was recognized in net earnings as the change in value of the hedging instrument for calculating ineffectiveness was the same or smaller as the change in value of the hedged items used for calculating the ineffectiveness. (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 92 11. FINANCIAL INSTRUMENTS (CONTINUED) Derivative financial instruments (continued) (c) Foreign exchange contracts: The Company's activities, which result in exposure to fluctuations in foreign currency exchange rates, consist of the purchasing of raw sugar, the selling of refined sugar and maple products, the purchase of natural gas and purchases of property, plant and equipment. The Company manages this exposure by creating offsetting positions through the use of financial instruments. These instruments include forward contracts, which are commitments to buy or sell U.S. dollars or euros at a future date, and may be settled in cash. The credit risk associated with foreign exchange contracts arises from the possibility that a counterparty to a foreign exchange contract, in which the Company has an unrealized gain, fails to perform according to the terms of the contract. The credit risk is much less than the notional principal amount, being limited at any time to the change in foreign exchange rates attributable to the principal amount. Forward foreign exchange contracts have maturities of less than four years and relate mostly to U.S. currency, and from time to time, euro currency. The counterparties to these contracts are major Canadian financial institutions. The Company does not anticipate any material adverse effect on its financial position resulting from its involvement in these types of contracts, nor does it anticipate non-performance by the counterparties. The Company's foreign currency forward contracts relating to the purchase of raw sugar, the sale of refined sugar, the purchase of natural gas and purchases of property, plant and equipment for the sugar segment are detailed below. In addition, for the maple products segment, the Company hedges its exposure to fluctuations in foreign currency related to its anticipated cash flows from sales to specific U.S. customers, using a foreign exchange forward contract. (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 93 11. FINANCIAL INSTRUMENTS (CONTINUED) Derivative financial instruments (continued) (c) Foreign exchange contracts (continued): September 29, 2018 Original contract value (US$/EUR) 68,896 6,769 1,040 76,705 (95,188) (2,590) (1,330) (99,108) (22,403) Original contract value (CA$) 88,515 8,696 1,341 98,552 (124,766) (3,410) (1,707) (129,883) (31,331) Current contract value (CA$) 87,153 6,408 1,355 94,916 (121,181) (1,061) (1,726) (123,968) (29,052) 1,606 2,108 2,058 (26,878) (25,272) (35,303) (33,195) (34,632) (32,574) Fair value gain/(loss) (CA$) (1,362) (2,288) 14 (3,636) 3,585 2,349 (19) 5,915 2,279 (50) 671 621 SUGAR Purchases U.S. dollars Less than 1 year 1 to 2 years 2 to 3 years Sales U.S. dollars Less than 1 year 1 to 2 years 2 to 3 years Total U.S. dollars - Sugar MAPLE PRODUCTS Purchases U.S. dollars Less than 1 year Sales U.S. dollars Less than 1 year Total U.S. dollars - Maple Total U.S. dollars (47,675) (64,526) (61,626) 2,900 MAPLE PRODUCTS Purchases Euro dollars Less than 1 year Sales Euro dollars Less than 1 year 1 to 2 years Total Euro dollars - Maple 364 554 509 (3,631) (92) (3,723) (3,359) (5,827) (144) (5,971) (5,417) (5,439) (142) (5,581) (5,072) (45) 388 2 390 345 Total Foreign Exchange (51,034) (69,943) (66,698) 3,245 (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 94 11. FINANCIAL INSTRUMENTS (CONTINUED) Derivative financial instruments (continued) (c) Foreign exchange contracts (continued): SUGAR Purchases U.S. dollars Less than 1 year 1 to 2 years 2 to 3 years Sales U.S. dollars Less than 1 year 1 to 2 years 2 to 3 years Original contract value (US$) 94,575 12,320 233 107,128 (119,837) (13,463) (783) (134,083) Original contract value (CA$) 122,561 15,552 294 138,407 (151,973) (18,190) (1,080) (171,243) September 30, 2017 Fair value gain/(loss) (CA$) (4,551) (172) (2) (4,725) 2,444 1,355 99 3,898 Current contract value (CA$) 118,010 15,380 292 133,682 (149,529) (16,835) (981) (167,345) Total U.S. dollars - Sugar (26,955) (32,836) (33,663) (827) MAPLE PRODUCTS Sales U.S. dollars Less than 1 year (5,962) (8,049) (8,654) (605) Total U.S. dollars (32,917) (40,885) (42,317) (1,432) (d) Interest rate swap agreements: In order to fix the interest rate on a substantial portion of the expected drawdown of the revolving credit facility, the Company enters into interest rate swap agreements. The outstanding swap agreements by maturity are as follows: Fiscal year contracted Date Fiscal 2014 Fiscal 2015 Fiscal 2017 Fiscal 2017 Fiscal 2017 June 30, 2014 to June 28, 2019 – 2.09% June 28, 2018 to June 28, 2020 – 1.959% May 29, 2017 to June 28, 2022 – 1.454% September 1, 2017 to June 28, 2022 – 1.946% June 29, 2020 to June 29, 2022 – 1.733% Total value $ 10,000 30,000 20,000 30,000 30,000 The counterparties to these swap agreements are major Canadian financial institutions. The Company does not anticipate any material adverse effect on its financial position resulting from its involvement in these types of swap agreements, nor does it anticipate non-performance by the counterparties. As at September 29, 2018, the fair value of the swap agreements amounted to an asset of $2.5 million (September 30, 2017 - asset of $1.0 million). (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 95 11. FINANCIAL INSTRUMENTS (CONTINUED) Derivative financial instruments (continued) (d) Interest rate swap agreements (continued): The forecasted interest payments, the hedged items, are used for calculating the hedge ineffectiveness. No ineffectiveness was recognized in net earnings as the change in value of the hedging instrument for calculating ineffectiveness was the same or smaller as the change in value of the hedged items used for calculating the ineffectiveness. Risks The Company, through its financial assets and liabilities, is exposed to various risks. The following analysis provides a measurement of risks at year-end. (a) Credit risk: Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligation. The Company believes it has limited credit risk other than those explained in Note 9, Trade and other receivables and Note 11, Financial instruments. (b) Currency risk: Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in the foreign exchange rate. The Company’s significant cash flow exposure to foreign currency is due mainly to the following: – – – – – sales in U.S. dollars for both the sugar and maple products segments; purchases of natural gas; sales of by-products; Taber refined sugar and by-products sales; ocean freight; and – purchases of property, plant and equipment for both the sugar and maple products segments. The Company mitigates its exposure to foreign currency by entering into forward exchange contracts (see Note 11, Financial instruments; Derivative financial instruments, (c) Foreign exchange contracts). (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 96 11. FINANCIAL INSTRUMENTS (CONTINUED) Risks (continued) (b) Currency risk (continued): The Company had the following significant foreign currency exposures at year-end: Financial instruments measured at amortized cost: Cash Trade and other receivables, including initial margin deposits Trade and other payables Financial instruments at fair value through profit or loss: Raw sugar futures sales contracts Raw sugar futures purchases contracts Balance of purchase price payable Natural gas contracts Fair value loss or (gain) on futures contracts Total exposure from above Forward exchange contracts Gross exposure September 29, 2018 September 30, 2017 (US$) (US$) 1,672 21,440 (3,560) 19,552 157,035 (156,754) — (30,135) 362 (29,492) (9,940) (47,675) (57,615) 8,454 15,851 (3,004) 21,301 208,025 (207,520) (659) (28,015) (1,242) (29,411) (8,110) (32,917) (41,027) As at September 29, 2018, the U.S./Can. exchange rate was $1.2918 (September 30, 2017 - $1.2476). Based on the above gross exposure at year-end, and assuming that all other variables remain constant, in particular the price of raw sugar and natural gas, a 5-cent increase in the Canadian dollar would result in an increase in net earnings of $2.1 million, (September 30, 2017 - increase of $1.5 million) while a 5-cent decrease would have an equal but opposite effect on net earnings. Management believes that the impact on the gross exposure is not representative as it needs to be adjusted for the following transactions, which are not recorded on the consolidated statements of financial position as at year-end but were committed during the fiscal year, and will be accounted for as the physical transactions occur: Gross exposure as per above Sugar purchases priced not received Committed future sales in U.S. dollars Ocean freight Other Net exposure September 29, 2018 September 30, 2017 (US$) (57,615) (93,516) 111,698 (15) (592) (US$) (41,027) (98,341) 117,736 (142) (284) (40,040) (22,058) (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 97 11. FINANCIAL INSTRUMENTS (CONTINUED) Risks (continued) (b) Currency risk (continued): The net exposure is due mainly to the Company’s policy not to hedge its foreign exchange exposure on natural gas futures contracts with maturities exceeding 12 months. The impact of a 5-cent increase in the Canadian dollar would result in an increase of net earnings by $1.5 million in 2018 (September 30, 2017 - increase of $0.8 million) while a decrease would have an equal but opposite effect on net earnings. The Company did not have a Euro foreign exchange currency exposure at year-end seeing as the forward exchange contracts were equal to the futures sales and purchases. Raw sugar futures sales contracts represent, in large part, futures contracts entered into when sugar is priced by a raw sugar supplier. As both the raw sugar futures sales contracts and the sugar purchases priced not received are in U.S. dollars, there is no need to economically hedge the currency, hence the reason for the adjustment for sugar purchases priced not received. Included in other is the Taber sales formula for refined sugar, which is based on the raw sugar value that trades in U.S. dollars. As all beet sugar is paid in Canadian dollars, the raw sugar value within the Taber sales contracts is in U.S. dollars and therefore needs to be economically hedged for currency exposure. Some sales are transacted in U.S. dollars. For these sales, the raw sugar value is not hedged, as the corresponding futures contract is also in U.S. dollars. Only the U.S. dollar refined sugar margin and ocean freight contribution are economically hedged for the currency exposure. Ocean freight for raw sugar is denominated in U.S. dollars and therefore forward exchange contracts are used to cover the foreign exchange exposure. (c) Interest rate risk: Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. As at September 29, 2018, the Company has a short-term cash borrowing of $12.0 million (September 30, 2017 - $20.0 million) and a