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Edited Transcript of AGT.TO earnings conference call or presentation 12-Nov-18 1:30pm GMT

Q3 2018 AGT Food and Ingredients Inc Earnings Call

TORONTO Nov 14, 2018 (Thomson StreetEvents) -- Edited Transcript of AGT Food and Ingredients Inc earnings conference call or presentation Monday, November 12, 2018 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lori Ireland

AGT Food and Ingredients Inc. - CFO

* Murad Al-Katib

AGT Food and Ingredients Inc. - President, CEO & Director

* Omer Al-Katib

AGT Food and Ingredients Inc. - Director of Corporate Affairs & IR

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Conference Call Participants

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* George Doumet

Scotiabank Global Banking and Markets, Research Division - Analyst

* Greg R. Colman

National Bank Financial, Inc., Research Division - MD and Energy Services and Special Situations Analyst

* Jacob Jonathan Bout

CIBC Capital Markets, Research Division - MD of Institutional Equity Research

* Joel Jackson

BMO Capital Markets Equity Research - Director of Fertilizer Research

* John Chu

Laurentian Bank Securities, Inc., Research Division - VP of Research & Diversified Agriculture Analyst

* Steven P. Hansen

Raymond James Ltd., Research Division - SVP

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the AGT Food and Ingredients Inc.'s Third Quarter 2018 Financial Results Conference Call. (Operator Instructions)

I would now like to turn the conference over to Omer Al-Katib, Director, Corporate Affairs and Investor Relations. Please go ahead, Mr. Al-Katib.

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Omer Al-Katib, AGT Food and Ingredients Inc. - Director of Corporate Affairs & IR [2]

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Thank you, operator.

Good morning, and thank you for joining us on our third quarter 2018 conference call. On the line with us today, we have Murad Al-Katib, President and CEO of AGT Food and Ingredients; Lori Ireland, our Chief Financial Officer; and Gaetan Bourassa, our Chief Operating Officer.

Before we get started, I would like to remind everyone that today's call may include forward-looking statements. Such forward-looking statements are given as of the date of this call and involve certain risks and uncertainties. A number of factors and assumptions were applied in the formulation of such statements, and actual results could differ materially.

This call may also include references to certain non-IFRS financial measures. For additional information with respect to forward-looking statements to factors and assumptions as well as a reconciliation to IFRS measures, we direct you to our news release, our website as well as our recent SEDAR filings.

With that, I'd like to turn things over to Murad for commas before questions. Murad?

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [3]

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Before I get to an update on our business, I'd like to provide a brief comment on the nonbinding privatization proposal currently before the Special Committee of AGT's Board of Directors and the last update in the press release on October 1, 2018.

Special Committee and the management bidding group have been working extremely hard in an attempt to finalize the transaction at the previously announced price at $18 per share. Negotiations between the Special Committee and the bidding group are ongoing, and the bidding group continues to work towards finalizing its financing arrangements for the transaction. While there's no set time line for concluding the process, the parties expect to be in a position to announce whether the transaction will proceed before the end of the year. At this time, there could be no assurance that the proposed transaction will proceed. Neither the Special Committee nor the Board of Directors of AGT has approved the proposed transaction, and our buyer's group proposal remains nonbinding. As a result, we're going to provide no further information or discussion regarding the proposal during this third quarter 2018 conference call.

I'd like to discuss the conditions we currently see in the market, some of these challenges AGT is facing with the market conditions and what impact it's having on the business.

We continue to see challenges in global pulse markets; challenges that have been present in our business for a few quarters now and that are impacting the business; the challenges that are principally impacting volumes and margins in our traditional shipping period, which is the period after harvest in North America, which traditionally starts the end of the quarter 3 period and leads through the end of the calendar year and then to early the new year, quarter 4 and quarter 1.

First, before we get into too much detail, I'm going to ask Lori Ireland, our CFO, to provide a summary of the Q3 results. Lori?

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Lori Ireland, AGT Food and Ingredients Inc. - CFO [4]

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Thanks, Murad.

