Earnings Transcript for AGXXF - Q2 Fiscal Year 2017

Executives: Omer Al-Katib - Director, Corporate Affairs Murad Al-Katib - CEO, President & Director Lori Ireland - CFO

Analysts: George Doumet - Scotiabank Steven Hansen - Raymond James Ltd. Jacob Bout - CIBC World Markets Joel Jackson - BMO Capital Markets Kyle McPhee - Cormark Securities John Chu - AltaCorp Capital Anoop Prihar - GMP Securities Westley Nixon - National Bank Financial

Operator: Welcome to the AGT Food and Ingredients Incorporated Second Quarter 2017 Financial Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Omer Al-Katib, Director of Corporate Affairs and Investor Relations. Please go ahead, Mr. Al-Katib.

Omer Al-Katib: Thank you. Good morning and thank you for joining us on our second quarter 2017 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, 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 filings on SEDAR. With that, I'd like to ask Murad to make some comments and then we'll go to questions.

Murad Al-Katib: Good morning. Thank you for your interest in AGT Foods. We're right at the start of harvest in Western Canada with harvest in some parts of Saskatchewan already underway. It's expected that the farmers should be [Technical Difficulty] -- over the coming weeks getting their products into their bins earlier than they typically would. This is coming after a hot, dry growing season. We've had a challenging quarter with margins constrained in metric tonnes invoice produced and a return to traditional cyclical global commodity markets resuming imports at a slower pace than in past years, where local production is being consumed first before imports will fill local demand. Global pulse market have been closely watching a number of factors with regards to harvest timing, production volumes and quality, import volumes to key consumption markets and resolution non-tariff trade barriers as markets advanced to the start of a traditional shipping period for pulses and staple foods in the late Q3 and Q4 2017-Q1 2018 period. Even with all of these factors I remain optimistic in the future prospects for our business in the coming quarters, as cycles in our business develop quickly, but also resolve relatively swiftly. Staple foods are fast-moving consumer products. I would like to discuss some of the market dynamics and developments in our business and outlook for the periods ahead where we see an expected resumption of traditional purchasing in import patterns. But first I'm going to ask Lori Ireland, our CFO, to go over the results for the current quarter. Lori?

Lori Ireland: Thanks Murad. Quarter 2 of 2017 presented some challenges for AGT. Total tonnes invoiced were down by approximately 10% for the second quarter compared to the first quarter, with lower invoiced tonnes in the pulse and grain processing and in the bulk handling and distribution segment. The gap between the price at the producer level and the sales price was a contributor to the reduction. Although tonnes invoiced in the food ingredients and packaged foods segment increased in quarter 2 compared to quarter 1 of 2017, adjusted gross profit and adjusted EBITDA decreased. The new pasta line in Turkey was commissioned during the quarter and pasta that was produced during this time was sold to various price-sensitive markets at lower margins. In addition margin pressure related to high-priced remaining old crop, stock and current drought conditions in North Dakota and Montana caused producers to demand higher prices. Product and customer mix also had an impact on earnings. However net debt did improve and decreased by $18.4 million at June 30th, 2017, compared to March 31st, 2017. The ratio of net debt to trailing 12-month EBITDA however increased to 5.37 compared to 5.23 at March 31st, 2017. This is due to the lower volumes this quarter coupled with the high fixed cost component to the AGT's operations and resulting lower earnings.Net working capital also improved when comparing $361.4 million at June 30th, 2017 to $389.3 million at March 31st, 2017. Net working capital as a percentage of trailing 12-month revenue decreased to 17.37% at June 30th compared to 18.97% at March 31st and compared to 20.96% the same period last year. We will continue to monitor this metric throughout the harvest season and we will continue to strive to maintain a ratio of net working capital to trailing 12-month revenue between 17% and 18%.General and administrative and marketing sales and distribution costs increased in the quarter ended June 30th, 2017 compared to the same quarter in prior year and were slightly higher when comparing to the 6 months ended June 30th, 2017 to the same period in the prior year. This is due to specific marketing campaigns related to the food ingredients and packaged food segment. Reduction of this expense as a percentage of revenue will continue to be an area of focus and we will work with each subsidiary to lower the ratio and ensure that discretionary expenditures are kept to a minimum. Non-cash foreign exchange includes a snapshot of outstanding foreign-denominated accounts receivable and accounts payable, as well as outstanding foreign exchange contracts and includes contract relating to the bond. This is a non-cash item and fluctuates depending on the strength or weakness of foreign currencies when compared to the Canadian dollar and is excluded from adjusted EBITDA calculations due to its non-cash nature. AGT has treasury processes in place to ensure that the need to purchase foreign currencies to sell debt will be minimized if it will result in cash losses in foreign exchange. AGT tracks adjusted earnings per share as it is reported exclusive of the non-cash foreign exchange effects of our global business whether that means a gain or a loss because management feels that inclusion of both gains or losses that results in snapshot non-cash IFRS effects do not accurately reflect the cash flow generating ability of the business. Adjusted earnings per share were $0.10 basic and fully diluted for the quarter ended June 30th, 2017 which was a decrease over the prior quarter and the same quarter in the prior year. This quarter we have included our June 2017 covenant requirements and the results in -- it's all in our MD&A. You will see that 3 of the covenants are at the ATP operating company level and 2 of the covenants are at the AGT consolidated level. Our credit agreement to find the calculations required for our covenants and in certain cases there are carve-outs and adjustments for certain activities. AGT continues to have a positive relationship with our lenders and we're in compliance with our syndicated facility covenants at June 30th, 2017. Thank you.