long-term cash borrowing of $160.0 million (September 30, 2017 - $150.0 million). The Company normally enters into a 30- or 90-day bankers’ acceptance for an amount varying between $100.0 million to $175.0 million of the borrowings, and will borrow either under prime rate loans or shorter term bankers’ acceptances for any other borrowings. To mitigate the risk in future cash flows due to interest rate fluctuations, the Company enters into interest rate swap agreements from time to time (see Note 11, Financial Instruments, Derivative financial instruments, (d) interest rate swap agreements). All other borrowings over and above the aggregate notional amount of the swap agreements are therefore exposed to interest rate fluctuations. For the year ended September 29, 2018, if interest rates had been 50 basis points higher, considering all borrowings not covered by the interest rate swap agreements, net earnings would have been $0.5 million lower (September 30, 2017 - $0.3 million lower) while a decrease would have an equal but opposite effect on net earnings. (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 98 11. FINANCIAL INSTRUMENTS (CONTINUED) Risks (continued) (d) Liquidity risk: Liquidity risk is the risk that the Company will not be able to meet its obligations as they fall due. The following are the contractual maturities of financial liabilities, including estimated interest payments: Carrying Contractual cash flows amount $ $ 0 to 6 months $ 6 to 12 months $ Non-derivative financial liabilities: Revolving credit facility 172,000 172,000 12,000 Trade and other payables 113,777 113,777 113,777 Finance lease obligations 114 121 28 285,891 285,898 125,805 — — 28 28 September 29, 2018 12 to 24 months After 24 months $ — — 56 56 $ 160,000 — 9 160,009 Derivative financial instruments measured at fair value through profit or loss: Sugar futures contracts (net) (i) (229) 831 1,426 (13,359) 13,224 (460) Forward exchange contracts (net) (i) (3,245) (69,943) (75,765) 1,046 5,142 Other long-term liabilities 773 773 773 — — (366) — Derivative financial instruments designated as effective cash flow hedging instruments: Natural gas contracts (i) 4,432 38,928 Interest on swap agreements (2,474) 5,505 3,070 837 (743) (23,906) (69,659) 285,148 261,992 56,146 3,446 783 (8,084) (8,056) 8,811 1,445 28,622 28,678 23,601 2,440 25,215 185,224 (i) Based on notional amounts as presented above. (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. FINANCIAL INSTRUMENTS (CONTINUED) Risks (continued) (d) Liquidity risk (continued): 99 Carrying Contractual cash flows amount $ $ 0 to 6 months $ 6 to 12 months $ 12 to 24 months $ After 24 months $ September 30, 2017* Non-derivative financial liabilities: Revolving credit facility 170,000 170,000 20,000 Trade and other payables 125,294 125,294 125,294 Finance lease obligations 162 178 28 295,456 295,472 145,322 — — 28 28 50,000 100,000 — 56 — 66 50,056 100,066 Derivative financial instruments measured at fair value through profit or loss: Sugar futures contracts (net) (i) (56) (920) (769) (6,098) 5,992 (45) Forward exchange contracts (net) (i) Other long-term liabilities Derivative financial instruments designated as effective cash flow hedging instruments: Natural gas contracts (i) Interest on swap agreements 1,432 5,291 (40,885) (52,869) 5,291 2,852 15,408 1,851 (2,638) 588 (786) — 6,170 (990) 11,847 34,952 7,206 5,644 307,303 301,116 3,254 855 (46,677) 98,645 2,928 846 14,935 14,963 6,962 1,619 12,523 62,579 21,808 3,886 24,863 124,929 * Includes adjustment of prior year purchase price allocation (see Note 4, Business combinations and Note 16, Goodwill). (i) Based on notional amounts as presented above. The convertible unsecured subordinated debentures of $155.3 million have been excluded from the above due to the Company’s option to satisfy the obligations at redemption or maturity in shares. The Company borrows under its revolving credit facility (see Note 17, Revolving credit facility). It is the Company’s intention to keep a debt level under its revolving credit facility between $100.0 million to $175.0 million. All other non-derivative financial liabilities are expected to be financed through the collection of trade and other receivables and cash flows generated from operations. Derivative financial instruments for raw sugar, natural gas and forward exchange contracts are expected to be financed from the working capital of the Company. As at September 29, 2018, the Company had an unused available line of credit of $93.0 million (September 30, 2017 - $105.0 million), a cash balance of $2.1 million (September 30, 2017 - $17.0 million) and an overdraft balance of $5.5 million (September 30, 2017 – nil). (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 100 11. FINANCIAL INSTRUMENTS (CONTINUED) Risks (continued) (e) Commodity price risk: Commodity price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in commodity prices. There are two types of commodity contracts, which are entered into by the Company: (i) Sugar: In order to protect itself against fluctuations of the world raw sugar market, the Company follows a rigorous hedging program for all purchases of raw cane sugar and sales of refined sugar. Anytime raw sugar is priced by a sugar supplier, a corresponding sugar futures contract is sold for the same quantity, period and underlying value. Anytime refined sugar is priced by a customer, the corresponding volume of raw sugar is purchased for the same quantity, period and underlying value. The Company’s policy is to cover all raw cane purchases and refined sugar sales as they are priced by the Company’s suppliers and customers. On a daily basis, the Company monitors all net sugar futures contract positions against the physical priced purchases and sales commitments to ensure that appropriate hedge positions are in place. For the Company’s beet operation, the Board of Directors approved an economic pre-hedge, using sugar futures contracts, of some of the beet sugar sales that will occur in the future, provided there is a contract in place with the Alberta Sugar Beet Growers to grow sugar beets. The Board of Directors also approved a trading book up to a maximum of 25,000 metric tonnes of sugar derivative contracts. The Board reviews on a quarterly basis the results achieved. (ii) Natural gas: In order to mitigate the overall price risks in the purchase of natural gas for use in the manufacturing operations, the Board approved the use of natural gas futures contracts. Natural gas futures contracts cannot be entered into for speculative reasons. The Board reviews on a quarterly basis the position of the natural gas contracts. As at September 29, 2018, the Company had the following commodity contracts: Sugar futures contracts Natural gas contracts Current average value Current contract value Current average value Current contract value Contracts (US$) (US$) (10,000 MM BTU) (US$) (US$) Volume (M.T.) 542,119 252.49 136,880 1,090 24.50 26,704 (541,154) 254.13 (137,523) — — — 965 n/a (643) 1,090 24.50 26,704 1.2918 (831) 1.2918 34,496 Purchases Sales Foreign exchange rate at the end of the period Net value CA$ (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 101 11. FINANCIAL INSTRUMENTS (CONTINUED) Risks (continued) (e) Commodity price risk (continued): (ii) Natural gas (continued): As at September 30, 2017, the Company had the following commodity contracts: Sugar futures contracts Natural gas contracts Volume (M.T.) 614,005 (609,839) 4,166 Current average value Current contract value Current average value Current contract value Contracts (US$) (US$) (10,000 MM BTU) (US$) (US$) 316.02 316.97 n/a 194,036 (193,299) 737 912 — 912 25.30 23,070 — — 25.30 23,070 1.2476 920 1.2476 28,782 Purchases Sales Foreign exchange rate at the end of the period Net value CA$ If, on September 29, 2018, the raw sugar value would have increased by US$0.05 per pound (being approximately US$110.0 per metric tonne), and all other variables remained constant, the impact on net earnings would have been an increase of approximately $0.1 million (calculated only on the point-in-time exposure on September 29, 2018) (September 30, 2017 - increase of $0.4 million for US$0.05 per pound increase). If the raw sugar value would have decreased by US$0.02 per pound (being approximately US$44.00 per metric tonne), and all other variables remained constant, the impact on net earnings would have been a decrease of approximately $0.1 million (September 30, 2017 - decrease of $0.3 million for US$0.03 decrease). Except for the beet pre-hedge, management believes that the above is not representative, as the Company has physical raw sugar purchases and refined sugar selling contracts that would offset most gains or losses realized from such decrease or increase in the commodity value, when such contracts are liquidated. The Company had no beet pre-hedge contracts as at September 29, 2018 nor September 30, 2017. If, on September 29, 2018, the natural gas market price would have increased by US$1.00, and all other variables remained constant, net earnings would have increased by $10.4 million (September 30, 2017 - increase of $8.4 million) as a result of the change in fair value of our natural gas futures. If the natural gas value would have decreased by US$1.00, and all other variables remained constant, net earnings would have decreased by $10.4 million (September 30, 2017 - decrease of $8.4 million). Management believes that this impact for natural gas is not representative as this variance will mostly offset when the actual natural gas is purchased and used. At such time, a gain or loss on the liquidation of the natural gas contracts would mostly offset the same increase or decrease in the actual physical transaction. (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 102 11. FINANCIAL INSTRUMENTS (CONTINUED) Fair values of financial instruments The fair values of derivative instruments are the estimated amount that the Company would receive or pay to terminate the instruments at the reporting date. The fair values have been determined by reference to prices available from the markets on which the instruments trade, subject to credit adjustments as applicable. The fair values of all derivative instruments approximate their carrying value and are recorded as separate line items on the consolidated statements of financial position. The following describes the fair value determinations of financial instruments: i) Cash: due to the short-term maturity of these instruments, the carrying amount approximates fair value. ii) Restricted cash: the carrying amount approximates fair value. iii) Trade and other receivables and trade and other payables: the carrying amount approximates fair value due to the short-term maturity of these instruments. iv) Borrowing under the revolving credit facility: the carrying amount approximates fair value as the borrowings bear interest at variable rates. v) The fair values for the derivative assets and liabilities are estimated using industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, natural gas prices, foreign exchange rates, and