Rubicon : Annual Result for the year to 30 June 2016

ANNUAL REVIEW YEAR ENDED 30 JUNE 2016 (released 29 August 2016)

There are statements in this Review that are 'forward looking statements.' As these forward-looking statements are predictive in nature, they are subject to a number of risks and uncertainties relating to Rubicon, and our Tenon and ArborGen investments, some of which are beyond our control. As a result of the foregoing, actual results and conditions may differ materially from those expressed or implied by such statements.

Tenon's risks and uncertainties include - that its operations and results are significantly influenced by the level of activity in the various sectors of the economies in which it competes, particularly in North America. Fluctuations in industrial output, commercial and residential construction activity, capital availability, housing turnover and pricing, levels of repair and remodelling and additions to existing homes, new housing starts, relative exchange rates, interest rates, and profitability of customers, can each have a substantial impact on Tenon's results of operations and financial condition. Other Tenon risks include competitor product development and demand, pricing and customer concentration risk, and the outcome of the Tenon Strategic Review which is unknown and uncertain (although a Blue Wolf Capital offer has been announced today in respect of Tenon's North America division). Grant Samuel is preparing a valuation report for Tenon shareholders, which shows a value range of NZ$3.01 - NZ$3.25 per Tenon share assuming completion of the Blue Wolf offer, however that value is subject to a number of uncertainties and risks beyond the control of Tenon, and it is also pre transaction / wind-up costs. The actual outcome will be determined by the Strategic Review process, which may differ materially from the indicative Grant Samuel valuation. Tenon discloses its results separately on the NZX, and those releases may contain additional information on its performance, risks and opportunities than does Rubicon's reporting of Tenon's activities. Accordingly, Rubicon shareholders should also refer to Tenon's separate NZX announcements.

ArborGen's risks and uncertainties include (in addition to those of Tenon) - the global markets and geographies in which it operates, intellectual property protection, regulatory approvals, public and customer acceptance of genetically engineered products, customer adoption of advanced seedling products, the success of ArborGen's research and development activities, weather conditions and biological matters. Rubicon is the majority shareholder in Tenon, and effectively controls the operational / financial performance and strategic direction of Tenon as a result. In contrast, Rubicon is only a minority equity investor in ArborGen, and accordingly it does not control the operational / financial performance and strategy of ArborGen, and it is therefore dependent upon another of ArborGen's partners voting in a like-minded manner in order for Rubicon to achieve its desired ArborGen outcomes.

As a result of the foregoing, actual results and conclusions may differ materially from those expressed or implied by such statements.

All references in this document to $ or "dollars" are references to United States dollars unless otherwise stated.

Tenon Highlights - 2016

Shareholder Value Announcements

• Strategic Review progressing -

  • Blue Wolf Capital ("Blue Wolf") offer received today for Tenon's North American operations -

    • US$110 million purchase price

    • Implied FY'16 EBITDA5 multiple of 7.3x (adj for the LSCFP8)

    • Offer to go to Tenon shareholders for approval in November

    • Will be combined with large shareholder pro-rata capital return

    • Grant Samuel to prepare independent report for Tenon shareholders

    • All Tenon debt to be repaid on closing

  • Separate review process in relation to Australasian Clearwood assets continuing

• Tenon final dividend of NZ6.502 cps announced, up 30% on last year's final dividend

  Financial and Operational

• Improved operational earnings performance

  • Revenue4 of $430 million, up 9% (cpp7 $396 million excluding forest/log sales4)

  • A goodwill write-down of $31 million recorded in relation to Blue Wolf offer along with $3 million of Strategic Review costs expensed, saw Tenon report a net loss after tax of $(21) million

  • Excluding both those costs, net profit after tax more than doubled, to $13 million (cpp $6 million), and this was after expensing $3 million of restructuring/impairment costs in North America and Australasia (refer EBITDA commentary below)
  • Gross margin expanded to 26% (cpp 24% adjusted for forest and log sales)
  • Operating earnings lifted 130% to $23 million (cpp $10 million) and EBITDA5 doubled to $26 million (cpp $13 million), prior to the $31 million goodwill write- down noted above in relation to the Blue Wolf offer, $3 million of Strategic Review costs, and $3 million of restructuring/impairment costs
• Key operational initiatives were completed -
  • The two NZ manufacturing capital projects, totalling $7 million, were concluded -

    • The optimising edger was commissioned in August / September '15, the ripline project was commissioned in April / May '16, and both are achieving targeted benefits

    • Annualised EBITDA benefits projected to exceed $4 million pa

      • Texas warehouse consolidation completed -

        • 367,000 sq ft building was completed in Texas in June '16

        • Houston and Dallas facilities now consolidated into this new mega-facility

        • Logistics, efficiency and rental gains moving forward

      • New procurement and forecasting system (Data Profits) now in place
      • New business won -

        • New, and extended, National Home Centre product programmes won (e.g. hardwood boards, commodity boards, etc)

      • Territories expanded -

        • Pro-dealer regional expansion implemented (e.g. Louisiana and New York)

      • Balance sheet strengthened -
        • Net cash from operating activities lifted materially, to $35 million (cpp $2 million)
        • Closing net debt reduced by $22 million, to $36 million (cpp $58 million), reflecting -

          • Cash flow from operations, less -

            • $3 million expenditure on the completion of the NZ manufacturing projects, and $2 million in other capex (e.g. IT-related spend in NA distribution activities)

            • $5 million in shareholder dividend payments

            • $3 million in financing costs

      Outlook

• US housing market to continue to improve
• NZ$:US$ cross rate forecast to decline from current levels as the year advances
• Operational initiatives put in place in FY'16 to be reflected in FY'17 earnings
• EBITDA5 and Net Earnings targeted to improve3 further ARBORGEN HIGHLIGHTS - 2016
• Production & sales

  • Revenue increased to $37 million

  • Advanced genetics targets met -

    • US advanced genetics increased to ≈ 25% of loblolly volumes (cpp 22%)

    • ANZ advanced genetics ≈ 85% of total radiata revenue

  • Global production was up 5% y-o-y, to 324 million seedlings (cpp 309 million)

    • Brazil sales increased 400%, to 30 million seedlings

      • 25 million eucalyptus (cpp 6 million)

      • 5 million loblolly (cpp nil)

    • ANZ sales were flat 'y-o-y' at 21 million

    • Although demand was strong, US sales were down 3% to 273 million, due to -

      • Floods in the US South affecting seed germination and damaging crops

      • Planting crew availability and unseasonal weather impacting site preparation

• Herbicide tolerant eucalyptus (biotech) field trial approval received from the regulatory authority (CTNBio) in Brazil
• Focus remains on critical commercial milestones for forward financing event
• Cash requirements for working capital and growth continue to be refined -

  • Surplus land sales advanced

  • Employee litigation settled

  • Restructuring initiatives completed

  • US acquisition opportunities progressed

• New Debt facilities put in place -

  • A new 20-year term loan facility of $13 million, was established with AgSouth

  • The existing NBSC bank relationship has been extended out to August 2017, with a $15 million working capital line

  • Funding lines of $28 million are now available to ArborGen in North America

  • Australasian operations are funded by a NZ$4.5 million facility, expiring in 2018

• On track to meet EBITDA operational break-even / positive FY'17 run rate objective
• Macro-conditions outlook remains favourable

  • US housing activity levels forecast to continue to grow over next 5 years

  • Brazil forestry and wood products market demand conditions to remain positive

  • New Zealand / Australia conditions to improve off current 'trough' conditions