Murad Al-Katib: Thanks Lori. As I mentioned at the start, harvest is getting underway. It's expected to be earlier than we've seen in the few years. Overall we expect average production volumes on lower yields, but with quality in the top grade. Acres are reduced in Canada and the U.S. over 2016 and environmental conditions are reducing the yield, but the projected production volumes in 2017 are still some of the highest on record when adding production and carry-in stocks from the 2016 harvest. There are still lots of peas and lentils expected in Canada potentially over 7.75 million metric tonnes or more of specialty crops overall. Stocks are viewed as ample on all origins that AGT has operations in. With anticipated better average quality with the new crop cycle, we expect these suppliers will allow us to meet consumer demands in traditional shipping periods as consumption market demand is needed to be filled and we expect better utilization of our assets going forward allowing for a gradual return to more normalized margins and volumes. In the current quarter we recorded margins as continuing to be constrained due to market transitions from North America in old crop to new crop. Expectations of farmers with remaining stocks in the period did not match the purchase price that local markets would bear and that importers were willing to book forward. With ample local stocks, importers were delaying purchases, working through local production and waiting for the new crop to come. There was an expectation that the new crop would be better quality with potentially similar or better price levels than old crop stocks. In the longer term we see a consumer demand for pulses and vegetable protein, they provide a traditional diet, as unchanged as a result of population growth, income growth and demand for food. Lower prices may also stimulate more consumption, fueling the need for imports to fill the gap between available local supply and demand in the near term. We forecast demand for pulses and staple foods to remain strong. These products are people -- are products that people need as basic staple foods that are relatively non-discretionary consumption items. However, supply and demand balance has become a key part of the market dynamic. This is the result of markets like India and Turkey where pulses are produced and consumed working through their own local production before commencing their imports. This is how the global pulse sector has operated for decades, with the past few years being an anomaly with the high levels of import in nontraditional periods. And as the market dynamic moves from consumption of local production to fill demand to imported products, we expect a resumption in later 2017 a period where imported products will make up part of the supply in deficit markets like India and Turkey. However, it may just happen at slightly a slower pace than in the past few years. India is the story that we see in global pulse markets today as they are the largest producer and consumer of pulses and their actions are a key driver of the market globally. Indian government has taken a number of steps in recent months to support their local market with elections and messaging surrounding food security, agricultural policy, anti-hoarding regulations, import of safety stocks to ensure availability and non-tariff trade barriers such as fumigation of agricultural products. However, the market development in India require monitoring. It's something we do as a management team every day. For example to illustrate how quickly the development can change, recent policy changes in India to restrict the import of pigeon peas and to impose a modest quote of 200,000 tonnes was announced on August the 5th 2017. It's a measure that we see may have a positive effect to clear up surplus stocks of pigeon peas and may have the effect of stimulating India's local market. This was rumored for only days and became a decreed policy change on August 5th with no phase-in period and validity until March 31st. Local production is stabilized to a degree providing more local stock to fill near term demand, although it's uncertain that Indian local production volume will continue at their current rate. Jute production trends in major consumption regions revert back to insufficient local production levels. Imports could again increase as they have in the past 4 or 5 years. The current policy of India regarding prices and supply levels may have had an opposite to the intended effect. There is high levels of supply, prices have fallen dramatically which may drive farmers to other crops in the upcoming planting season. Added to this are non-tariff trade barriers that the markets have appeared to have a relatively slower move towards a return to shipping volumes. We expect that the evolving Indian government intervention in pulse markets to build prices back up, reduce stocks, that may result in the return of more normalized imports. Overall the short term flow of imported products to markets are impacted. However, there's no change in demand fundamentals. Markets are expected to resume traditional purchasing, import patterns later in 2017 and 2018 looks to be a positive year. We also believe margin constraints seen in this quarter will be moderated by new crop supplies coming on-stream. In our food ingredient and packaged food segment we see our pulse ingredient business continue to advance with incremental volume gains. However, margins decreased due product mix of the packaged food side of our business. Food-manufacturing customers have provided feedback, they're pleased with the functionality of our pulse ingredients, the product development cycle for human products is one that's long, but we continue to see traction and movements with less pressure from lower corn prices, with constrained crop supply in the United States. Human food and pet food sales programs continue to advance as seen by the volume gains in this segment. Product and customer mix had some impact on AGT's ingredient and packaged foods business unit, with fibre, flour and starch sales continuing to develop to complement the growing book of sales to both customers and human and pet food markets as they ramp up their requirements for protein. This continues to be the core focus