Overall, adjusted gross profit per tonne improved for quarter 3 in 2018 compared to quarter 2 due to metric tonne improvements in all segments. In the pulse and grain processing segment, adjusted gross profit and adjusted EBITDA per tonne were consistent when comparing Q3 to Q2 of 2018 and improved when compared to Q3 of 2017. Stronger margin in the Turkish business, along with consistent margins out of Canada, resulted in improved margins when compared to the prior quarter and the same period of the prior year. Adjusted gross profit and adjusted EBITDA per tonne decreased when comparing the 9 months ended September 30, 2018, to the same period of the prior year. This was due largely to the impact of duties on sales to India that were imposed in 2017 and continue to affect 2018 sales significantly in the first part of the year.

The food ingredient and packaged foods segment showed earnings improvements in both the quarter and the year-to-date September 2018 when compared to the same periods of 2017. This is due to strong margins in pasta as a result of the devaluing Turkish lira and lower input costs for pasta. In addition, margins at the Minot facility were strong due to programs associated with protein sales and popcorn sales out of the South Africa -- or, I'm sorry, popcorn sales out of South Africa also contributed.

The bulk handling and distribution segment showed improvements in adjusted gross profit per tonne and adjusted EBITDA per tonne for quarter 3 2018 when compared to quarter 2 2018 due to gradual improvements from the Indian subsidiary as well as strong results with the European platform. Adjusted gross profit per tonne decreased when comparing the 3 and 9 months ended September 2018 to the same periods of the prior year. This is a lingering result of tariffs imposed on imports to India affecting sales in late 2017 and the first part of 2018. Adjusted EBITDA for the 3 months ended September 2018 improved over the same period in the prior year due to cost savings initiatives implemented as a result of the constrained margins.

Overall, adjusted EBITDA for Q3 was $18.5 million and trailing 12 months adjusted EBITDA at Q3 was $67.3 million.

General and administrative and marketing, sales and distribution expense include costs related to share-based comp, nonrecurring costs related to the privatization bid and the write-down of the inland container port investment in North Dakota in the amount of $4 million.

There's an income tax recovery in Q3 of 2018 in the amount of $4 million for the quarter, $12.4 million year-to-date, resulting from losses for tax purposes by most subs but predominantly in Turkey, North America and India.

Noncash foreign exchange was a loss of $14.2 million in Q3 of 2018, $37.9 million year-to-date. This number is derived from mark-to-market gains and losses on intercompany balances as well as the loss in mark-to-market of the cross-currency swap on the bonds. Other comprehensive losses due to foreign exchange are mainly due to FX losses in Turkey; 1 TL was CAD 0.3297 in January of 2018. That same 1 TL is now CAD 0.2057 in September, a decrease of 37.6% in 9 months and a decrease of almost 27% in the third quarter alone.

Net working capital as a percentage of 12-month revenue and in absolute dollars decreased in Q3 2018 when compared to Q2 2018 and compared to Q4 2017.

Accounts payable increased from the second quarter of 2018.

At September 30, 2018, AGT was in compliance with all financial covenants. Thank you.

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [5]

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Thanks, Lori.

The oversupply conditions in global pulse markets that we've discussed in recent periods, along with the ongoing trade tariff policies and policy of volume restriction in India, continues to challenge global commodity product flows and with them AGT's ability to execute our business plan. This has particularly been evident in our core pulse and grain processing segment, our traditional business that accounts for a significant portion of our earnings. Certainly, our other segments, particularly our food ingredient and packaged foods segment, has provided some of the necessary diversification in our business over the period, with customers in this segment less impacted or influenced by commodity market cycles and conditions.

Harvest is complete in Western Canada and the Northern Tier states. Completion was a little late with harvest in Saskatchewan delayed due to wet, cold and, in some cases, snow after an early start.

With harvest complete, reports on production volumes are becoming available. It appears that significant volumes of pulses were again produced in 2018 and high carry-in from 2017, where shipping volumes were reduced due to market conditions we've discussed. Pulse production in Canada dropped by only 7% estimated from the last year and quality is slightly above average. These levels of production in Canada and the United States, coupled with levels of production in India and Turkey that were in the range of normal annual production in 2018, have continued governmental intervention in markets like India and have slowed commodity trade flows and impacted prices. These have not assisted markets in moving towards normalization.

