Thursday, 28 March 2024

Announcement

HALFYR: RBC: Rubicon Six-Month Review - December 2012

22 Feb 2013 17:05NZX
This document is the Interim Review of operations for Rubicon''s 2013 fiscal
year (i.e. for the six months ended 31 December 2012). It addresses in
summary the operational and financial highlights for the period in each of
the Company''s major activities.
_____________

Our Annual Review for 2012 is available on our website - www.rubicon-nz.com.
In addition to our shareholder reports, from time to time we make
announcements to the New Zealand Exchange. These can be viewed either on the
NZX website or on Rubicon''s own website, where a complete history of our
releases is maintained.

There are statements included 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,
including - the markets and geographies in which ArborGen and Tenon operate
and compete, foreign exchange rate fluctuations, US housing market
conditions, US and global credit market conditions, intellectual property
protection, regulatory approvals, public and customer acceptance of
biotechnology products, customer adoption of advanced seedling products, the
success of ArborGen''s research and development activities, weather conditions
- and other factors (many of which are beyond the control of Rubicon). As a
result of the foregoing, actual results and conditions may differ materially
from those expressed or implied by such statements.

Rubicon''s functional currency is the US dollar, and accordingly, unless
otherwise stated, all references to dollars in this Review are references to
US dollars.
_____________

TENON

The US housing market - Tenon''s largest market exposure - is now in the early
stages of a full recovery. This is an extremely positive development for
Tenon, although it is really only in very recent months that this improvement
has occurred in any meaningful way. To date, this recovery has been centred
on new house construction, but the forward looking data now indicates that
the rebound should also spread into a higher level of renovation and
remodelling activity later in this calendar year. Given Tenon is exposed to
both segments of the market (but more particularly to the latter segment), it
should see the benefit of this broader market recovery reflected in its
earnings as the calendar year advances.

These next charts give an idea of the extent of the recovery that has
occurred in the new home construction segment. Although still well off its
previous peak of 2.3 million homes, you can see that new housing starts have
almost doubled now - up from a cyclical and historical low of only 478,000
homes per annum to around 900,000 per annum today.

[ chart ]

Importantly, this new housing recovery has been quite sudden relative to the
depth and length of the down-turn. This next chart shows this clearly, with
current housing starts being up 28% on those recorded only a year ago
(December 2011). Building permits have also increased significantly over this
same period, and at 925,000 currently, they are now up 32% on the permit
level of a year ago.

[ chart ]

This noticeable lift in new housing starts and building permits indicates
that this segment of the market has now turned for the positive. Other
supportive (January 2013) indicators include -
? New home sales - up 9% in year-over-year;
? New home prices - up 14% year-over-year; and
? New home inventory - which at 4.9 months of supply, is now well below its
peak level of over 12 months of supply.

This segment is also being supported by record low mortgage rates in the US.
30-year (tax deductible) mortgage rates are now at 3.4%, which compares with
around 4% a year ago - so it is certainly an affordable time to buy a home.

Indicators are now also turning positive in the renovation and remodelling
segment of the market. The two key drivers of this segment are existing home
sales (as home buyers tend to renovate nine months or so after purchasing
their home) and existing home prices (as home-owners need to be confident
that they will recover the value of their remodelling investment, and in some
cases increased home equity provides the finance for the remodelling
activity). Both of these drivers now appear to be moving in the right
direction.

The chart on the next page shows the Case-Shiller index which tracks the path
of existing single-family homes sales prices. You can see that this
seasonally-adjusted index has moved up every month for each reported month in
calendar 2012, and prices are up 6% on the recent low recorded a year ago.

[ chart ]

This next chart shows the months-of-supply of existing home inventory - a
measure which factors in both the rate of home sales and the inventory pool
available for sale. You can see that this measure has noticeably and
positively trended down, from 6.4 months in June 2012 to only 4.2 months in
January, where historically 6 months'' supply has been considered to represent
a balanced market.

[ chart ]

On top of all this, pending home sales in December were up 6.9% year-on-year,
and the inventory of existing homes available for sale is now at its lowest
point for 13 years. Most reported data is now very favourable to an on-going
cyclical recovery.