for AGT, the building of the starch flour and fibre sales to complement the protein. All starches and flours and co-product streams are being sold out as produced and management is seeing a gradual stability and increase in the average price for its star attractions which had the long term potential to positively impact margins in our segment overall. The balance of products mix to customers continues to be a focus within this business unit. It's essential to maintain uses and markets for all fractions to ensure that as subsequent production lines are added in the future that AGT is not only able to market all the product streams, but to realize the return it expects on each product stream of production. Currently, AGT's Minot facility is operating at 95% capacity, but really full capacity over the 3 production lines. The newly commissioned fourth production line is ramping up commercial production. Sales are going out the door, production is going as planned. Overall, volumes in the Q2 period in Minot were up approximately 20% when comparing Q2 to Q1 and pea prices in North America were firm as old crop stocks were depleted to nearly sold-out. Higher priced residual stocks and farm levels remained firm due to drought conditions in North Dakota and Montana and margins were under pressure. However, new crop stocks began to arrive in July 2017, harvest is in full swing and early indications are that yields may be better than projected. New crop contracts are being negotiated with large customers and demand forecasts in all segments of food ingredient are for additional volume in 2018, boding well for new production capacity from the fourth line and margins are expected to gradually recover later this year as new crop stocks are purchased. Packaged foods business continues to grow as market opportunities and sales and distribution efficiencies are realized and the units contribute positively to this segment. Similarly raw material pressures were seen in the business unit in particular with tighter [indiscernible] stocks later in the quarter prior to the new Turkish harvest in June and of course the new North American harvest durum that is upon us. We feel the pressures will be alleviated with new crop harvests and we feel that the segment and its business units are advancing as expected. Our strategy aimed at further margins and volumes in this segment will yield success in our coming quarters as we enhance the products available to meet consumer requests and demand. Pasta volumes were up over 50% when comparing Q2 to Q1. Margins were reduced slightly with that durum wheat input cost and the commissioning related to the 6 production line is largely underway and commencing well. As the pulse ingredient business ramps up and the food and packaged foods business ramps up, management's evaluations of opportunities and investments for additional infrastructure, production of pulse-based or blended pulse ingredient pastas are ongoing, however, we've provided no time line yet for announcement or completion of these projects. Markets for healthier and gluten-free or reduced gluten pastas in North America, Asia and Europe are continuing to grow and our management team continues to investigate production, co-packing and sales opportunities in this important future business line. Our bulk handling and distribution segment including our distribution business unit for non-core commodities as well as our short-line rail operations continues to grow as a contributor to earnings in a steady and regular fashion. It provides opportunities to augment our earnings with little capital deployment other than working capital to finance the business unit. With the upcoming production volumes from North America and volume to be moved to market, our investment in logistics like the mobile short-line railway and west central road and rail loading locations as well as our port and terminal investment like CanEst we announced during the quarter will provide efficient modes of transport and the necessary infrastructure for loading handling and cartage and access to port facilities that are necessary to monetize this business unit. In the quarter we're also pleased to announce our partnership with Fairfax as a strategic partner that provides numerous advantages for AGT and its business across all segments with regards to emerging market growth strategies particularly India and Africa, delevering of our balance sheet, providing necessary liquidity for current and future growth needs including the possibility of future strategic investments and acquisitions. We're pleased to have them onboard and confident in our ability to grow our business as we go forward. Let me be very clear, the process for this decision to undertake the transaction with Fairfax was a long process that involved a significant due diligence process on both sides to identify the management alignment on our views of the world and particularly the role that Canada and AGT may play in building a global champion in a supply chain integrated strategy and pulses and staple foods. We believe that Prem Watsa, Paul Rivett and the Fairfax team and its affiliate investing companies provide us with exceptional partnership opportunities. Before we go to questions, I want to conclude by stating that the past period has been challenging. However, the conditions further demonstrate our strategy of balance sheet initiatives, investment in logistics infrastructure and diversified operations in segments is the correct one. In the first 2 quarters of 2017 almost half of our adjusted EBITDA came from businesses that were not in existence within AGT 8 years ago. We're optimistic that our business will continue to grow and develop with strong fundamentals, long term trends and our short term position will be solidified by our recent investments in packaged foods, food ingredients, bulk handling and ports. We're going to stay the course with our strategy, focus on disciplined capital allocation, focusing on costs and efficiencies in our current production systems and focus on the utilization of our processing and bulk handling infrastructure more efficiently growing value-added opportunities for our products globally. I want to thank you for your interest in AGT Foods and I'll go to questions.