There have not been significant progress reported with regard to policies by the Indian government with respect to these tariffs, volume restrictions and their own policies to support their local agricultural production and farmers, including minimum support prices.

With high levels of consumption in India, India is a driver of volumes and prices in global pulse markets with buyers in markets around the world taking their lead from what happens in India. Economic conditions in Turkey, with volatility in local currency affecting local importers and their ability to access credit and execute purchases destined for regional markets, is another factor that we're monitoring closely to determine what impacts there may be on AGT's business.

With regard to oversupply, the factors that markets appear to be the most able to address, we believe that global markets must work through the oversupply condition, assimilating new market conditions, duties, tariffs and prices into their product pricing decisions to materially reduce volumes available in the markets to provide market signals that gradual recovery is beginning to emerge in the markets. We expect that improving conditions may become evident in the second half of 2019 as margins reach a bottom prior to that and allow and anticipate a slow recovery of our volumes, utilization of our production facilities, and with that, our margins and our earnings. Supply constraints and effective resolution of governmental policy in pulse markets is needed to assist in that normalization of shipping margins and volumes. And we will look to that to aid in finding a return to traditional market flows.

It should be noted AGT can't control the timing of the market recovery. This is evidenced by the slower pace of normalization of volumes and margins in the market than maybe we anticipated a few quarters ago. While these conditions work through, certainly our other segments aid us in providing stable free cash flow, generating offsetting earnings for our other segments that have been impacted and allow us to focus on our business as a whole.

Our food ingredient and packaged foods segment had seen volume gains and increased margins, allowing AGT a platform that links its global farmer origination network to value-added processing facilities and ultimately to food ingredient and retail food customers as this segment advances.

I'm going to go to questions. However, I do wish to share our view.

We believe that demand fundamentals remain intact for our business. However, the pace of normalization to what would be considered normal trade is something we continue to monitor and execute strategies to increase the likelihood that when normalization occurs, we'll be ready.

As we've stated, it's our goal to remain competitive to position ourselves to ensure we have the ability to be among the first to respond when the market calls for more staple foods, grains and pulses as conditions stabilize in the near term with market dynamics we're hopeful will improve in 2019.

Again, I thank you for your interest, and I'll turn it back to Omer, and we'll go to questions.

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Omer Al-Katib, AGT Food and Ingredients Inc. - Director of Corporate Affairs & IR [6]

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Thanks, Murad.

Operator, can we open the question queue, please, with the first question?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Joel Jackson with BMO Capital Markets.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research [2]

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Murad, what I'd like to explore is on the food and packaged business. You had a really good quarter year-over-year, and you gave the 4 reasons why it was better. Can you break down sort of in priority what caused the year-over-year performance in that business, whether it's Turkish lira -- you talked about popcorn sales, talked about protein sales programs and I guess lower pulse prices? And so break out what was the biggest impact in order? And then are these food margins sustainable into Q4, into early '19? Or are there a lot of onetimes in the quarter?

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [3]

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Well, yes, I'm going to start by saying one thing, that there aren't lot of onetimes. So that's not the impact. The biggest impact definitely was that pasta was very positive. The margins in pasta were quite materially affected by the devaluation of the Turkish lira. And so it's actually the opposite, right, because at this point in the cycle, we're buying a lot of Turkish domestic durum. And so you turn around and you look at the Turkish durum situation. Prior to the devaluation, we were buying durum around TRY 1,175. So at the time the Turkish lira was around TRY 4.6; that was about $255 a tonne. Post devaluation, we were paying around TRY 1,300 instead of TRY 1,175, but the Turkish lira went all the way to TRY 6.4, which was $203. So there was roughly about a $52 a tonne impact just on the local daily purchases of durum wheat. In addition to that, our op costs in Turkish lira, we have a pretty material energy cost in terms of electricity and steam and other things. So from that perspective, that was one of the factors.