Because of the natural lag that exists between these drivers and the
resulting remodelling and renovation activity that usually follows in the
future, Tenon hasn''t yet seen demand pick up in this segment in its product
categories, beyond the small localised regional lift in activity that
resulted from Hurricane Sandy. It should do so however, and in this respect
this next chart from Harvard''s recent Housing Study shows the strong uplift
that is expected to occur in this segment later in calendar 2013, once this
timing lag has cleared.

[ chart ]

When all of the charts above are considered, along with their supporting
market data, you can see that the "big picture" environment for Tenon is now
changing, and that the US housing cycle is at last turning in Tenon''s favour.
Although there are some notable hurdles to a full US housing market recovery
- unemployment, access to mortgage credit, home foreclosures, and resolution
of the US "fiscal cliff," being the main concerns - and moving forward the
month-to-month data is likely to be a little bumpy, it appears clear now that
we are heading out of the deep cycle-trough that has plagued the industry for
too many years now.

As noted above, it has only been in the relatively recent months that the US
housing market recovery has taken hold, and to date it has really only been
in one (i.e. new home construction) of the two segments comprising the total
market. Accordingly, the six-month financial period under review largely
reflects a "pre-recovery" US market for Tenon and its direct competitors. It
is important to understand that for that reason it is the forward earnings
profile that is now providing positive momentum for listed stocks in the
sector, rather than the historic results discussed below in this Review.
Having said that, Tenon''s earnings result for the six months to 31 December
2012 was in line with market expectations for this "pre-recovery" period. In
summary -

? At $174 million, consolidated Revenue was up 7.4% on the $162 million
recorded for the corresponding six-month period last year. This top line
growth came from increased sales in pro-dealer activities - up more than 20%
on the previous period - as this market segment began to recover, and also
from the impact of new product introductions launched last year, such as the
Creative Stair Parts program which saw stair sales increase by 35%. The price
of Tenon''s highest grade of lumber, moulding and better (M&B), also lifted 5%
in the period, reflecting a tightening supply chain and rising demand.

Sales volumes also benefited from both geographic and product
diversification. For example, Tenon''s Taupo manufacturing operation increased
its high-value lumber sales into both China and Europe, rebalanced its
product portfolio across lumber, clear board and solid lineal mouldings
products to optimise customer sales and margin opportunities, and expanded
its activities into Australia.

? The "thinness" of the industry supply chain in a now recovering US housing
market saw manufacturers (including Tenon''s own Taupo operation) place
customers (i.e. distributors into the US, such as Empire) on product supply
allocation restrictions during the period. Accordingly, Cost of Sales
increased in the period, as third-party suppliers pushed through product
price increases in this very tight supply environment, and also as Tenon''s
absolute volume of purchases increased to match market demand.

While Tenon''s gross profit margin did compress slightly in the period by just
over 1% (normalised for non-recurring costs), to a large degree this was a
direct result of the path of the NZ dollar - particularly the NZD:USD cross
rate, which strengthened from 79 cents at 30 June 2012, to 82 cents at
balance date, and which as at the time of writing had increased even further
to around 84 cents.

Unfortunately, this factor is likely to remain with Tenon for the balance of
the year. Internally, we think of this adverse currency movement as
representing a 5% gross profit margin decline in the profitability of Tenon''s
NZ manufacturing activities, which it must make up with further cost out
initiatives across the Group - particularly given that the gains from the $5
million Taupo profit improvement programme put in place only last year have
effectively now been "stolen" by the strengthening NZD currency to date.
During the period under review, examples of such further cost-out initiatives
that were put in place include the -

? Completion of the consolidation of Ornamental''s manufacturing activities
onto one US site in North Carolina (NC). The order files and manufacturing
lines have now been transferred, the operation has been integrated into
Tenon''s North American shared services operation, and all surplus Canadian
property has now been sold releasing $3 million to debt repayment. The
results for the six months just completed, include all costs relating to
manufacturing "start-up" of the product lines now being produced at the
single NC site. Manufacturing efficiencies will be evident in the second six
months'' results;

? Relocation of Southwest''s Dallas operation to a larger, special purpose
warehousing facility. Although the floor space has been expanded to match
increased demand forecasts, efficiency gains will allow Southwest to achieve
an effective decrease in per square foot warehouse space and a lower overall
dollar cost; and

? Implementation of IT enhancements across the Group, such as electronic
order confirmation, delivery, and invoicing, which will not only assist in
working capital management but also in lowering back-room administration
costs.