Omer Al-Katib: Operator, we'll take the first question please.

Operator: [Operator Instructions]. The first question comes from the line of George Doumet with Scotiabank.

George Doumet: Just two quick ones, Murad, if I can. Firstly, can you maybe share your views on this year's kharif season in India from a pulse season standpoint, where you see it relative to the last year? And the second one, should we expect the continued reversal in working capital in the next 2 quarters?

Murad Al-Katib: Yes. So with regard to India, there's a lot of mixed reports coming out of India related to the kharif season. The monsoons were actually quite uneven. So while you can read reports and talk about an average monsoon, you actually have drought conditions in certain areas and actually surplus conditions in others which have a number of analysts in India predicting that the harvest will not be as large as government forecasts had projected. We're also looking at the effect of low prices and the current lower minimum support levels on commodities like lentils where with the current depression in prices, the seeding of the crops that will be harvested in March which is really the harvest that affects AGT's business, we expect that to be much more of a profound effect in terms of the effect on our business. So I think that what we're going to see is a depletion of local stocks over the near term and a resumption of imports as we go forward in the year. I think that this oversupply scenario -- I mean the monsoon variability is something that I think is going to become normal course and I don't think we're going to see much difference this year. George, you'll have to just repeat your second question, you're still in the queue to remember --

George Doumet: Yes, sure. I was -- just wanted to -- we saw a pretty healthy reversal in working capital this quarter. I think seasonally in Q2, we got those, but I was just wondering if there's any chance we got more of that in the back half of the year?

Murad Al-Katib: I think that again our demonstration of the reduction of the working capital as a percentage of 12-months trailing revenue show that these working capital measures are working and we've managed to reduce that; 2 years ago we were running at around 27% working capital as a percentage of trailing 12-month's revenue. We're actually in our target zone now with 17% to 18% and so we expect again that as commodity prices have normalized and that as we continue to sell out our stocks, collect and then restock again, we could see stable to potentially declining working capital. Certainly I don't project that working capital is going to be a consumer of cash as we go forward in the near term which I think is really positive. As earnings recover, we'll start to show the free flow that we -- that we projected coming along.

Operator: Our next question is from the line Steve Hansen with Raymond James.

Steven Hansen: Just very quickly on sort of the infrastructure footprint that you have today, you've done a lot of work, Murad, on building out the origination side both through processing initially and then more recently on the bulk handling side. I'm just curious to what the downstream footprint that you might want or that you would aspire to have over time given I guess one, the Fairfax investment, but then -- and again, the recent macros from what we've been seeing off late, is there any desire to have a downstream footprint in some of your end-markets like India?