forward and spot prices for currencies. vi) The fair value of convertible unsecured subordinated debentures was based upon market quotes for the identical instruments. The fair value of the conversion option has been marked-to-market using a model with various inputs. vii) See Note 21, Finance lease obligations. viii) The fair value of the contingent consideration was discounted and calculated using a probability-weighted expectation (see Note 8, Restricted cash). (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 103 11. FINANCIAL INSTRUMENTS (CONTINUED) Fair values of financial instruments (continued) The following tables provide a comparison of carrying and fair values for each classification of financial instruments at year-end, and show a level within the fair values hierarchy in which they have been classified. Fair values hierarchy level September 29, 2018 Fair values Carrying values $ $ September 30, 2017* Carrying values $ Fair values $ Level 1 Level 2 229 3,245 229 3,245 56 — 56 — FINANCIAL ASSETS: Derivative financial instruments measured at fair value through profit or loss: Sugar futures contracts Foreign exchange forward contracts Derivative financial instruments designated as effective cash flow hedging instruments: Interest rate swap Level 2 2,474 2,474 990 990 Financial assets recorded at amortized cost: Cash Restricted cash Trade and other receivables Income taxes recoverable Total financial assets FINANCIAL LIABILITIES: Derivative financial instruments measured at fair value through profit or loss: Foreign exchange forward contracts Embedded derivatives Derivative financial instruments designated as effective cash flow hedging instruments: Level 1 Level 1 n/a n/a 2,101 846 2,101 846 81,736 81,736 — — 17,033 4,832 80,032 1,174 17,033 4,832 80,032 1,174 90,631 90,631 104,117 104,117 Level 2 Level 2 — — — — 1,432 74 1,432 74 Natural gas futures contracts Level 2 4,432 4,432 6,170 6,170 Financial liabilities recorded at amortized cost: Bank overdraft Revolving credit facility Trade and other payables Income taxes payable Finance lease obligations Other long-term liabilities Convertible unsecured subordinated debentures Total financial liabilities Level 1 5,469 5,469 — — n/a n/a n/a n/a Level 3 172,000 172,000 170,000 170,000 113,777 113,777 125,294 125,294 3,506 3,506 114 773 114 773 — 162 — 162 5,291 5,291 Level 1 142,421 157,464 111,544 121,469 442,492 457,535 419,967 429,892 * Includes adjustment of prior year purchase price allocation (see Note 4, Business combinations and Note 16, Goodwill). (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 104 12. PROPERTY, PLANT AND EQUIPMENT Machinery and equipment Buildings Furniture and fixtures Barrels Construction in progress Finance leases $ $ $ $ $ $ Land $ Total $ Cost or deemed cost Balance at October 1, 2016 17,748 62,722 259,965 — 6,981 440 6,004 353,860 Additions through business combination* 201 2,198 3,046 2,240 — — — — — 1,711 — — 55 6,994 — — — — 139 2 408 163 1 — (2) (184) (16) (3) — (3) 1 17,055 (9,113) — — 7,988 17,113 — (186) (22) 17,949 66,631 270,044 2,237 7,528 417 13,947 378,753 4,616 1,771 — 3,490 17,242 — 349 — 29 110 572 — 15 3 1 — 6 — 5 — 8,132 22,524 24,760 (21,304) — — 24 18,089 73,468 293,688 2,589 8,240 428 15,167 411,669 21,130 150,333 1,429 10,878 — — 59 — 3,523 607 (2) 243 49 (183) (10) (2) — (1) — — — — — — 175,229 13,022 (185) (13) 22,559 161,201 57 4,128 108 — 188,053 1,725 11,807 412 709 — 1 — — 63 — — 14,716 — 1 — 24,284 173,009 469 4,837 171 — 202,770 Additions through business combination 140 3,347 Additions Transfers Disposals Effect of movements in exchange rate Balance at September 30, 2017 Additions Transfers Effects of movements in exchange rate Balance at September 29, 2018 Depreciation Balance at October 1, 2016 Depreciation for the year Disposals Effect of movements in exchange rate Balance at September 30, 2017 Depreciation for the year Effect of movements in exchange rate Balance at September 29, 2018 Net carrying amounts — — — — — — — — — — At September 30, 2017 * 17,949 44,072 108,843 At September 29, 2018 18,089 49,184 120,679 2,180 2,120 3,400 3,403 309 257 13,947 190,700 15,167 208,899 * Includes adjustment of prior year purchase price allocation (see Note 4, Business combinations and Note 16, Goodwill). There were no impairment losses during fiscal 2018 and 2017. All property, plant and equipment have been pledged as security for the revolving credit facility (see Note 17, Revolving credit facility). (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 105 13. INTANGIBLE ASSETS Cost Balance at October 1, 2016 Additions through business combinations* Additions Effect of movements in exchange rate Balance at September 30, 2017 Customer Software relationships $ 3,368 255 257 — $ — 25,260 — (57) Brand names(1) $ — 3,860 — (10) Other $ 284 — — — Total $ 3,652 29,375 257 (67) 3,880 25,203 3,850 284 33,217 Additions through business combinations Additions Effect of movements in exchange rate 87 94 — 9,220 2,000 — 119 — 21 Balance at September 29, 2018 4,061 34,542 5,871 Amortization Balance at October 1, 2016 Amortization for the year Balance at September 30, 2017 Amortization for the year Balance at September 29, 2018 Net carrying amounts At September 30, 2017* At September 29, 2018 1,648 194 1,842 317 2,159 — 352 352 3,395 3,747 — — — — — 2,038 1,902 24,851 30,795 3,850 5,871 Includes adjustment of prior year purchase price allocation (see Note 4, Business combinations and Note 16, Goodwill). * (1) Indefinite life — 290 — 574 121 28 149 46 195 135 379 11,307 384 140 45,048 1,769 574 2,343 3,758 6,101 30,874 38,947 14. OTHER ASSETS Deferred financing charges, net Other September 29, 2018 September 30, 2017 $ 975 10 985 $ 979 3 982 Deferred financing charges represent the fees and costs related to the negotiation of the 5-year credit agreement. Borrowings under the revolving credit facility are short term in nature and can be repaid at any time. Therefore, deferred financing charges are presented separately and not applied against the debt (see Note 17, Revolving credit facility). On December 20, 2017, the Company paid $0.1 million in financing fees to amend its existing revolving credit facility by drawing addi- tional funds under the accordion feature (see Note 17, Revolving credit facility). Then, on May 28, 2018, the Company exercised its option to extend the maturity date of its revolving credit facility to June 28, 2023 under the same terms and conditions of the amended credit agreement entered into on December 20, 2017. An amount of $0.2 million was paid in financing fees, bringing the total paid to $0.3 million in fiscal 2018 (see Note 17, Revolving credit facility). (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 106 14. OTHER ASSETS (CONTINUED) These fees, along with the outstanding balance of the previously deferred financing charges, are amortized over the extended life of the revolving credit facility, which now matures on June 28, 2023. 15. DEFERRED TAX ASSETS AND LIABILITIES The deferred tax assets (liabilities) comprise the following temporary differences: Assets: Employee benefits Derivative financial instruments Losses carried forward Provisions Intangibles Other Liabilities: Property, plant and equipment Derivative financial instruments Goodwill Deferred financing charges Intangibles Other Net assets (liabilities): Property, plant and equipment Intangibles Employee benefits Derivative financial instruments Losses carried forward Goodwill Provisions Deferred financing charges Other September 29, 2018 September 30, 2017* $ $ 8,330 1,299 1,518 583 41 1,205 12,976 (29,260) (1,517) (2,509) (417) (8,694) (1,841) (44,238) (29,260) (8,653) 8,330 (218) 1,518 (2,509) 583 (417) (636) 10,279 2,022 110 585 36 2,016 15,048 (27,763) (668) (2,418) (337) (6,497) (898) (38,581) (27,763) (6,461) 10,279 1,354 110 (2,418) 585 (337) 1,118 * Includes adjustment of prior year purchase price allocation (see Note 4, Business combinations and Note 16, Goodwill). (31,262) (23,533) (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. DEFERRED TAX ASSETS AND LIABILITIES (CONTINUED) The movement in temporary differences during the current years is as follows: 107 Balance Recognized Recognized in other in profit comprehensive income (loss) September 30, 2017* Property, plant and equipment Intangibles Employee benefits $ (27,763) (6,461) 10,279 $ 76 779 (186) Derivative financial instruments 1,354 (1,581) Losses carried forward 110 1,408 Goodwill Provisions Deferred financing charges Other (2,418) 585 (337) 1,118 (23,533) (91) (2) (80) (595) (272) $ — — (1,763) 9 — — — — — (1,754) Recognized in equity $ — — — — — — — — (1,159) (1,159) Acquired Balance in business September 29, 2018 combination $ (1,573) (2,971) — — — — — — — $ (29,260) (8,653) 8,330 (218) 1,518 (2,509) 583 (417) (636) (4,544) (31,262) * Includes adjustment of prior year purchase price allocation (see Note 4, Business combinations and Note 16, Goodwill). Balance October 1, 2016 Recognized in profit (loss) Recognized in other comprehensive income Recognized in equity $ Property, plant and equipment (27,024) Intangibles Employee benefits — 13,977 $ (74) 819 484 Derivative financial instruments (2,175) 3,430 Losses carried forward Goodwill Provisions Deferred financing charges Other — (2,295) 791 (323) 761 110 (36) (206) (901) 665 $ — — (4,182) (106) — — — — — (16,288) 4,291 (4,288) $ — — — — — — — 838 (686) 152 * Includes adjustment of prior year purchase price allocation (see Note 4, Business combinations and Note 16, Goodwill). Acquired Balance in business September 30, combination* $ (665) (7,280) — 205 — (87) — 49 378 2017* $ (27,763) (6,461) 10,279 1,354 110 (2,418) 585 (337) 1,118 (7,400) (23,533) (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 108 16. GOODWILL Balance, beginning of year Adjustment of prior year purchase price allocation Additions through business combination Balance, end of year September 29, 2018 September 30, 2017 $ 316,949 — 16,058 333,007 $ 229,952 (6,279) 93,276 316,949 Recoverability of cash generating units (“CGU”): For the purpose of impairment testing, goodwill and intangibles with indefinite useful life are allocated to the Company’s operating segments, which represent the lowest level within the Company at which the goodwill and intangibles are monitored for internal management purposes, as follows: Sugar: Goodwill Maple products: Goodwill Brand names September 29, 2018 September 30, 2017 $ $ 229,952 229,952 103,055 5,871 338,878 86,997* 3,850* 320,799 * Includes adjustment of prior year purchase price allocation (see Note 4, Business combinations) In assessing whether goodwill and indefinite life intangible assets are impaired, the carrying amount of the segments (including goodwill and indefinite life intangible assets) are compared to their recoverable amount. The recoverable amounts of segments are based on the higher of the value in use and fair value less costs of disposal. The Company performed the annual impairment review for goodwill and indefinite life intangible assets as at September 29, 2018, and the estimated recoverable amounts exceeded