? Operating Profit before Financing Costs was a loss of $1 million, compared
with a loss of $5 million (including $2 million of business re-engineering
costs) in the corresponding period last year. However, the earnings figure
that equity analysts tend to focus on for company comparative purposes is
EBITDA (please refer to note 10 to the Financial Statements), because that
number removes distortions caused by differences in asset age and
depreciation policies, and by different debt : equity funding structures.
EBITDA increased from a $2 million loss last year to a profit of $1 million
for the current six-month period.

? Tenon''s net debt (i.e. interest bearing debt net of cash) increased from
$39 million at 30 June 2012 to $44 million at balance date. This increase is
a direct result of the increased inventory it needs to carry as the market
enters its recovery phase and the need to ensure it has no stock-outs with
its large delivery-sensitive customers as sales grow in its core product
lines (please also refer to OUTLOOK section below).

ARBORGEN
The ArborGen text is drawn largely from the December ASM presentations made
and discussions therein, as shareholders present at the ASM felt it was
valuable explanatory information that should be  shared / repeated in this
interim Review.

With ArborGen, there is an important parallel to Tenon''s story - i.e. as the
US housing market recovery gets underway the demand for wood will grow,
whether that be for Tenon''s mouldings & millwork and outdoor products, or for
structural lumber, panels, flooring products, and so on. In turn, this means
more trees need to be harvested, and as a consequence more trees will need to
be replanted - which, of course, plays directly into ArborGen''s business
model.

[ graphic ]

Loblolly pine tree planting levels in the US South-East have declined from
around 1 billion or so seedlings per annum before the US housing bubble, to
only over 600 million today, and this has occurred "in sync" with the decline
in the US housing market. As the housing market recovers - both in new home
construction and renovation and remodelling activity - so too will ArborGen''s
seedling sales volume, and in this way ArborGen will be a natural beneficiary
of a recovering market in the US. To quantify this, ArborGen believes that a
return to a mid-cycle level of housing activity would see current planting
levels lift by over 50% (with a lag effect, to account for increased
harvesting decisions being finalised and for the necessary forest land
preparation to occur). This lift will be further supported by the continuing
move towards plantation forestry, and by the increasing global demand for
wood in the developing Asian countries.

Of course, it is not just about absolute sales volumes for ArborGen - it is
also about the mix of seedling types that it sells. To this point, this next
chart indicatively shows that for non-biotech genetics, in loblolly pine in
the US the immediate goal is to over time increase the share of volume that
ArborGen sells in the form of mass control pollinated seedlings (MCP) and
varietal seedlings, where ArborGen''s margins will be considerably higher.
Biotech products (which are not shown on this chart) will be further additive
to the genetic value planted.

There is no need to repeat in full the ArborGen story again in this Review,
as Shareholders will all know it well. MCP and varietal seedlings deliver
much higher value to landowners than do industry-standard open pollinated
(OP) seedlings, because of the -

? Higher volume of valuable saw logs they produce per acre (as opposed to the
much lower value pulp wood);
? Consistency with which they deliver that log out-turn; and
? Shorter time they require to reach harvest age.

To give an understanding of the value that these seedlings can create, an
acre of land planted with MCP genetics can, in present value terms, easily
more than double the per acre return delivered to a landowner who is
currently planting standard OP seedlings - and of course varietals take this
value increment to the next level again. This value lift is dramatic, and as
this next chart shows, there is nothing else that a landowner can possibly do
with silvicultural management - whether it be more efficient land
preparation, improved weed control, less fertiliser, or reduced planting cost
- that can produce anywhere near the levels of value uplift that genetic gain
can deliver. The quality of the genetics planted "swamps" all other
controllable factors.