Murad Al-Katib: Yes, good question Steve. Certainly, we have been already vocal a little bit about the need for port infrastructure within our Canadian platform. So the small strategic investment in CanEst in Montreal, it is the only handling facility in Montreal right in the port that's able to receive a full 10,000 tonne unit train and it can actually take it into containers for export, with 60,000 tonnes of on-site storage. This provides us with a tremendous opportunity, all of our east coast side coupled of course with our Thunder Bay terminal that we have Mobilex that has been built out and licensed over the course of the last 12 months. So our east coast infrastructure is done. West coast terminal agreements and terminal handling agreements, long term agreements are currently in our focus. And so in order to monetize the very impressive bulk handling system and origination system that we built out and acquired, we'll need that port agreement and infrastructure to happen. We think that there's a opportunity where we do see currently the repurposing of certain assets that were utilized for other dry commodities, whether it be the forestry products or coal or other type of dry agricultural or bulk commodities coming available for grain. And so from that perspective you can expect it will make those types of moves. With regards to India, I do think fundamentally that we're going to see long term opportunities to link the bulk supply chain that we have in Canada through a port agreement on the west coast into some modest infrastructure in India. On port side to be able to receive vessels, offload vessels into warehouses, into the silos and put them into milling and distribution in India and so we'll have our eye on that as we go forward and implement our strategy in the 2018, '19 and '20 period. I think that that will be an essential part of the long term strategy. But again the Fairfax partnership helps us. I mean, Fairfax is one of the largest owners of private warehousing and distribution services in India. So they currently have a large investment in that particular area. So the synergies and opportunities between Fairfax investee companies in AGT was one of the big draws that we had in the strategic investment that we've undertaken with them.

Operator: Our next question comes from the line of Jacob Bout with CIBC.

Jacob Bout: Talk a bit about any changes that you're anticipating to happen as a result of Fairfax and Point North involvement either from say a corporate governance or strategy perspective?

Murad Al-Katib: Well, I think that again both partners are great partners for us. We have a long term relationship with the partners at Point North, Barry Goldberg, Phil Evershed are long term friends of the firm. So we worked with them very extensively at their time at Genuity Capital Markets and they've expressed their support for management and support for the strategy and at the end of the day focus with Fairfax and Point North and all our shareholders really of course that we remain a very large shareholder in this company is that focus on recovery of utilization of our assets, focus on costs and efficiency, focus on margin improvement and that will generate the free cash flow with the stability that we have in our working capital currently. And our cap budgets are going to be very modest. If I look at the 2017 cap budget, it's heavily weighted in the first half of the year, so we've expanded a lot of the funds that were allocated. These projects were started in 2016, finished in 2017 and I think that they're go-forward basis will go there. From a corporate governance side, we added two independent directors that were new over the past year. And that's going well and we're going to be assuming that we close the Fairfax transaction, we'll be having an independent director nominee from their side. And we'll be focusing again on taking a look at opportunities to improve our governance quick scores and to continue to focus on corporate governance. And we made some good strides this year with the appointment of an independent lead director, formalization of our committees. We've appointed committee chairs on all of the different committees from our independent director groups and we're optimistic that from the corporate governance side we're certainly in the not only sophisticated and compliant, but we're moving in the right direction.

Operator: Our next question is from the line of Joel Jackson with BMO Capital Markets.

Joel Jackson: I had a couple of questions. So my first question is going through all your disclosure and some of your commentary, you talk about a number of issues that affected margin in Q2 in the pulse business and what I could pull out was you talk about higher freight cost, container shortage, talk about crop mix shift and more peas. You of course talk about low utilization and you of course talk about a delay from purchasers -- importers purchasing because of the higher inventories, places like India and Turkey, can you walk us through those issues and any other ones you want to add maybe more concisely talk about how each of those issues are going to get better, worse or stay the same in Q3 and Q4?

Murad Al-Katib: Okay, it's a good -- great question, Joel. So let me start with the freight. I mean our commentary on freight was very much related to our Australian business, so we were looking at the mix of business units that contributed and performed and those that may have underperformed in the quarter. And as a result of a later harvest in Australia in 2016, one of the things that is a dynamic in Australia for us is we're container-shipper and container dynamics are such that Australia actually has surplus ports and deficit ports and the port of Adelaide in South Australia which is one of our biggest operations is actually a deficit port and it's a deficit port because they have very strong South Australian wine export, so all of us like Australian wine and so from that perspective wines also use containers along with grain and everything else. With the later harvest period, the shipping period were quite constrained in the quarter 1 and quarter 2 and so we had to constrain longer shipping windows into shorter timeframes which led to container shortages and container freight rate increases. There was supply-demand issue. Those have largely resolved themselves, so we don't foresee that -- in fact we're seeing as a result of North American stocks being relatively more moderate this year, that North American freight is actually going to be quite competitive this year, we're seeing container rates quite stable. So we think that the freight pressure on our margins is largely alleviated and we think as well that the CanEst investment that we made will provide us with a good Montreal balance to our Vancouver freight option in particular when we look at the Indian subcontinent and Asia. So we actually load via Montreal and we go by the Suez Canal even into the Indian subcontinent. So I think that the freight side is relatively resolved when we look at the Q3, Q4 period. The product mix side that we discussed was really relative to -- available green lentil stocks weren't there, so -- but we were sold out, that's a market where we make margin, okay? So that wasn't available to us and the red lentils that were available were relatively poor quality and demand was relatively constrained as a result of full market and really reluctant to buy the old crop relatively not good stocks. So we looked at what was available to buy and that was peas, so green peas, yellow peas, flaxseed, different types of commodities that went through our system that utilized our assets, but may have generated lower margin. I can tell you on a percentage basis we shipped more peas in the second quarter than we usually do because again demand was there and product was there and we took the demand to generate cash flow, that's largely resolving itself as well. The new crop is upon us. So we'll be back to a mix of green lentils, chickpeas, beans, red lentils, peas, flaxseed will be the full product mix back into our Q3, Q4 season. So I think those constraints are going to be resolving themselves as we go through Q3 into Q4 and into Q1. Again the supply constraints and the transition side, we just talked about the new crop. So my commentary is, look, we went through 2 quarters of relative constraint, I think that from that perspective we will certainly start to see an easing of that and go from there. Did you have another question, Joel?