the carrying amounts of the segments and, as a result, there was no impairment identified. (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 109 16. GOODWILL (CONTINUED) SUGAR SEGMENT The recoverable amount was based on value in use. The key assumptions used in the estimation of the recoverable amount are set out below. The values assigned to the key assumptions represent management's assessment of future trends in the relevant industries and have been based on historical data from both external and internal sources. Pre-tax discount rate Terminal growth rate Budgeted EBITDA growth rate (average of next 5 years) 2018 % 10.6 2.0 0.6 The discount rate was a pre-tax measure estimated based on historical industry weighted-average cost of capital adjusted for impacts on risk and taxes. The cash flow projections included specific estimates for five years and a terminal growth rate thereafter. The terminal growth rate was based on management's best estimate of the long-term compound annual EBITDA growth rate, consistent with the assumptions that a market participant would make. Budgeted EBITDA was estimated taking into account past experience, adjusted as follows: • Revenue growth for the first year was projected taking into account the budgeted sales volumes, and the following years taking into account the average growth levels experienced over the past 5 years and the estimated sales volumes and price growth for the next five years. It was assumed that the sales price would increase in line with forecasted inflation over the next five years. Management has identified the two key assumptions that could cause the carrying amount to exceed the recoverable amount. The following table shows the amount by which these two assumptions would need to change individually for the estimated recoverable amount to be equal to the carrying amount. Pre-tax discount rate Budgeted EBITDA growth rate 2018 % 3.9 (2.8) (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 110 16. GOODWILL (CONTINUED) MAPLE PRODUCTS SEGMENT The recoverable amount was based on value in use. The key assumptions used in the estimation of the recoverable amount are set out below. The values assigned to the key assumptions represent management's assessment of future trends in the relevant industries and have been based on historical data from both external and internal sources. Pre-tax discount rate Terminal growth rate Budgeted EBITDA growth rate (average of next 5 years) 2018 % 13.6 3.0 7.9 The discount rate was a pre-tax measure estimated based on historical industry weighted-average cost of capital adjusted for impacts on risk and taxes. The cash flow projections included specific estimates for five years and a terminal growth rate thereafter. The terminal growth rate was based on management's best estimate of the long-term compound annual EBITDA growth rate, consistent with the assumptions that a market participant would make. Budgeted EBITDA was estimated taking into account past experience, adjusted as follows: • Revenue growth for the first year was projected taking into account the budgeted sales volumes, and the following years taking into account the average growth levels experienced in the past and the estimated sales volumes and price growth for the next five years. It was assumed that the sales price would increase in line with forecasted inflation over the next five years. • Costs savings related to ongoing return on investment capital projects. Management has identified the two key assumptions that could cause the carrying amount to exceed the recoverable amount. The following table shows the amount by which these two assumptions would need to change individually for the estimated recoverable amount to be equal to the carrying amount. Pre-tax discount rate Budgeted EBITDA growth rate 2018 % 0.2 (0.4) (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 111 17. REVOLVING CREDIT FACILITY On December 20, 2017, the Company amended its existing revolving credit facility thereby increasing its available credit by $40.0 million by drawing additional funds under the accordion feature embedded in the revolving credit facility (“Additional Accordion Borrowings”). A total of $0.1 million was paid in financing fees (see Note 14, Other assets). On May 18, 2018, the Company reduced and canceled an amount of $50.0 million that was drawn under the accordion (“Accordion Borrowings”) on April 28, 2017. In 2017, the funds from the Accordion borrowings were used to repay the Fourth series convertible unsecured subordinated debentures (“Fourth series debentures”) on May 1, 2017. On May 28, 2018, the Company exercised its option to extend the maturity date of its revolving credit facility to June 28, 2023 under the same terms and conditions of the amended credit agreement entered into on December 20, 2017. An amount of $0.2 million was paid in financing fees (see Note 14, Other assets). 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 drawing additional funds under the accordion feature embedded in the revolving credit facility (“Additional LBMT Accordion Borrowings”). As a result of the amended revolving credit facility, the Additional Accordion Borrowings and the Additional LBMT Accordion Borrowings, the Company has a total of $265.0 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. As at September 29, 2018, a total of $407.8 million of assets are pledged as security (September 30, 2017 - $417.9 million). The following amounts were outstanding as at: Outstanding amount on revolving credit facility: Current Non-current September 29, 2018 September 30, 2017 $ $ 12,000 160,000 172,000 20,000 150,000 170,000 As at September 29, 2018, an amount of $160.0 million is shown as non-current as we don’t expect it to be repaid within the next 12 months. The carrying value of the revolving credit facility approximates fair value as the borrowings bear interest at variable rates. (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 112 18. TRADE AND OTHER PAYABLES Trade payables Other non-trade payables Personnel-related liabilities Dividends payable to shareholders September 29, September 30, 2018 $ 91,675 2,754 9,897 9,451 113,777 2017* $ 101,605 3,692 10,480 9,517 125,294 * Includes adjustment of prior year purchase price allocation (see Note 4, Business combinations and Note 16, Goodwill). Considering that Maple products syrup is harvested once a year, the Federation des producteurs acericoles du Quebec (“FPAQ”) offers to authorized purchasers the possibility to pay their purchases over the course of the year (ending in February). Once the syrup is graded, the Company must pay 30% of the cost of the syrup on the 15th of the following month. The outstanding balance bears interest (prime + 1%) and is paid in four monthly installments (November, December, January and February). Included in trade payables is an amount of $61.8 million as of September 29, 2018 (September 30, 2017 - $70.9 million). During the year, more than 85% of the maple syrup purchases were made from the FPAQ. Personnel-related liabilities represent the Company’s obligation to its current and former employees that are expected to be settled within one year from the reporting period as salary and accrued vacation. The Company’s exposure to currency and liquidity risks related to trade and other payables is disclosed in Note 11, Financial instruments. 19. OTHER LONG-TERM LIABILITIES September 29, 2018 September 30, 2017 Contingent consideration payable Balance of purchase price payable $ 4,469 — 190 — $ 822 — 8 30 Total $ 5,291 — 198 30 Contingent consideration payable Balance of purchase price payable $ — $ — Total $ — 5,573 5,735 11,308 22 — 9 (12) 31 (12) (3,886) (860) (4,746) (1,126) (4,910) (6,036) 773 773 — 773 — — — — 773 773 — 773 4,469 822 5,291 3,881 588 4,469 822 — 822 4,703 588 5,291 Opening balance Business acquisition (Note 4) Accretion expense Foreign exchange adjustment Payment made Closing balance Presented as: Current Non-current (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20. PROVISIONS Opening balance Additions Provisions used during the period Closing balance Presented as: Current Non-current 113 September 29, 2018 September 30, 2017 $ 2,231 724 (750) 2,205 1,006 1,199 2,205 $ 2,994 — (763) 2,231 478 1,753 2,231 Provisions are comprised of asset retirement obligations, which represent the future cost the Company estimated to incur for the removal of asbestos in the operating facilities and for oil, chemical and other hazardous materials storage tanks for which the Company has been able to identify the costs. The estimate of the total liability for future asset retirement obligations is subject to change, based on amendments to laws and regu- lations and as new information concerning the Company’s operations becomes available. Future changes, if any, to the estimated total liability as a result of amended requirements, laws, regulations and operating assumptions would be recognized prospectively as a change in estimate, when applicable. 21. FINANCE LEASE OBLIGATIONS The Company leases moveable equipment. The leases substantially transfer all the usage benefits of such equipment to the Company. These leases have an interest rate of 5.65% with maturity dates in fiscal 2020. The outstanding liabilities are as follows: Finance lease obligations September 29, 2018 September 30, 2017 Carrying values $ 114 Fair values $ 114 Carrying values $ 162 Fair values $ 162 The finance lease obligations are payable as follows: September 29, 2018 September 30, 2017 Future minimum lease payments $ 55 66 121 Present value of minimum lease payments $ 50 64 114 Future minimum lease payments $ 56 122 178 Interest $ 5 2 7 Present value of minimum lease payments $ 48 114 162 Interest $ 8 8 16 Less than one year Between one and five years (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 114 22. EMPLOYEE BENEFITS The Company sponsors defined benefit pension plans for its employees (“Pension benefit plans”), as well as health care benefits, medical plans and life insurance coverage (“Other benefit plans”). The following table presents a reconciliation of the pension obligations, the plan assets and the funded status of the benefit plans: Fair value of plan assets: Pension benefit plans Defined benefit obligation: Pension benefit plans Other benefit plans Funded status: Pension benefit plans Other benefit plans Experience adjustment arising on plan liabilities Experience adjustment arising on plan assets September 29, 2018 September 30, 2017 $ $ 104,362 100,450 120,650 15,206 135,856 (16,288) (15,206) (31,494) (4,911) 1,732 121,886 17,733 139,619 (21,436) (17,733) (39,169) (13,296) 2,570 The Company has determined that, in accordance with the terms and conditions of the defined benefit pension plans, and in accor- dance with statutory requirements (such as minimum funding requirements) of the plans of the respective jurisdictions, the present value of refunds or reductions in the future contributions is not lower than the balance of the total fair value of the plan assets less the total present value of the obligations. As such, no decrease