[ graph ]

ArborGen''s desire to advance the deployment of higher quality forestry
genetics is not a new idea - it has happened before in the agriculture
industry. To show this, the graph on the next page plots the history of corn
yields from the equivalent of the forest industry''s open pollinated seedlings
right through to very advanced biotech corn products. The value that higher
value genetics have delivered over time to this industry is quite obvious.

If we consider where US loblolly pine sits on a development timeline like
this, it is right back in the very early days of genetic improvement (circled
in orange on the chart below), and that is why the opportunity is just so
incredibly large for ArborGen - quantum leaps in forestry genetic value can
be made.

[ chart ]

So, as we reported in our Annual Review to Shareholders, on 15 August 2012
ArborGen announced that it had strengthened its position in loblolly pine
genetics by finalising the acquisition of its only global varietal pine
competitor - CellFor. CellFor had a head-start on ArborGen in varietals,
having invested more than $140 million in advanced varietal-genetics
technology. It had built the capability to produce hundreds of millions of
embryos at scale, cost-effectively, and it had an extensive tree trial base
in the US, NZ, and Brazil. In short, it was the leader in its space. When
CellFor''s varietal technology, trials, and current products, are combined
with ArborGen''s existing leadership position in MCP products, its own
varietal development programme, and its leading customer-base, ArborGen is
clearly the global leader in advanced loblolly pine seedling products.

Just one example - tree trials - is sufficient to justify ArborGen''s
acquisition of CellFor.

Tree trials are extremely important for forestry customers. While customers
will look at the projected genetic data ArborGen gives them, at the end of
the day they like to confirm it for themselves. So ArborGen needs to have
tree trials in place that it can show customers - "seeing is believing."
Fortunately these don''t have to be fully grown 25 year old trees, as
foresters have well proven biometric models that allow them to project with
reasonable certainty, what a tree will look like at harvest, based on what it
looks like at its selection age. Selection age for loblolly pine typically
tends to be 6-8 years of age. So having 6-8 year old trial data and physical
tree trials to show customers, is absolutely critical, as it is just not
possible to convince foresters to buy seedlings without trials and trial data
from selection age trees.

[ chart ]

The first bar in the chart above shows what the age profile for ArborGen''s
varietal trials looked like last year, before the acquisition of CellFor. The
second bar shows what it is now like with the inclusion of CellFor''s trials
and with the passage of a year. As you can see, around 80% of ArborGen''s
varietal trials will be beyond the critical six-year age next year. Not only
does ArborGen now have these necessary trials, but the data output from them
is very compelling.

By way of a generalised example of this, the first "heat map" shown on the
next page records the spatial distribution of trees at selection age in a
composite hectare of land planted in industry-standard OP seedlings. The
green blocks represent trees that will grow into high value sawlogs, the red
represents trees that will only be useable for pulp, and the orange
represents natural attrition. Given sawlogs sell for up to 4 -5 times the
price of pulp logs, obviously the more green on this map the better. If they
plant OP seedlings, then this is the picture that foresters will see - and
unfortunately, there''s just not a lot of green on the map.

[ graphic ]

However, if this OP map were to be compared with a varietal "heat map"
distribution at the same age (shown below), the picture would be quite
different. Indeed, the vast value difference in outcomes between a hectare of
OP trees and a hectare of varietals is quite obvious in this comparison.

[ graphic ]

As you can see from the two distributions, the very desirable green section
on the map massively increases under the varietal planting, which means the
value to the landowner has increased significantly, because of the much
higher percentage of land employed that will produce the 4-5 times more
valuable sawlogs. So (as noted earlier), while planting MCP seedlings can
more than double the per-acre return to land-owners, when you look at these
two maps, it''s not too difficult to understand how varietals can take that
genetic improvement step to an even higher level. The comparison also helps
explain why the acquisition of CellFor''s trials and trial data are so central
to ArborGen''s future varietal sales plan, and as a consequence, to locking in
the value of ArborGen''s core US business.