Joel Jackson: If I can follow up on that, I know you don't give guidance, but can you help us out is Q2 likely the lowest earning of the year similar as 2016, like should we see Q3 better than Q2 or with something drastically worst case scenario for Q3 has to happen to see earnings below Q2?

Murad Al-Katib: Yes, I can't really give you much guidance, but I can tell you that our commentary was that we see a gradual improvement in Q3, so I think we're kind of giving you the answer already in our disclosures.

Operator: Our next question comes from the line of Kyle McPhee with Cormark Securities.

Kyle McPhee: Can you comment on Minot line for utilization during Q2? Your statement about volume at Minot being up 20% quarter-over quarter, just line 4 ran at about 60% utilization throughout the whole quarter on average, is that accurate? What's going on here?

Murad Al-Katib: Yes, I guess you've done the math the other way based on capacity and I would say it probably wasn't that high, Kyle, you probably had some spillover from Q1 o Q2 in terms of production and invoice. I mean, remember, we don't -- like just because it's produced and put it into a shipping unit depending on where it's being shipped, it may be transitioning to a port, so if that was produced in Q1, it was in Q2, so I don't think utilization was quite that high on our fourth line, but what I can tell you is, is that we started commissioning in April, by May it was running and by June it was really running. So we're in a position now where we're happy with the volumes, production has went well, we continue to demonstrate our ability to do what we call plug-and-play where we have the system done, we plop in a line, we pipe it in, we can commission it within 4 weeks to 6 weeks and we could be up and have the [indiscernible] production capacity increase dramatically in a very short period of time. So we're quite optimistic again that the Q3, Q4 period -- in particular later in Q3 and Q4, yes, the summer period July and August are really quite predictably a lot of scheduled shutdowns for a number of our food manufacturing clients and pet food manufacturing clients. So they would have on average let's say the pet food side because they handle a lot of meat and other things, they have some very stringent clean-down processes that they'll do once a year, they'll get [indiscernible] the volume utilization was material and we're quite happy with it.

Operator: Our next question is from the line of John Chu with Laurentian Bank.

John Chu: Got a couple of questions here. Can you just comment the marketing and promotional expenditure you're doing on the pulse and green side and how long do we expect to see that continue going forward?

Murad Al-Katib: Yes, you know what, John, these were just seasonally you've got both of your packaged food business and your pulse ingredients business, certain expenditures related to larger show presences and things like that like the IFTRS or Food Technologists Show is in the second quarter, that's a very big pulse ingredient presence for us. We have the new pasta lines coming on in Turkey which would have had us incur some promotional or listing fees related to the new production volume and we've added in Turkey roughly 25% to 30% of their capacity. So these are kind of -- I don't want to use the word one-time, but they certainly were largely falling in the quarter just from a timing perspective. So we don't foresee all of them on a recurring basis, but they did happen to fall in the quarter and they were one of the reasons why G&A were a bit higher. So we expect G&A to normalize again and I can tell you that in a time of some constraint on margin, every cost is being examined. That is something that is in management's control. So whether it be production cost, maintenance cost, in particular G&A cost, we're scrutinizing every penny and we're going to make sure that we do what we can to tighten our belts up and make sure those costs don't escalate. On a percentage of revenue, we're actually seeing G&A cost stable again or declining, so we want to see that continue as well.

John Chu: Okay. And then just another question; last couple of quarters you had some additional cost, liquidity issues facing some of the importers, can you tell us if that's been mostly resolved or that's still an ongoing issue?