in the defined benefit asset is necessary as at September 29, 2018 (September 30, 2017 - no decrease in defined benefit asset). (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 115 22. EMPLOYEE BENEFITS (CONTINUED) The Company measures its accrued benefit obligations and the fair value of plan assets for accounting purposes at year-end. The most recent actuarial valuations of the pension plans for funding purposes were as of December 31, 2016 and the next required valuations will be as of December 31, 2019. The asset allocation of the major categories in the plan was as follows: Equity instruments Government bonds Cash and short-term securities September 29, 2018 September 30, 2017 % 60.9 36.6 2.5 100.0 $ 63,557 38,196 2,609 104,362 % 63.6 34.8 1.6 100.0 $ 63,886 34,957 1,607 100,450 The pension committee prepares the documentation relating to the management of asset allocation, reviews the investment policy and recommends it to the Board of Directors for approval in the event of material changes to the policy. Semi-annually monitoring of the asset allocation of the pension benefit plans allows the pension committee to ensure that the limits of asset allocation of the pension benefit plans are respected. Based on historical data, contributions to the defined benefit pension plans in fiscal 2019 are expected to be approximately $3.7 million. The pension plan exposes the Company to the following risks: (i) Investment risk: The defined benefit obligation is calculated using a discount rate. If the fund returns are lower than the discount rate, a deficit is created. (ii) Interest rate risk: Variation in bond rates will affect the value of the defined benefit obligation. (iii) Inflation risk: The defined benefit obligation is calculated assuming a certain level of inflation. An actual inflation higher than expected will have the effect of increasing the value of the defined benefit obligation. (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 116 22. EMPLOYEE BENEFITS (CONTINUED) Movement in the present value of the defined benefit obligations is as follows: For the years ended September 29, 2018 Pension benefit plans $ Other benefit plans $ Total $ Pension benefit plans $ September 30, 2017 Other benefit plans $ Total $ 121,886 17,733 139,619 126,972 22,994 149,966 2,388 (1,478) 10 4,528 1,003 (4,512) 282 — (56) 652 — — 2,670 (1,478) (46) 5,180 1,003 2,724 — 17 4,166 961 (4,512) (4,243) 468 — (62) 740 — — 3,192 — (45) 4,906 961 (4,243) (1,037) (632) (1,669) (1,073) (749) (1,822) — (2,427) (2,427) 651 (3,744) (3,093) (814) (210) (1,024) (9,532) (2,417) (11,949) (1,324) (136) (1,460) 1,243 503 1,746 120,650 15,206 135,856 121,886 17,733 139,619 Movement in the present value of the defined benefit obligation: Defined benefit obligation, beginning of the year Current service cost Past service costs Re-measurements of other long-term benefits Interest cost Employee contributions Benefit payments from plan Benefit payments from employer Actuarial (gains) losses arising from changes in demographic assumptions Actuarial gains arising from changes in financial assumptions Actuarial (gains) losses arising from member experience Defined benefit obligation, end of year Movement in the fair value of plan assets: Fair value of plan assets, beginning of the year Interest income 100,450 3,835 — — 100,450 3,835 97,033 3,212 Return on plan assets (excluding interest income) Employer contributions Employee contributions Benefit payments from plan Benefit payments from employer Plan expenses Fair value of plan assets, end of year 1,732 3,251 1,003 (4,512) (1,037) (360) 104,362 — 632 — — (632) — — 1,732 3,883 1,003 (4,512) (1,669) (360) 2,570 2,583 961 (4,243) (1,073) (593) 104,362 100,450 — — — 749 — — (749) — — 97,033 3,212 2,570 3,332 961 (4,243) (1,822) (593) 100,450 (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 117 22. EMPLOYEE BENEFITS (CONTINUED) On October 16, 2017, the Alberta Treasury Board and Finance approved an amendment to the Alberta Hourly Plan which led to the elimination of the reserve for future supplements, and investment earnings accumulated thereon, effective January 1, 2017. As a result, during the first quarter of fiscal 2018, a $1.5 million pension income was recorded. The net defined benefit obligation can be allocated to the plans’ participants as follows: September 29, 2018 Pension benefit plans Other benefit plans September 30, 2017 Pension benefit plans Other benefit plans Active plan participants Retired plan members Deferred plan participants Other 45.8 49.9 1.3 3.0 100.0 41.6 58.4 — — 100.0 44.4 50.1 5.5 — 100.0 The Company’s defined benefit pension expense was as follows: September 29, 2018 Pension benefit plans $ Other benefit plans $ 2,388 (1,478) 360 693 10 1,973 282 — — 652 (56) 878 For the years ended Pension benefit plans $ 2,724 — 593 954 17 4,288 Total $ 2,670 (1,478) 360 1,345 (46) 2,851 September 30, 2017 Other benefit plans $ 468 — — 740 (62) 1,146 1,435 555 1,990 3,730 715 4,445 538 1,973 323 878 861 2,851 558 4,288 431 1,146 989 5,434 Pension costs recognized in net earnings: Current service cost Past service cost Expenses related to the pension benefits plans Net interest cost Re-measurements of other long-term benefits Pension expense Recognized in: Cost of sales Administration and selling expenses 42.3 57.7 — — 100.0 Total $ 3,192 — 593 1,694 (45) 5,434 (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 118 22. EMPLOYEE BENEFITS (CONTINUED) The following table presents the change in the actuarial gains and losses recognized in other comprehensive income: For the years ended September 29, 2018 Pension benefit plans $ Other benefit plans $ Total $ Pension benefit plans $ September 30, 2017 Other benefit plans $ Total $ 4,040 (3,870) (6,181) (2,773) (2,141) (6,643) 14,248 (523) 13,725 (10,208) (5,658) (15,866) 170 (8,954) (8,784) 4,040 (6,181) (2,141) (2,843) (2,037) (4,880) (7,518) (4,166) (11,684) Cumulative amount in income at the beginning of the year Recognized during the year Cumulative amount in income at the end of the year Recognized during the year, net of tax Principal actuarial assumptions used were as follows: September 29, 2018 September 30, 2017 For the years ended Pension benefit plans % 3.90 2.20 3.85 2.20 Other benefit plans % 3.90 3.00 3.85 3.00 Pension benefit plans % 3.85 3.00 3.35 3.00 Other benefit plans % 3.85 3.00 3.35 3.00 Company’s defined benefit obligation: Discount rate Rate of compensation increase Net benefit plan expense: Discount rate Rate of compensation increase (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 119 22. EMPLOYEE BENEFITS (CONTINUED) Assumptions regarding future mortality are based on published statistics and mortality tables. The current longevities underlying the value of the liabilities in the defined benefit plans are as follows: Longevity at age 65 for current pensioners: Males Females Longevity at age 65 for members aged 45: Males Females September 29, 2018 September 30, 2017 21.9 24.6 23.4 26.0 21.8 24.5 23.3 25.9 The assumed health care cost trend rate as at September 29, 2018 was 5.73% (September 30, 2017 - 5.6%), decreasing uniformly to 4.00% in 2040 (September 30, 2017 - 4.43% in 2034) and remaining at that level thereafter. The following table outlines the key assumptions for the year ended September 29, 2018 and the sensitivity of a percentage change in each of these assumptions on the defined benefit plan obligations and the net defined benefit plan costs. The sensitivity analysis provided in the table is hypothetical and should be used with caution. The sensitivities of each key assumption have been calculated independently of any changes in other key assumptions. Actual experience may result in changes in a number of key assumptions simultaneously. Changes in one factor may result in changes in another, which could amplify or reduce the impact of such assumptions. (Decrease) increase in Company’s defined benefit obligation: Discount rate Impact of increase of 1% Impact of decrease of 1% Rate of compensation increase Impact of increase of 0.5% Impact of decrease of 0.5% Mortality 99% of expected rate For the year ended September 29, 2018 Pension benefit plans $ Other benefit plans $ Total $ (15,069) 19,005 (1,827) 2,287 (16,896) 21,292 856 (845) 267 4 (4) 56 860 (849) 323 Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percent- age-point change in assumed health care cost trend would have the following effects: Effect on the defined benefit obligations Increase $ 1,926 Decrease $ (1,572) As at September 29, 2018, the weighted average duration of the defined benefit obligation amounts to 14.1 years (September 30, 2017 - 14.1 years). (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 120 23. CONVERTIBLE UNSECURED SUBORDINATED DEBENTURES The outstanding convertible debentures are as follows: Non-current Fifth series (i) Sixth series (ii) Seventh series (iii) Total face value Less net deferred financing fees Less equity component (i), (iii), (iii) Accretion expense on equity component September 29, September 30, 2018 $ — 57,500 97,750 155,250 (6,488) (6,930) 589 2017 $ 60,000 57,500 — 117,500 (3,121) (3,826) 991 Total carrying value - non-current 142,421 111,544 (i) Fifth series: On December 16, 2011, the Company issued $60.0 million Fifth series, 5.75% convertible unsecured subordinated debentures (“Fifth series debentures”), maturing on December 31, 2018, with interest payable semi-annually in arrears on June 30 and December 31 of each year, starting June 29, 2012. The debentures may be converted at the option of the holder at a conversion price of $7.20 per share (representing 8,333,333 common shares) at any time prior to maturity, and cannot be redeemed prior to December 31, 2014. The Company allocated $1.2 million of the Fifth series debentures into an equity component. During the year, the Company recorded $243 (September 30, 2017 - $187) in finance costs for the accretion of the Fifth series debentures. The Company incurred issuance costs of $2.7 million, which are netted against the convertible debenture liability. On March 28, 2018, a portion of the net proceeds from the issuance of the Seventh series, 4.75% convertible unsecured subordinated debentures (“Seventh series debentures”) was used to redeem the Fifth series debentures. The total amount redeemed was $59,990 as an amount of $10 was converted to 1,388 common shares by holders of the convertible debentures. (ii) Sixth series: On July 28, 2017, the Company issued $57.5 million Sixth series, 5.00% convertible unsecured subordinated debentures (“Sixth series debentures”), maturing on December 31, 2024, with interest payable semi-annually in arrears on June 30 and December 31 of each year, starting on December 31, 2017. The debentures may be converted at the option of the holder at a conversion price of $8.26 per share (representing 6,961,259 common shares) at any time prior to maturity, and cannot be redeemed prior to December 31, 2020. On or after December 31, 2020 and prior to December 31, 2022, the debentures may be redeemed by the Company, at a price equal to the principal amount plus