In addition, South Africa, if you remember a year ago, they were in a drought situation. They were just coming out of it. Popcorn sales were quite material. So that was also positive.

And then Minot, frankly, on the food ingredient side, we are seeing our starch monetization initiatives. So the ability to increase our average starch price. We've seen stable pea prices, which really feed into our input costs. So we do expect that the positive trend in margin that we saw in that step-up, I mean, we're getting back to -- closer to levels we were about 1 year, 1.5 years ago before we took a bit of a downturn in the margins in this segment. So we are expecting that even though a big part of it was the onetime in the Turkish lira devaluation, we do expect that margins in this segment are going to continue quite positively.

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Operator [4]

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Our next question comes from Jacob Bout with CIBC.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [5]

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Murad, so maybe just give us your thoughts on the dividend, what point you'd look at possibly cutting or suspending it. And then on the debt covenant side, what was the adjusted EBITDA-to-interest? And maybe remind us what the adjustments to EBITDA are for the covenant.

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [6]

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Well, let's just start with dividend policy. The dividend policy is reviewed quarterly by the board. And again, it was reviewed this quarter, and the dividend was declared and paid. At this point, I can't make any comment on the board's view that, that dividend policy may change. So I can honestly say that there hasn't been a discussion around the reduction or suspension. So I'm not going to speculate on that point. So at this point, again, the dividend's declared and we'll review it every quarter as we go forward. The minimum EBITDA-interest expense is measured at the APP level and also at the AGT level. And the covenant itself was minimum EBITDA-to-interest expense at the APP level is 2.5:1 is the covenant, and I can tell you that we're testing at a level that is materially higher than that. So we don't have any headroom issues. APP, of course, our Alliance Pulse Processors subsegment of AGT, is where we have the food ingredients business. And so a large part of our earnings is actually located in the banking group segment. And so from that perspective, we don't have any issues there.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [7]

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What was the covenant for the quarter?

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [8]

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Sorry, go ahead, Jacob.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [9]

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What was the covenant for the quarter? Sorry, what was the actual number...

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [10]

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We don't actually disclose the covenant level. It is -- the covenant is measured at 2.5:1, And we were materially above that. So we don't actually have the subsegment out, because we don't disclose the subsegment results. So it's difficult to do that. The minimum EBITDA-to-interest expense ratio, oh, that's actually what we measure at the APP level.

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Lori Ireland, AGT Food and Ingredients Inc. - CFO [11]

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Yes.

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [12]

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So that's it. So yes, we've got no issues on that covenant.

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Operator [13]

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Our next question comes from Steve Hansen with Raymond James.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [14]

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Murad, just curious if you're contemplating today investing further capital into the business, either trying to take advantage of the downturn and/or continuing to take advantage of the food ingredient momentum? I mean, how would you think about deploying additional capital in the business today? Do you think there's opportunities in the downturn year to take advantage of some stress in the system. I know you deployed a little bit of capital into the Churchill terminal recently. And -- but just how do you think about deploying one side versus the other as it stands today?

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [15]

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Well, just to clarify first, the Churchill terminal investment was not a material investment from us of any capital. So our total investment into that was in the range of around $250,000. So that was more a Fairfax initiative than ours. So -- but listen, there's no doubt that there's opportunities in a downturn. At the same time, from our perspective at this point, we don't have the capacity to do a material amount of deployment of capital. I mean, right now, we're focused very much on managing what we have. We have debt levels that are elevated as a result of the temporary downturn in our earnings. And so we're very focused on a very managed CapEx program. We've committed to the CapEx related to our bulk program, building out the Delisle grain processing and consolidation center and the Chuka Creek terminal, the container terminal in Regina that we're doing with CN Rail. So those 2 projects are ongoing, budgeted CapEx. And outside of that, we're going to be focusing our food ingredient initiatives on some small maintenance and efficiency CapEx projects that will help us to monetize our starch. But I think you're going to see a hold-the-line-type approach over the next few quarters. Things are not normalizing as quickly as we had hoped. And in that time, we're in capital preservation mode, and we're going to make sure that we try and execute stability and a bit of recovery before we start to deploy much more capital.