Murad Al-Katib: John, as they crystallize their losses and they move through them and markets stabilize, liquidity improves. As I made my comments about the non-discretionary nature of staple foods, staple foods in large bases are cash, right, they're like cash, they're cash -- almost cash equivalent, that they can move through the system if you choose to market them. And so from the perspective of our importers, what we saw is the reluctance of some importers to crystallize their losses and hope for the best. As markets have troughed and started to come back up, we're seeing importers liquidate stocks and even start to think about re-buying which again is why we believe that maybe might be bit slower pace, but we're optimistic about the resumption of imports.

Operator: Our next question is from the line of Anoop Prihar with GMP Securities.

Anoop Prihar: Just a point of clarification; on the Q3 -- sorry, on the Q2 income statement there's a $2.5 million in nonrecurring expenses that are included in EBITDA and the year-to-date number is about $4.2 million for the quarter; can you tell me what exactly those charges relate to?

Murad Al-Katib: Yes, there's the compensation expenses related to stock-based comp are always in there, Anoop, so they're always a part of what we would put in those costs. So that's a normal -- every quarter those go in. And then it would be a combination of cost. A big one in this period was some demurrage detention and ancillary cost related to 2 programs. One was related to the Syrian refugee program, so with some conflict. The United Nations had to change the way we distributed some of the products and parcels which led to some ancillary cost, so these would be viewed as nonrecurring ancillary cost related to you may argue almost a force majeure type of event because of the war in Syria. So that would have been material cost in that segment. And then the second thing would have been related to Indian government tendering on pigeon peas from Africa, so there were some ancillary cost related to that that again we judged as one-time cost related to non-tariff phytosanitary issues. So those are in, but we expect those cost to come back in line. When we look at a global business, we usually have somewhere in the range around a $1.5 million or so that we kind of judge into that nonrecurring side, so we're watching that really carefully.

Operator: Our next question is from the line of Westley Nixon with National Bank Financial.

Westley Nixon: We see margins tend to jump around quarter to quarter in the ingredients division. We saw it this quarter with product mix and the input cost, but if we think longer term plan for ramping up, how should we be thinking about the margin progression in the ingredients division longer term?

Murad Al-Katib: Yes, I definitely, Westley, think that as we said when we look at overall the big aspects of this segment over the last 2 quarters has really been the nonfood ingredient side, it's been more the packaged food side of our business, so the African business unit had had some constrained margins as a result of the drought in Africa. That's largely resolved itself. So we'll start to see that improve in Q3 and Q4. And the product constraints in terms of the North American side have also been resolved with the new crop harvest. So I think that we should start to see -- with our starch monetization issues related to marketing our starch, we should start to see a progression back to improved margins in that segment and of course that's the focus today. It's not only about utilizing that fourth line, but it's about extracting more margin out of the current production system we have on 4 production lines plus the de-flavoring line. So I have some optimism that that's going to happen. Same thing on our pasta business; I mean, we had more volume and pasta is a fixed cost manufacturing business, so anytime you can increase capacity by 25% to 30%, you're going to see a margin improvement as long as you've got the retail clients to sell to and we do have that. So I've got some optimism there.

Operator: Our next question comes from the line of Steve Hansen with Raymond James.

Steven Hansen: Just one follow-up. I'm not sure if I missed it in the opening remarks, but just any clarification you could provide on the fumigation issues. The current exemption I think we have today extend still into September, other jurisdictions I think are until December, just any clarification on the update for the program to find some sort of permanent resolution there and how that might impact Q3 shipments if it's not resolved?

Murad Al-Katib: Yes, right now the Canadian exemption is only until September the 30th. Every other market in the world has an exemption until end of December. So from that perspective, one of the things that we'll be watching carefully is whether or not Canada secures an extension to the end of December. Now, there would be a view by many in the market just that the trade view and really the view that we're getting even from our government here in Canada, this is at the highest levels being discussed between senior level of the Canadian and Indian governments. We see no reason not to be optimistic about an extension of our deadline in Canada to at least match the December 31st. I mean, one of the things that we're hearing through the government sources is that Canada has presented what we call our systems-based approach. We don't have the pest of concern, therefore our position is that with our weather condition be [indiscernible] for fumigation, we don't require fumigation, therefore the Indian government should allow us a long term exemption. And in the absence of that, what we're going to see is what U.S. origin is able to be shipped. So we have our U.S. processing plants that could make up some volume. Australia is able to ship. Turkey is able to ship. So from that perspective -- and then Canada can ship -- involve vessel and then we can also pay up the 5x penalty, Steve. Just so we're clear on that, I think we put some clarification in our -- maybe we didn't actually, okay. To clarify what a 5x penalty means is if you don't fumigate here, you can ship and you will pay around a $12 a tonne penalty. So again $12 a tonne isn't great, but it's not the end of the world. The supply chain may have an ability to bear that in some fractions. So from that perspective, I remain optimistic it's in the interest of India and Canada to have a long term resolution. I expect that to happen.