accrued and unpaid interest, only if the current market price on the day preceding the date on which the notice is given is at least 125% of the conversion price of $8.26. Subsequent to December 31, 2022, the debentures are redeemable at a price equal to the principal amount thereof plus accrued unpaid interest. (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 121 23. CONVERTIBLE UNSECURED SUBORDINATED DEBENTURES (CONTINUED) (ii) Sixth series (continued): On redemption or at maturity, the Company will repay the indebtedness of the convertible debentures by paying an amount equal to the principal amount of the outstanding convertible debentures, together with accrued and unpaid interest thereon. The Company may, at its option, elect to satisfy its obligation to repay the principal amount of the convertible debentures, which are to be redeemed or which have matured, by issuing shares to the holders of the convertible debentures. The number of shares to be issued will be determined by dividing $1,000 (one thousand) of principal amount of the convertible debentures by 95% of the then current market price on the day preceding the date fixed for redemption or the maturity date, as the case may be. The Company allocated $2.6 million of the Sixth series debentures into an equity component (net of tax an amount of $2.0 million). During the year, the Company recorded $287 (September 30, 2017– $46) in finance costs for the accretion of the Sixth series debentures. The Company incurred underwriting fees and issuance costs of $2.7 million, which are netted against the convertible debenture liability. The fair value of the Sixth series convertible unsecured subordinated debentures is measured based on Level 1 of the three-tier fair value hierarchy and was based upon market quotes for the identical instruments. The fair value as at September 29, 2018 was approximately $59.2 million (September 30, 2017 – $59.4 million). (iii) Seventh series: On March 28, 2018, in connection with a bought deal offering filed on March 21, 2018, the Company issued 85,000 Seventh series debentures, maturing on June 30, 2025 and bears interest of 4.75%, with interest payable semi-annually in arrears on June 30 and December 31 of each year, commencing on June 30, 2018 for gross proceeds of $85.0 million. Then, on April 3, 2018, the Company issued an additional 12,750 Seventh series debentures pursuant to the exercise in full of the over-allotment option granted by the Company for gross proceeds of $12.8 million. As a result of the over-allotment, the total amount outstanding under the Seventh series is $97,750. The debentures may be converted at the option of the holder at a conversion price of $8.85 per share (representing 11,045,197 common shares) at any time prior to maturity, and cannot be redeemed by the Company prior to June 30, 2021. On or after June 30, 2021 and prior to June 30, 2023, the debentures will be redeemable in whole or in part from time to time at the option of the Company on not more than 60 days and not less than 30 days prior notice at a price equal to the principal amount thereof plus accrued and unpaid interest, provided that the weighted average trading price of the common shares, for the 20 consecutive trading days ending on the fifth trading day preceding the day prior to the date upon which the notice of redemption is given is at least 125% of the conversion price of $8.85 per Debenture Share. On or after June 30, 2023 and prior to the maturity date, the debentures may be redeemed at a price equal to the principal amount thereof plus accrued and unpaid interest. On redemption or on the maturity date, the Company may, at its option, elect to satisfy its obligation to pay the principal amount of the outstanding debentures by issuing and delivering to the holders of the debentures that number of debenture shares obtained by dividing the principal amount of the outstanding debentures which are to be redeemed or which have matured by 95% of the weighted average trading price of the RSI Shares on the Toronto Stock Exchange for the 20 consecutive trading days ending on the fifth trading day preceding the date fixed for redemption or on the maturity date, as the case may be. On redemption or on the maturity date, the Company will repay the indebtedness of the convertible debentures by paying an amount equal to the principal amount of the outstanding debentures, together with accrued and unpaid interest thereon. (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 122 23. CONVERTIBLE UNSECURED SUBORDINATED DEBENTURES (CONTINUED) (iii) Seventh series (continued): The Company allocated $4.3 million ($3.1 million net of tax) of the Seventh series debentures into an equity component. During the period, the Company recorded $255 in finance costs for the accretion of the Seventh series debentures. The Company incurred underwriting fees and issuance costs of $4.5 million, which are netted against the convertible debenture liability. The fair value of the Seventh series convertible unsecured subordinated debentures is measured based on Level 1 of the three- tier fair value hierarchy and was based upon market quotes for the identical instruments. The fair value as at September 29, 2018 was approximately $98.2 million. 24. SHARE CAPITAL AND OTHER COMPONENTS OF EQUITY During the second quarter of fiscal 2018, a total of $10 of the Fifth series debentures was converted by holders of the securities for a total of 1,388 common shares. This conversion is a non-cash transaction and therefore not reflected in the audited consolidated financial statement of cash flow. See Note 23, Convertible unsecured subordinated debentures. On May 22, 2018, the Company received approval from the Toronto Stock Exchange to proceed with a normal course issuer bid (“NCIB”). Under the NCIB, the Company may purchase up to 1,500,000 common shares. The NCIB commenced on May 24, 2018 and may continue to May 23, 2019. During the year, the Company purchased 736,900 common shares having a book value of $706 for a total cash consideration of $3,963. The excess of the purchase price over the book value of the shares in the amount of $3,257 was charged to deficit. All shares purchased were cancelled. In addition, the Company entered into an automatic share purchase agreement with Scotia Capital Inc. in connection with the NCIB. Under the agreement, Scotia may acquire, at its discretion, common shares on the Company’s behalf during certain “black-out” periods, subject to certain parameters as to price and number of shares. During fiscal 2017, a total of 96,500 common shares were issued pursuant to the exercise of share options under the Share Option Plan. See note 25, Share-based compensation. During fiscal 2017, further to a special resolution approved at the shareholders’ meeting of February 1, 2017, the Company reduced the stated capital by $100.0 million and the contributed surplus was increased by the same amount of $100.0 million. During fiscal 2017, a total of $435 of the Fourth series debentures was converted by holders of the securities for a total of 66,922 common shares. On August 5, 2017, the Company acquired all of the issued and outstanding shares of LBMT for a total consideration of $166.4 million (see Note 4, Business combinations). As part of the financing, a public offering was completed on July 28, 2017 consisting of subscrip- tion receipts (converted to 11,730,000 common shares upon closing of the transaction) for gross proceeds of $69.2 million ($66.8 million net of underwriting commissions and professional fees of $3.2 million and deferred tax of $0.8 million). As of September 29, 2018, a total of 105,008,070 common shares (September 30, 2017- 105,743,582) were outstanding. (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24. SHARE CAPITAL AND OTHER COMPONENTS OF EQUITY (CONTINUED) The Company declared a quarterly dividend of $0.09 per share for fiscal years 2018 and 2017. The following dividends were declared 123 by the Company: Dividends Contributed surplus: For the years ended September 29, 2018 September 30, 2017 $ 37,971 $ 34,896 The contributed surplus account is used to record amounts arising on the issue of equity-settled share-based payment awards (see Note 25, Share-based compensation). Capital management: The Company's objectives when managing capital are: – To ensure proper capital investment is done in the manufacturing infrastructure to provide stability and competitiveness of the operations; – To have stability in the dividends paid to shareholders; – To have appropriate cash reserves on hand to protect the level of dividends made to shareholders; – To maintain an appropriate debt level so that there is no financial constraint on the use of capital; – To have an appropriate line of credit, and; – To repurchase shares or convertible debentures when trading values do not reflect fair values. The Company typically invests in its operations between $15.0 million and $20.0 million yearly in capital expenditures. Management believes that these investments, combined with approximately $30.0 million spent on average annually on maintenance expenses, allow for the stability of the manufacturing operations and improve its cost competitiveness through new technology or process procedures. The Board of Directors aims to ensure proper cash reserves are in place to maintain the current dividend level. Dividends to share- holders will only be raised after the Directors have carefully assessed a variety of factors that include the overall competitive landscape, volume and selling margin sustainability, the operating performance and capital requirements of the manufacturing plants and the sustainability of any increase. The Company has a $265.0 million revolving credit facility. The Company estimates to use between $100.0 million and $175.0 million of its revolving credit facility to finance its normal operations during the year. (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 124 24. SHARE CAPITAL AND OTHER COMPONENTS OF EQUITY (CONTINUED) Capital management (continued): The Company monitors, on a quarterly basis, the ratio of total debt to earnings before interest, income taxes, depreciation and amorti- zation, adjusted for the impact of all derivative financial instruments (“adjusted EBITDA”) of the operating company. Through required lenders’ covenants, the debt ratio must be kept below 4:1 in order not to have restrictions on interest payments from Lantic to the Company up to a year after an acquisition and below 3.5:1 thereafter. At year-end, the operating company’s debt ratio was below 1.60:1 for fiscal 2018 and below 1.50:1 for fiscal 2017. Having satisfied the above factors, if cash is available, it will be used to repurchase the Company’s shares and convertible debentures when the Board of Directors considers that the current trading range does not reflect the fair trading value of the Company’s shares. As such, the Company puts in place a NCIB from time to time. The Company does not use equity ratios to manage its capital requirements. 