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Operator [16]

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Our next question comes from Greg Colman with National Bank Financial.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services and Special Situations Analyst [17]

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Murad, just a quick question on the balance sheet there, keeping on that theme. As we go into year-end here with sort of standard net working capital requirements as well, do you anticipate your net debt to increase in the same sort of vein that we've seen in prior years, anywhere from sort $60 million to $120-ish million on an absolute level? Or is some of the factors that we've been talking about this year, which are I would say transient or onetime-y -- we've been talking about the lira currency; we've been talking input costs -- going to mute that balance sheet growth.

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [18]

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Yes, we are expecting that one of the big increases usually in the quarter 4 period is Australia, and Australia is going through one of the worst droughts in the past 30 years. So it would be 2 or 3 of -- top 2 or 3 worst droughts of the past 3 decades. And so we're expecting volumes in Australia to be quite muted over the quarter 4 period into harvest as whatever is harvested is going to be guarded safely by the farmers to ensure that they have some product to sell into windows. In addition to that, I mean, again, volumes are muted a bit, and the product flows are not material. In fact, we're attempting to do our best to continue our initiatives to look at ensuring that in 2019, we have a positive cash flow from operating activities. We need to reverse the working capital trend and reduce our capital deployed in this cycle. And so we'll be doing our best to look at every nook and cranny within the business on our balance sheet to unlock working capital and to attempt to return capital in order to reduce debt. So we're going to be doing our best to do that. So we're going to do our best. We don't expect that we'll certainly have a big swell on capital for the fourth quarter.

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Operator [19]

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Our next question comes from John Chu with Laurentian Bank Securities.

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John Chu, Laurentian Bank Securities, Inc., Research Division - VP of Research & Diversified Agriculture Analyst [20]

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Murad, maybe just on the bulk handling. You seem to have a big improvement on the EBITDA per tonne. And can you maybe just try to give us a bit more detail? Is it just all cost savings? And what's the sustainability level of that going forward?

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [21]

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Yes, John, we have had an initiative to recreate the bulk segment. And a couple of things played in here. One is all of the negative drain of the India situation last year. Our India business is in the bulk handling and distribution segment. And so the material drain of duties and negative margins were all in that segment. Those have largely washed through the system. And so we did see for the first quarter in maybe 5 quarters our India subsidiary actually had a positive EBITDA. So I think that was one of the contributors. The other thing is, is that, well, the European business had strong positive margins, but the bulk handling business in North America, albeit it's still scaling because the Fibreco terminal in Vancouver is not complete until fall of 2019, so we'll see that in quarter 4 of 2019, the business that we are doing, whether it be our durum wheat business or others, we are having small positive earnings in that. And so positive earnings in all of our business lines there have led to quite a material increase in the overall segment. And so we are seeing the bulk handling segment in 2020 and '21 and '22 in our 5-year plan as having a material opportunity to be one of the contributors to earnings recovery. So I think what you're seeing there isn't abnormal. I think you're going to see a recreated contributor and not just an add-on business that we used to kind of look at this segment. It's going to be one of our segments of focus. And we have deployed capital there, so we're hopefully going to start to see some of the benefits of that as we go forward.

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Operator [22]

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Our next question comes from Joel Jackson with BMO Capital Markets.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research [23]

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I had a couple in my round 2 here. So in the pulse business, operating costs are actually rising a bit. Is -- could you talk about that? And is there a way to sort of reduce some of your -- like scale down some of your operating costs? And then as you look into 2019, is it possible like, I mean, reasonably possible that in your base case that the food business will generate higher earnings than pulses?

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [24]

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Yes. So, Joel, let me take the first part of your question on op costs. Lori did mention that we had some onetime costs that she, well, broke through. These are not actually onetimes related to the actual business per se. One was a write-down of a container terminal investment that we had undertaken in North Dakota, at a container terminal in Minot, North Dakota. We did do a $4 million impairment write-down of that particular investment. It was in conjunction with another party.