The value of CellFor to ArborGen is not limited to the US market. This is
because CellFor also had varietal plantings in other geographies - but
particularly in Brazil, where some of their trials are now at selection age.
These trials now offer ArborGen an entry strategy into the second largest
loblolly pine market behind the US, and offers ArborGen the future
opportunity to leverage its extensive pine varietal genetics and commercial
scale production technologies into a completely new market.

The CellFor acquisition and the resultant benefits that will accrue to
ArborGen, lends support to our belief that the Rubicon share price continues
to reflect only a fraction of the full value potential that ArborGen offers.
The chart below, which was included in the 2012 Annual Review sent to
Shareholders, is repeated again here to reinforce the point. (This subject is
discussed further in the GOVERNANCE section below.)

[ graphic ]

FINANCIAL

As Rubicon''s functional currency is the US dollar, our financial statements
generally refer to US dollars unless otherwise stated. All numbers are
rounded to the nearest million. As Rubicon has majority ownership (59%) of
Tenon, NZ International Reporting Standards (IFRS) require Tenon''s Income,
Cash Flows and Balance Sheet financial statements to be consolidated into
Rubicon''s statements. This is the basis upon which our financial statements
are presented in this Review.

On 5 July 2012 we concluded a capital raise by way of a 1:3 rights offering,
raising the full NZ$21 million (US$15 million, net of fees) we sought. All of
Rubicon''s Directors and officers took up their rights in full, and the fact
that not one share of the offer needed to be allocated to outside investors,
was an indication of the extremely strong support the offer received from the
Company''s existing shareholder base - support for which we are very grateful.

As a result of our capital raise, Rubicon''s consolidated debt (net of cash
balances) as at balance date was $52 million, comprising $44 million in Tenon
and $8 million in Rubicon Limited. As Rubicon owns only 31.67% of ArborGen,
ArborGen is treated as an associate and its debt is not consolidated into
Rubicon''s balance sheet.

During the period, ArborGen re-negotiated its two existing bank funding
facilities. The US facility was extended out to 3 August 2013, and increased
in size by a further $6.5 million. ArborGen''s NZ facility was re-established
under a 3-year deal, which means its expiry will not occur until 30 November
2015. Tenon''s current syndicated facility does not expire until July 2016.
Tenon''s debt is non-recourse to Rubicon Limited, and this is also the case
for ArborGen''s debt.

The table below provides a "snap-shot" of our consolidated operating earnings
performance for the period under review - i.e. it reports on the Group''s
EBITDA for the six months to 31 December 2012, compared with the two
immediately preceding six-month periods (i.e. the six-month periods to 30
June 2012 and 31 December 2011). As discussed in the TENON section of this
Review, we focus on EBITDA in this analysis, as that is the measurement most
analysts use to compare companies, because EBITDA is a measurement that
allows comparability across companies with different aged assets and
depreciation policies, and different funding structures (i.e. different debt
: equity mixes).

[ table ]

In reviewing these numbers, it is important to understand that ArborGen''s
commercial operations are cash and EBITDA positive today, even after
including the expenditure being made to develop the ''next generation''
products it wishes to bring to market. Indeed, in the period under review
ArborGen invested almost $5 million on its research and development program,
for its pipeline of MCP, varietal, and biotech-enhanced products. The $2
million shown in the earnings table above represents only that component of
the total spend that is not allowed to be capitalised to its product pipeline
under IFRS rules - i.e. expenditure on products that are not sufficiently far
advanced to meet the definition of development rather than research
expenditure. As ArborGen''s pipeline of products moves closer to
commercialisation, a higher percentage of expenditure on those products will
be capitalised over time.

Tenon''s earnings continued to be adversely affected by a very strong NZD:USD
currency cross rate and the depressed US housing market. Although we are now
confident that the worst is behind us in terms of the macro US housing
environment, and the US market now appears to have entered the initial stages
of a strong recovery phase, the NZD has continued to gain momentum and
strength (please also refer OUTLOOK section) and this factor will likely be
with us for the remainder of the fiscal ''13 year.