25. SHARE-BASED COMPENSATION (a) Equity-settled share-based compensation: The Company has reserved and set aside for issuance an aggregate of 4,000,000 common shares (September 30, 2017 - 4,000,000 common shares) at a price equal to the average market price of transactions during the last five trading days prior to the grant date. Options are exercisable to a maximum of 20% of the optioned shares per year, starting after the first anniversary date of the granting of the options and will expire after a term of ten years. Upon termination, resignation, retirement, death or long-term disability, all share options granted under the Share Option Plan not vested shall be forfeited. On December 4, 2017, a total of 1,065,322 share options were granted at a price of $6.23 per common share to certain executives and senior managers. During fiscal 2018, a total of 60,000 share options were forfeited following the departure of a senior manager. During fiscal 2017, a total of 360,000 share options were granted at a price of $6.51 per common share to certain executives. In addition, during fiscal 2017, a total of 96,500 common shares were issued pursuant to the exercise of share options under the Share Option Plan for total cash proceeds of $521, which was recorded to share capital as well as an ascribed value from contributed surplus of $28. Compensation expense is amortized over the vesting period of the corresponding optioned shares and is expensed in the administration and selling expenses with an offsetting credit to contributed surplus. An expense of $189 was incurred for the year ended September 29, 2018 (September 30, 2017 - $74). (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25. SHARE-BASED COMPENSATION (CONTINUED) (a) Equity-settled share-based compensation (continued): The following table summarizes information about the Share Option Plan as of September 29, 2018: Exercise price per option $4.59 $5.61 $6.23 $6.51 Outstanding number of options at September 30, 2017 830,000 80,000 Options granted during the period — — Options forfeited during the period Outstanding number of options at September 29, 2018 Weighted average remaining life (in years) — — 830,000 80,000 — 1,065,322 (60,000) 1,005,322 360,000 — — 360,000 1,270,000 1,065,322 (60,000) 2,275,322 6.65 3.45 9.35 8.17 n/a 125 Number of options exercisable 490,000 80,000 — 72,000 642,000 The following table summarizes information about the Share Option Plan as of September 30, 2017: Exercise price per option $4.59 $5.61 $6.51 Outstanding number of options at October 1, 2016 850,000 156,500 — 1,006,500 Options granted during the period — — 360,000 360,000 Options exercised during the period (20,000) (76,500) — Outstanding number of options at September 30, 2017 830,000 80,000 360,000 (96,500) 1,270,000 Weighted average remaining life (in years) 7.65 4.45 9.17 n/a Number of options exercisable 150,000 80,000 — 230,000 Options outstanding held by key management personnel amounted to 1,655,322 options as at September 29, 2018 and 1,270,000 options as at September 30, 2017 (see Note 31, Key management personnel). The measurement date fair values were measured based on the Black-Scholes option pricing model. Expected volatility is estimated by considering historic average share price volatility. The inputs used in the measurement of the fair values of the share- based payment plans granted in the first quarter of fiscal 2018 are the following: Total fair value of options at grant date Share price at grant date Exercise price Expected volatility (weighted average volatility) Option life (expected weighted average life) Expected dividends $373 $6.31 $6.23 16.194% to 17.640% 4 to 6 years 5.71% Weighted average risk-free interest rate (based on government bonds) 1.647% to 1.760% (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 126 25. SHARE-BASED COMPENSATION (CONTINUED) (b) Cash-settled share-based compensation: i) Share Appreciation Rights (“SAR”): During the first quarter of fiscal 2017, a SAR plan was created under the existing Share Option Plan that entitle the grantee to a cash payment based on the increase in the share price of the Company’s common shares from the grant date to the settlement date. During the first quarter of fiscal 2017, a total of 125,000 SARs were granted at a price of $6.51 to an executive. Compensation expense is amortized over the vesting period of the corresponding optioned shares and is expensed in the administration and selling expenses with an offsetting debit / credit to liability. A gain on fair value change of $5 was recorded for the year ended September 29, 2018 (September 30, 2017 – an expense of $15). The liabilities arising from the SARs as at September 29, 2018 were $10 (September 30, 2017 - $15). The following table summarizes information about the SARs as of September 29, 2018: Outstanding number of units at September 30, 2017 Share price per unit Units granted during the period Units exercised during the period Units forfeited during the period Outstanding number of units at September 29, 2018 Number of units exercisable $6.51 125,000 — — — 125,000 25,000 The following table summarizes information about the Share Option Plan as of September 30, 2017: Outstanding number of units at October 1, 2016 Units granted during the period Units exercised during the period Units forfeited during the period Outstanding number of units at September 30, 2017 Number of units exercisable Share price per unit $6.51 — 125,000 — — 125,000 — (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 127 25. SHARE-BASED COMPENSATION (CONTINUED) (b) Cash-settled share-based compensation (continued): i) Share Appreciation Rights (“SAR”) (continued): The fair values at the measurement date were measured based on the Black-Scholes option pricing model. Expected volatility is estimated by considering historic average share price volatility. The inputs used in the measurement of the fair values of the SARs granted are the following: Options granted December 5, 2016 Total fair value of options Share price Exercise price Grant date Measurement date as at September 29, 2018 $53 $6.63 $6.51 $15 $5.47 $6.51 Expected volatility (weighted average volatility) 16.520% to 18.670% 15.197% to 17.246% Option life (expected weighted average life) Expected dividends Weighted average risk-free interest rate (based on government bonds) 2 to 6 years 5.43% 4 to 8 years 6.58% 0.740% to 1.160% 2.32% to 2.42% The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the SARs is indicative of future trends, which may not necessarily be the actual outcome. ii) Performance Share Units (“PSU”): During the first quarter of fiscal 2018, a PSU plan was created for executives that entitle them to a cash payment, with an aggregate of 224,761 PSUs having been granted by the Company at a share price of $6.31. In addition, an aggregate of 10,291 PSUs at a weighted-average share price of $6.01 were allocated as a result of the dividend paid during the last four quarters, as the participants also receive dividend equivalents paid in the form of PSU’s. As at September 29, 2018, an aggregate of 235,052 PSUs are outstanding. These PSUs will vest at the end of the 2017-2020 Performance Cycle based on the achievement of total shareholder returns set by the Human Resources and Compensation Committee (“HRCC”) and the Board of Directors of the Company. Following the end of a Performance Cycle, the Board of Directors of the Company will determine, and to the extent only that the Vesting Conditions include financial conditions, concurrently with the release of the Company’s financial and/or operational results for the fiscal year ended at the end of the Performance Cycle, whether the Vesting Conditions for the PSUs granted to a participant relating to such Performance Cycle have been achieved. Depending on the achievement of the Vesting Conditions, between 0% and 200% of the PSUs will become vested. The Board of Directors of the Company has the discretion to determine that all or a portion of the PSUs granted to a participant for which the Vesting Conditions have not been achieved shall vest to such participant. The value to be paid-out to each participant will be equal to the result of: the number of PSUs granted to the participant which have vested, multiplied by the volume weighted average closing price of the Common Shares on the Toronto Stock Exchange (the “TSX”) for the five trading days immediately preceding the day on which the Company shall pay the value to the participant under the PSU Plan, and such date will in no event occur after December 31 of the third calendar year following the calendar year in which the PSUs are granted. An expense of nil was recorded for the period ending September 29, 2018 (September 30, 2017 – not applicable) in administration and selling expenses. The liabilities arising from the PSUs as at September 29, 2018 was nil. (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 128 26. OPERATING LEASES The Company has financial commitments for minimum lease payments under operating leases for various mobile equipment and the premises for the sugar and maple product segments. Non-cancellable operating lease rentals are payable as follows: Less than 1 year Between 1 and 5 years More than 5 years September 29, 2018 September 30, 2017 $ 2,581 5,128 956 8,665 $ 1,988 3,770 188 5,946 For the year ended September 29, 2018, an amount of $3.9 million was recognized as an expense in net earnings with respect to operating leases (September 30, 2017 - $2.9 million). 27. COMMITMENTS As at September 29, 2018, the Company had commitments to purchase a total of 1,337,000 metric tonnes of raw cane sugar (September 30, 2017 - 1,708,000), of which 316,128 metric tonnes had been priced (September 30, 2017 – 286,000), for a total dollar commitment of $120.8 million (September 30, 2017 - $122.7 million). In addition, the Company has a commitment of approximately $43.5 million (September 30, 2017 - $43.1 million) for sugar beets to be harvested and processed in fiscal 2019. A subsidiary of the Company has $19.3 million (September 30, 2017 - $2.5 million) remaining to pay related to an agreement to purchase approximately $38.2 million (12.8 million pounds) (September 30, 2017 - $4.0 million; 1.5 million pounds) of maple syrup from the FPAQ. In order to secure bulk syrup purchases, the Company issued letters of guarantee for a total amount of $16.0 million in favor of the FPAQ (September 30, 2017 - $12.5 million). The letters of guarantee expire on March 31, 2019. During the year ended September 29, 2018, the Company entered into capital commitments to complete its capital projects for a total value of $19.6 million (September 30, 2017 - $6.3 million). The Taber beet sugar processing facility was established in 1950. Over the past few years, the Company has been actively working on solutions to reduce the air emissions footprint of the facility. The Taber facility obtained from Alberta Environment and Parks a variance for non-compliance of air emission standards valid until May 2019. As at the third quarter of fiscal 2018, the Company completed the engineering and project design to upgrade the Taber beet factory to be fully compliant with the new air emissions regulations. This solution is expected to require between $8.0 million to $10.0 million in capital expenditures of which, approximately $7.0 million to $9.0 million will be spent in fiscal 2019. 