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Lori Ireland, AGT Food and Ingredients Inc. - CFO [25]

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Also there, we -- because of the Turkish lira devaluation, we did have some bad debts in Turkey. So we had some allowances set up in Turkey just due to some liquidity issues of some smaller buyers, and those have been included in G&A costs within the Arbel Group.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research [26]

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Okay, so what's...

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [27]

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Certainly, we're going to...

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research [28]

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What's the right run rate then for that business and for op costs? Maybe I should ask it that way.

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Lori Ireland, AGT Food and Ingredients Inc. - CFO [29]

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I would say you should probably knock about $2 million or $3 million off of the op costs.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research [30]

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For the year?

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Lori Ireland, AGT Food and Ingredients Inc. - CFO [31]

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Yes.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research [32]

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Okay. And for the second question, Murad?

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [33]

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Yes, the second question, I think, just if I could -- just clarify your question. Is that why are we deploying more capital into the food ingredient?

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research [34]

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This year, food is going to be -- this year, food is going to enjoy higher EBITDA than pulse processing, it looks like, right? And so next year, do you see the same thing happening?

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [35]

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Do I see the food ingredient segment driving higher earnings than the pulse segment?

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research [36]

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No, no, no. Do you see the food and -- the food business segment earning higher EBITDA in 2019 than pulse and grains?

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [37]

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I'm a bit confused by your question. I mean, yes, the margins in that segment are a lot higher, yes. And I expect it to continue to be.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research [38]

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What I guess I'm asking is the pulse -- I guess I'm asking that in next year, do you believe the food and packaged ingredients business will generate higher earnings overall than the pulse and grain earnings overall?

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [39]

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Oh, I'm sorry, in absolute terms?

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research [40]

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Yes. Yes.

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [41]

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I apologize. I could not -- I did not quite understand your question.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research [42]

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No problem.

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [43]

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The answer to that is probably. So again, I can't give you a definitive forward looking.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research [44]

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But if that's your base case...

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [45]

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I mean, if you look at -- if the pulse segment is continuing to be constrained, we're going to do our best to look at the opportunity, as I said in the answer on working capital, to look at the possibility of unlocking capital deployed into working capital in the pulse segment, which would then free up cash capacity to continue to invest in the other segments. So we'll be looking at the opportunity to balance. There's a cyclical business here. At some point, again, the earnings power of our pulses business will come back. And what we've been focusing on is attempting to reduce that capital cost, and we'll do our best to keep doing it.

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Operator [46]

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Our next question comes from George Doumet with Scotiabank.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [47]

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Murad, I just wanted to follow up a little bit on Minot. Can you talk to capacity utilization there? And just any potential capital that we need to deploy? And just remind us of the human-to-pet mix there and where you see that evolving over the next couple years.

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [48]

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Well, the utilization in Minot was quite high. Tonnes were up quarter-over-quarter. Year-over-year, they were, I think, relatively consistent for this seasonal period. We don't have a lot more capacity to utilize there actually. So capacity utilization would have been running in the low 90s in terms of utilization. Investments there at this point are focused on things like starch monetization, so the ability to present our starch into different forms. We are seeing our deflavored product offerings sales starting to grow. And if you'll remember, that was an investment that was done 2 years ago, but it was such a new technology and a new process that the food development cycle takes 2 years in order to develop. So we are seeing deflavored offerings going into extruded products, into a number of different food applications. So when we turn around and look now at our mix of products, we're probably running around 70% pet food, 30% into human food. And that jumped from probably 80%-20% up to 70%-30%. It's been caused by our ability to look at our starch going into higher-value uses. So we're pleased overall with the progress there. The team continues to implement commercialization initiatives on the joint development agreements that we have with the major food manufacturing companies. And we're seeing pet food demand rise. So from that perspective, even clients that we felt we were at a high concentration with are ordering more. And we're seeing the pipeline of food applications growing, with actual volumes attached to them in sales. So we're seeing a number of emerging segments, bakery, snacks, extrusion, pasta, nondairy milks, meat applications. I mean, these are all things that are starting to get a bit of traction.

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Operator [49]

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Our next question is from John Chu with Laurentian Bank Securities.