Operator: Our next question is from the line of Kyle McPhee with Cormark Securities.

Kyle McPhee: Just two quick follow-up here, so on the total food segment your volume was up 30% quarter-over quarter, but your gross profit per tonne came down a fair bit. So in other words it sounds like this incremental volume coming in came in at material lower margin. I know the input cost is an issue. You talked about that in your MD&A, the input cost inflation, but that was also an issue in Q1, so what's going on here to drive kind of that margin decrease quarter-over quarter?

Murad Al-Katib: Well, like you just said, I told you in the MD&A we had product availability constraints. We talked very clearly about the fact that the pasta volumes were up. When you're commissioning a pasta line, you produce and you stop, you produce, you stop, right? You're commissioning a large line and many of you analysts have been to our production facilities; a pasta production facility that's producing in the range of 5.5 tonnes per every hour of production, you get what you would call second-quality product that when you're producing commissioning. So that second-quality product would have been sold into food aid markets, would have been sold into Africa. This is normal product commissioning. So now when that product is now running on a full-time basis, we're producing into our regular markets, we should see margins improving. So again I think that what we have to do is focus on the positive. The positive is sales are there, right? Our production systems are functioning appropriately. We think margins are going to improve. We think that sequentially we should start to see improvements and we think that 48% of our earnings coming out of that segment provides us with a strong base in which to weather the storm in our pulse business. So we think overall it's a great result and we're optimistic that the food ingredients segment is going to continue to be a good strong growth and balance for us as we go forward.

Kyle McPhee: Okay, thanks a lot. That makes sense. And then really quick, your corporate eliminations line items, revenue and volume was down in a big way in Q2. What's going on there? Can you just quickly remind what's feeding those numbers?

Murad Al-Katib: The corporate eliminations are just tonnes that are shipped from one company to another. They have to be eliminated. It just shows that a seasonal flow, we don't ship a lot of products from Canada to Turkey during the Q2 period because Turkey is harvesting. So those numbers down is a normal seasonal side, we just have less inter-company shipments which leads to less inter-corporate eliminations. That's it. That's just a balancing thing on revenue recognition.

Operator: Our next question is from the line of John Chu with Laurentian Bank Securities.

John Chu: Just two follow-up questions here. Do you have a utilization rate for the pulse and grain processing segment?

Murad Al-Katib: Yes, we're running right around 51% or so, John, so it was very constrained. So on our pulses side, this was about as low as utilization has got even in the 2011 period. So you know what, we -- when the sun is not shining, we still have to make hay. We maintained our plants. We did our scheduled maintenance shutdowns and when demand resumes, we're ready to roll. So that's what you do in a time where you've got some under-utilization.

John Chu: Okay. And then the follow-up question is on the pulse ingredient side, we keep seeing new data coming out showing more new products coming out with -- including that has pulse ingredients in it. And you mentioned in your MD&A that the pace of ingredient option expected to increase in the back half of this year in 2018. So I'm curious, when you say that, are you saying that your adoption should be increasing at a similar rate or should we start to see it accelerate based on all these new products in North America and globally that are coming out now?

Murad Al-Katib: I don't know what data you're looking at, but I can tell you that this business, I characterized it to somebody recently like -- it's like a freight train. When you -- you've got to get a lot of power to get it rolling along. But once it's rolling, it's hard to stop the train. And so from that perspective, we put a tremendous amount of dollars into R&D, application development, product development, process development, construction, engineering and production facilities and now we're going to start to see that pace of adoption increasing. So I would like to think that we as a first-mover will probably accelerate above the trend. I mean that's obviously what you want to do when you're that first-mover.

Omer Al-Katib: Thanks a lot, Murad. That brings us to the end of our time allotted for questions in the session. I'd like to thank all of you for joining us on the call this morning and I'd like to remind anyone still on the call that if have any follow-up questions, you can feel free to contact us at our Regina head office and we'd be more than happy to follow up with you. Again, thanks for attending the AGT Foods conference call this morning and I wish you all a good day.

Operator: Thank you. Today's conference call has concluded. You may disconnect your lines at this time. Thank you.