Regardless, and as we have commented previously, the bottom line earnings
result (which after financing expense and taxation, was a loss of $3 million)
is a long way away from being indicative of the underlying value of our Tenon
and ArborGen investments (for the reasons just noted). With time, as ArborGen
matures and Tenon is supported by the more favourable operating environment
now emerging, our future earnings results will grow to reflect the true value
of both of these two businesses.

GOVERNANCE
Our ASM was held in Wellington (NZ) on 14 December 2012. Over 86% of the
Company''s issued shares were voted at the meeting. This is the highest voting
statistic the Company has ever had, and it is a reflection of the high level
of interest our investors have in the Company, and of our consolidated share
register. All resolutions were passed with a majority in excess of 87% of
shares voted, which is an indication of shareholder alignment with Board and
management views as to the potential we see for Rubicon moving forward.

Although the Rubicon share price has recovered to be approximately 40% above
the rights offering price at the time of writing, relative to our view of the
Company''s value potential it has underperformed. Rubicon''s historic share
price performance appears largely to have been driven by -

? A few selling shareholders, more recently those who have made a 30% gain
since the rights offering in the under-subscription pool and who have
determined to realise their gain;

? The poor macro-US housing environment and its flow on effect on Tenon; and

? The dismal performance of the US "clean technology" bio-products stocks we
follow, which are off approximately 80% over the past 18 months or so, and
which has affected Rubicon to the extent that investors use these stocks as
proxies for ArborGen.

While there is not much we can do about the first of these, the second factor
is now clearly turning for the positive and by the end of the fiscal year it
should be strongly in Tenon''s favour rather than acting as the head-wind we
have faced for the past five years or so. To this point, our ASM
presentations (which are freely available on our website at
www.rubicon-nz.com) outlined the future potential for Tenon in a recovering
US housing market environment. This, combined with improved US housing data,
has been very positive for Tenon''s recent share price performance, which, at
the time of writing, had increased by approximately 35% over the two months
since our ASM. While this is good news, we still believe Tenon''s traded share
price is still below "fair value" as at this point in the cycle, and this
view is supported by an equity analyst report released by the Edison Group
which valued Tenon in a range of NZ$1.79 - $2.05 per share (inclusive of tax
losses).

As to the third, "clean-tech" factor, we do take every investor opportunity
to differentiate ArborGen from the individual performance of the bio-product
companies that make up the clean-tech performance shown in this chart. For
example, unlike ArborGen, which is the recognised global leader in its space
and the largest supplier of products to its markets and customers, many of
the companies included in the clean-tech performance index shown in the above
chart do not have economically viable commercial products or customers at all
today. Unlike ArborGen, the risk profile of most of them is high. This
comment also applies to their capital expenditure requirements and to the
level of market competition each faces. And the defensibility of their
business models is typically not as strong as ArborGen''s position is either.
For these reasons, we feel any comparison to this index performance is harsh
and not supportable, and we are actively engaged in dispelling such beliefs
through further investor education.

OUTLOOK

Tenon

At our ASM, we outlined what the earnings potential might look like for Tenon
under future mid-cycle conditions - conditions where Tenon sees EBITDA of $35
million being achievable (assuming a mid-cycle NZ:USD cross rate of 70 cents,
and assuming historic margin levels). This expanded potential is a direct
result of the significant organic growth that Tenon has put in place through
the down-cycle (for a discussion of the growth that has now been embedded in
the Company please refer to Tenon''s 2012 Annual Report, which is also
available at www.tenonglobal.com). To date the gains from these growth
initiatives have been masked by the extent of the downturn that has taken
place, however they should become obvious as the pace of recovery gains
momentum and the market progresses towards a mid-cycle path.

In relation to the more immediate term, like most participants in the sector,
Tenon will not be giving specific earnings guidance. Put simply, there
continue to be too many uncontrollable factors that could affect the
projected outcome - the frustratingly strong and strengthening NZD:USD cross
rate, and resolution to the US "fiscal cliff" issue being the two immediate
factors that could chart a significantly different course than is currently
anticipated. Those factors aside, Tenon''s expectation is that its North
American financial performance in the second six months of the year will
comfortably surpass that recorded for the six months just completed. The
final NZ performance however, will largely be determined by the path of the
NZD:USD cross rate, which is currently some 7 cents above Tenon''s budgeted
level.