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John Chu, Laurentian Bank Securities, Inc., Research Division - VP of Research & Diversified Agriculture Analyst [50]

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Murad, this is just more of a big-picture, broad, macro question here. But maybe just point to a couple of the signs that you're going to be looking for in terms of giving you a bit more confidence about things stabilizing and, more importantly, things recovering. Is it just India related? Is it acres in some of the key countries going down as they switch to other crops? Or can you just give me some sense of what you think are some of the key little first steps to give you a sense of recovery?

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [51]

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I mean, India is certainly one of them. I mean, we're going to be watching very carefully the April elections and how the March crop comes. They're in the middle of seeding right now. It's no secret that there are reports that seeding progress is slightly behind. There is reports that there is some dryness in certain areas in India. And so the ability to corroborate that with actual physical deliveries. I mean, John, it would be fair for me to say that we don't attach a high level of confidence in the news media and governmental news releases in India. And they are very much driven by political agendas. And at this point, the political agenda has shifted the opposite direction. It was food inflation combating. Now it's raising prices. So with minimum support payment levels, the focus of government in local farmer incomes, the focus of government prior to the election, we believe there could be information that is skewing and messaging towards that political agenda. So we're watching it carefully. India will certainly be one. Two, stability in currencies. We've seen the Turkish lira stabilize. We're pleased with President Erdogan's policies. In particular, the Saudi Arabia file has brought him, I think, a little bit closer back towards the West, and we believe that's a positive for not only Turkey but for regional stability. And so that's a file that we're watching closely on how that will affect not only Turkey but regional demand and regional stability. I think those are 2 big areas that we'll be watching now carefully. We're pleased that NAFTA has resolved itself, and we see the North American trade flow as being -- continued to be quite secure. So I think that's positive as well.

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Operator [52]

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Our final question is a follow-up from Steve Hansen with Raymond James.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [53]

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Yes, Murad, just one quick follow-up here. How are you feeling about the market tier opportunities in this downturn? I'm just curious about what kind of stress you're seeing across the broader landscape and whether you see that as an opportunity to take share if at all you're willing to commit any capital. It sounds like you're in capital preservation mode for right now. But as the cycle turns, do you envision the opportunity to take share from some of the weaker competitors?

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Murad Al-Katib, AGT Food and Ingredients Inc. - President, CEO & Director [54]

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Well, listen, I think it's fair to say that while people like us, as we're public and we're visible and we're the only ones who every 90 days get to come in front of all you guys, there's certainly private competitors around the world, I mean, everybody else is private. We believe that with our knowledge of traditional capitalization levels of those private companies and the reliance on banking and trade finance credit systems, and we're seeing it not only within our competitors but within the importers and customers and distributors around the world. There is a liquidity constraint within the system. The volatility, historically high prices coming to historically low prices in a very short period of time has left the system in an unhedgeable commodity with massive capital gaps. And so from that perspective, again, that's part of the risk in the business currently. It's part of the reason why our trade flows are being quite closely managed by our COO, Gaetan, and the risk teams. But -- and that may create some opportunities in 2020 and 2021 and beyond. As things recover, we expect that we'll be, again, financially one of the stronger players, and we'll certainly take a look at what we can do to capitalize on that. As I said in my comments, we want to be competitive, we want to sit back, we want to preserve capital and we want to wait for the opportunity to take the market when it offers itself. So we're going to continue to do our best to do that.

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Operator [55]

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This concludes the question-and-answer session. I would now like to turn the conference back over to Omer Al-Katib for any closing remarks.

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Omer Al-Katib, AGT Food and Ingredients Inc. - Director of Corporate Affairs & IR [56]

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Thank you, operator.

As the operator mentioned, that brings us to the end of our questions and on the call this morning. I'd like to thank anyone -- or I'd like to thank you all for joining. And I'd like to remind anyone who's still on the call, if you do have any follow-up questions, you can feel free to contact us, and we'd be more than happy to follow up with you. Wish you all a good day, and thanks for attending our conference call this morning.

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Operator [57]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.