28. CONTINGENCIES The Company is subject to laws and regulations concerning the environment and to the risk of environmental liability inherent to its activities relating to its past and present operations. The Company, in the normal course of business, becomes involved from time to time in litigation and claims. While the final outcome with respect to claims and legal proceedings pending as at September 29, 2018 cannot be predicted with certainty, management believes that no provision was required and that the financial impact, if any, from claims related to normal business activities will not be material. (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 29. EARNINGS PER SHARE Reconciliation between basic and diluted earnings per share is as follows: Basic earnings per share: Net earnings 129 For the years ended September 29, 2018 September 30, 2017 $ $ 48,729 21,906 Weighted average number of shares outstanding 105,600,860 96,027,566 Basic earnings per share Diluted earnings per share: Net earnings Plus impact of convertible unsecured subordinated debentures and share options Weighted average number of shares outstanding: Basic weighted average number of shares outstanding Plus impact of convertible unsecured subordinated debentures and share options 0.46 0.23 48,729 5,694 54,423 21,906 467 22,373 105,600,860 22,173,123 96,027,566 7,197,978 127,773,983 103,225,544 Diluted earnings per share 0.43 0.22 As at September 29, 2018, the 862,661 share options were excluded from the calculation of diluted earnings per share as they were deemed anti-dilutive. As at September 30, 2017, the Fifth series debentures, representing 8,333,333 common shares were excluded from the calculation of diluted earnings per share as they were deemed anti-dilutive. (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 130 30. SUPPLEMENTARY CASH FLOW INFORMATION Non-cash transactions: Additions of property, plant and equipment and intangible assets included in trade and other payables Investment tax credit included in income taxes payable September 29, 2018 September 30 2017 $ 1,041 — $ 247 — October 1, 2016 $ 135 220 31. KEY MANAGEMENT PERSONNEL The Board of Directors as well as the executive team, which include the President and all the Vice-Presidents, are deemed to be key management personnel of the Company. The following is the compensation expense for key management personnel: Salaries and short-term benefits Attendance fees for members of the Board of Directors Post-employment benefits Share-based compensation (note 25) 32. PERSONNEL EXPENSES Wages, salaries and employee benefits Expenses related to defined benefit plans (1) (note 22) Expenses related to defined contributions plans Share-based compensation (note 25) For the years ended September 29, 2018 September 30, 2017 $ 2,763 907 120 184 3,974 $ 3,603 627 164 89 4,483 For the years ended September 29, 2018 September 30, 2017 $ 83,688 2,851 4,552 184 91,275 $ 72,674 5,434 3,992 89 82,189 (1) On October 16, 2017, the Alberta Treasury Board and Finance approved an amendment to the Alberta Hourly Plan which led to the elimination of the reserve for future supplements, and investment earnings accumulated thereon, effective January 1, 2017. As a result, during fiscal 2018, a $1.5 million pension income was recorded. (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 32. PERSONNEL EXPENSES (CONTINUED) The personnel expenses were charged to the consolidated statements of earnings and comprehensive income or capitalized in the consolidated statements of financial position as follows: 131 Cost of sales Administration and selling expenses Distribution expenses Property, plant and equipment For the years ended September 29, 2018 September 30, 2017 $ 72,173 17,234 1,434 90,841 434 91,275 $ 66,941 13,255 1,564 81,760 429 82,189 33. RELATED PARTIES Lantic has outstanding redeemable Class B shares of $44.5 million that are retractable and can be settled at Lantic’s option by delivery of a note receivable from Belkorp Industries Inc., having the same value. The note receivable bears no interest and has no fixed terms of repayment. The Class B shares are entitled to vote, but on a pro rata basis at a meeting of shareholders of Lantic. Under the terms of a voting trust agreement between Belkorp Industries Inc. and Rogers, Rogers is entitled to vote the Class B shares so long as they remain outstanding. Due to the fact that Lantic has the intent and the legal right to settle the note receivable with the redeemable preferred shares, these amounts have been offset and, therefore, are not presented on the consolidated statements of financial position. Belkorp Industries Inc. also controls, through Lantic Capital, the two Lantic Class C shares issued and outstanding. The Class C shares entitle Lantic Capital to elect five of the seven directors of Lantic, but have no other voting rights at any meetings of shareholders of Lantic, except as may be required by law. (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 132 34. SEGMENTED INFORMATION The Company has two operating and reportable segments, sugar and maple products. The principal business activity of the sugar segment is the refining, packaging and marketing of sugar products. The Maple products segment processes pure maple syrup and related maple products. The reportable segments are managed independently as they require different technology and capital resources. Performance is measured based on the segments’ gross margins and results from operating activities. These measures are included in the internal management reports that are reviewed by the Company’s President and CEO, and management believes that such information is the most relevant in the evaluation of the results of the segments. Transactions between reportable segments are interest receivable (payable), which are eliminated upon consolidation. Revenues Cost of sales Gross margin Depreciation and amortization Results from operating activities Additions to property, plant and equipment and intangible assets Total assets Total liabilities For the year ended September 29, 2018 Sugar $ 601,958 499,380 102,578 13,495 72,102 Maple products $ 203,243 174,968 28,275 4,979 13,352 Corporate and eliminations $ — — — — (1,354) Total $ 805,201 674,348 130,853 18,474 84,100 23,352 1,792 — 25,144 For the year ended September 29, 2018 Sugar $ 742,993 (899,026) Maple products $ 292,232 (248,871) Corporate and eliminations $ (165,016) 627,333 Total $ 870,209 (520,564) (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 34. SEGMENTED INFORMATION (CONTINUED) Revenues Cost of sales Gross margin Depreciation and amortization Results from operating activities Additions to property, plant and equipment and intangible assets Total assets Total liabilities Sugar $ 655,851 582,143 73,708 13,105 41,247 17,306 Sugar $ 744,311 (918,313) 133 For the year ended September 30, 2017 Maple products Corporate and eliminations $ 26,666 23,076 3,590 491 948 64 $ — — — — (1,164) Total $ 682,517 605,219 77,298 13,596 41,031 — 17,370 For the year ended September 30, 2017* Maple products $ 255,538 (212,129) Corporate and eliminations $ (164,375) 629,124 Total $ 835,474 (501,318) * Includes adjustment of prior year purchase price allocation (see Note 4, Business combinations and Note 16, Goodwill). Revenues were derived from customers in the following geographic areas: Canada United States Other For the years ended September 29, 2018 September 30, 2017 $ 613,213 112,642 79,346 805,201 $ 624,992 50,055 7,470 682,517 (In thousands of dollars except as noted and per share amounts)2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 134 ROGERS SUGAR INC. Corporate Information DIRECTORS M. Dallas H. Ross, (1) (3) Chairman and CEO Kinetic Capital Limited Partnership Dean Bergmame, (2) (3) Director William S. Maslechko, (3) Partner Burnet, Duckworth & Palmer LLP Daniel Lafrance, (1) (2) Director Gary Collins, (2) Senior Advisor Lazard Group (1) Nominees to Board of Directors of Lantic Inc. (2) Audit Committee Members (3) Nominating and Governance Committee Members LEGAL COUNSEL Davies, Ward, Phillips & Vineberg Montreal, Quebec TRADING SYMBOL RSI STOCK EXCHANGE LISTING The Toronto Stock Exchange ANNUAL MEETING The annual meeting of Shareholders to be held at 9:00 AM (Pacific Time) January 31, 2019 at the Vancouver Marriott Pinnacle Downtown 1128 West Hastings St. Vancouver, British Columbia V6E 4R5 Tel: (604) 684-1128 ADMINISTRATIVE OFFICE 4026 Notre-Dame Street East Montreal, Quebec H1W 2K3 Tel: (514) 527-8686 Fax: (514) 527-8406 REGISTRAR & TRANSFER AGENT Computershare Investor Services Inc. Toronto, Ontario AUDITORS KPMG LLP Montreal, Quebec INVESTOR RELATIONS Manon Lacroix Tel: (514) 940-4350 Fax: (514) 527-1610 WEBSITE lanticrogers.com (In thousands of dollars except as noted and per share amounts)Rogers Sugar Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSLANTIC INC. Corporate Information — Management DIRECTORS OF LANTIC INC. M. Dallas H. Ross, (1) Chairman & CEO Kinetic Capital Limited Partnership AUDITORS KPMG LLP Montreal, Quebec Gary Collins, (2) Senior Advisor Lazard Group Michael Heskin, (2) Vice President Finance and CFO Belkorp Industries Inc. Donald G. Jewell, Managing Partner RIO Industrial Daniel Lafrance, (1) (2) Director John Holliday, President and Chief Executive Officer Lantic Inc. (1) Rogers Sugar Inc. Nominees (2) Audit Committee Members OFFICERS John Holliday, President and Chief Executive Officer Patrick Dionne, Vice President, Operations and Supply Chain Diana R. Discepola, Director of Finance Jean-François Khalil, Vice President, Human Resources Manon Lacroix, Vice President Finance, Chief Financial Officer and Secretary Michael Walton, Vice President, Sales and Marketing MANAGEMENT OFFICE 4026 Notre-Dame Street East Montreal, Quebec H1W 2K3 Tel: (514) 527-8686 Fax-General: (514) 527-8406 Fax-Administration: (514) 527-1610 PLANT ADDRESSES 123 Rogers Street, Vancouver, British Columbia V6B 3N2 Western Operation Operations Manager: Gary Mustvedt Tel: (604) 253-1131 Fax: (604) 253-2517 5405 – 64th Street Taber, Alberta T1G 2C4 Western Operations Operations Manager: Andrew Llewelyn-Jones Tel: (403) 223-3535 Fax: (403) 223-9699 230 Midwest Road Scarborough, Ontario M1P 3A9 Plant Manager: David Saulnier Tel: (416) 757-8787 Fax: (416) 757-2315 4026 Notre-Dame Street East Montreal, Quebec H1W 2K3 Plant Manager: Serge Allaire Tel: (514) 527-8686 Fax-Gen.: (514) 527-8406 BOTTLING FACILITIES L.B. Maple Treat 1037 boul. Industriel, Granby, Québec J2J 2B8 Great Northern 331 rue Principale, Saint-Honoré-de-Shenley, Québec G0M 1V0 Décacer 21 rue Industrielle, Dégelis, Québec G5T 2J8 Highland Sugarworks PO Box 58, Websterville Vermont, 05678, USA Designed and written by MaisonBrison Communications Printed in Canada LanticRogers.com 

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