Tenon''s growth activities will continue as planned. For example, Tenon will
continue with its new product introductions, with the goal of expanding the
breadth of its product range into both the retail and pro-builder channels
that it has created over the past five years. Examples of this are "FindIt",
a new internally developed proprietary pull-out kitchen cabinet product which
Lowe''s has asked Tenon to distribute into over 900 stores commencing in the
first quarter of the current calendar year, Empire''s range of "Plank
Paneling" products introduced into 600 Lowe''s stores, and Southwest''s new
doors program which will focus on the Texas pro-builder market. Tenon will
also be targeting expansion potential in the US pro-builder channel, by way
of acquisitions, as opportunities present themselves.

[ photos ]

Tenon has previously indicated the importance that China will play in its
future. Pleasingly, the NZ Government, through both ministerial involvement
and the activities of New Zealand Trade and Enterprise (NZTE), has been very
supportive of Tenon''s China goals and we are very grateful for their on-going
assistance. Tenon''s immediate plan is to continue to increase the sale of
product out of its Taupo operation directed into the China market, and to
take a position in the wholesale market there - a pre-requisite to building
an in-market position of size. Tenon plans to be in a position to report
positively on both of these initiatives in the next six months.

At the same time as it has been growing its business through the down-cycle
Tenon has also been actively reducing debt - from a peak of $90 million to
$44 million recorded at balance date. Tenon does not now see that level
materially declining in the short term, as the market recovery that is now
underway will naturally generate a need for increased working capital as its
sales lift and as it expands its product categories further. Clearly, we do
not wish to see Tenon''s growth artificially constrained in a recovering
market, and we also do want to be in a position to pursue acquisitions that
will further strengthen its business activities. Accordingly, Tenon is now
actively reviewing its existing funding, to ensure it provides the company
with sufficient flexibility moving forward.

ArborGen

In the Outlook statement to Shareholders in our Annual Review released in
September, we commented that ArborGen''s immediate focus, post the completion
of its recent company-wide restructuring process, would be on growing its
base business, by -

? Participating in increased industry sales that will occur with recovery in
the US housing cycle;
? Moving customers up the genetic value ladder to MCP and varietal offerings;

? Building on new business opportunities - e.g. bioenergy in the US; and
? Investing in geographic growth - e.g. Brazil and China.

To this list must now be added the integration of the recently completed
CellFor acquisition, to ensure that the technology improvement and cost /
efficiency gains envisaged are actually realised, the expanded product
offerings to customers becomes a reality, and the new-market growth
opportunities CellFor offers are implemented.

Shareholders can also expect ArborGen to continue with its biotech investment
program in the manner outlined in our Annual Review - i.e. "...resources
allocated to future biotech potential will be targeted on research and
development for the creation of the truly ''blockbuster'' category of products
- i.e. traits that are highly demanded by customers but which are
unattainable under traditional breeding technologies."

1 April 2013 represents the beginning of ArborGen''s next funding year, by
which time the quantum and source of funding for the new ArborGen fiscal year
will be known and agreed. Although Rubicon and its two ArborGen partners each
has the financial capacity to continue to meet their on-going minimum annual
capital contributions to ArborGen (i.e. $5 million p.a.), each year a full
review is still undertaken to determine the optimal funding path for
ArborGen. This funding can potentially be provided from a variety of sources
- including from on-going partner contributions (as has been the case in the
past), from private capital, from bank funding, or from a mix of the above.
As always, this is a complex matter, which will need to take account of
liquidity / dilution impacts and the general health of equity markets,
amongst other things. The partners are yet to determine the ArborGen funding
path for 2013, but we will advise Rubicon shareholders once the decision has
been made.

Once again we would like to take the opportunity to thank all our
stakeholders for their continued support. As usual, we will update you
throughout the year on progress being made towards our goals for both
ArborGen and Tenon.

Steve Kasnet
Chairman

Luke Moriarty
Chief Executive Officer

22 February 2013

[ END ]
End CA:00233358 For:RBC    Type:HALFYR     Time:2013-02-22 17:05:05
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