: Good morning, guys. : Hi, Peter. : Hi, Peter.: Perhaps I’m a bit early, but given the success of your expansion initiatives like your pouch facilities, have y ou started to consider where you might keep expanding in 2014? : Absolutely. I mean, we’re in the middle of our budgeting process right now, and I think it’s fair to say that we will continue to have capital expenditures in both of our aseptic and pouch businesses in 2014 as well. We now have four lines on the East Coast in Allentown facility, that facility has room for more and obviously we’re also considering what we can – how we can expand to the West coast.
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: Sure. But just given the strength of your cash flow and your balance sheet and the success you’re having, is there room to be even more aggressive with your organic growth plans, particularly in the absence of any acquisitions? And do you think that there is sufficient demand from your customer base for that? : Yeah, we believe we do, I mean I think it is – we have an aggressive growth plan for, especially for consumer products as well as our ingredients platform going forward in 2014. And as I mentioned already in my remarks, we’re now expanding in new categories aseptic, where traditionally we’ve been very focused on the non-diary segment, we’re now going into dairy, we’re going into nutritional. Those are huge categories and we’re just dipping our toes in and I see a lot of potential there. The same is true for pouch. We have done a lot in the baby food categories. And now there as well, we’re working with some large nutritional com panies, launching new products that you should hopefully see on supermarket shelves by the end of this year.: Great. Thanks very much. : Take care, Peter. Operator: Our next question comes from the line of Christine Healy with Scotia Bank. Your line is open.: Thanks. Hi, guys. : Good morning. : Hi Christine.: I wanted to I guess ask a couple questions on the Consumer Products segment, because I think this is the big surprise for the quarter. Just the margins close to 4% with only two of the pouch lines running. Can you talk about what you expect for margins after lines three and four are up? So I guess second half of this year and into next year? I know on your last call you said lines one and two will lead to a breakeven and three and four should get you to 5%. So how has this view changed? w w w . Ca l l S tre e t. com
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: Yeah, I think we were positively surprised by the fact that the Allentown facility was able to run albeit very small, but still a small operating profit on the basis of running just a few lines. So of course with not having to add lot of staff, staff, lines 3 and 4 should significantly add to that one. And as I mentioned in my remarks already, Consumer Products as a whole is now well north of 10% gross margins and that I see continue growing as we’re able to attract more value-added businesses to all of our facilities really.: Okay. And then I know it wasn’t just the pouches that led to that strong margin. You mentioned that the beverages and the frozen did quite well too. Is it sustainable on those sides or was there anything unusual I guess that happened this quarter that led to higher margins in those other areas? : I think in our traditional beverage business, which is really lemonades and waters, we were aided in the second quarter by fairly heavy retail promotion programs, so there’s a bit of seasonality in that. I think on the frozen business we have done a lot of upgrades in our facility over there that have now come to a close. We have our [ph] SQFII (24:49) accreditation. So we should be able to start bidding for other businesses and we see positive things going there for at least the remainder of this year.
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: Okay. And then I guess last quarter’s call, Rik, I think you mentioned that you had locked in about 50% of the volume for lines three and four. So, line three was essentially full and you just needed to fill four. Can you give us an update there and how soon could we see a decision on five and six? : Yeah, I think, well, as I’ve just mentioned lines five and six as well as West Coast is going to be – is going to basically be part of our budgeting process. So we’ll hopefully be able to update you on that more in the November timeframe. And when you talk about the capacity being full, of course, we wouldn’t be talking about lines five and six already now in concept and in November hopefully in much more detail if we wouldn’t be filling that capacity. So we’re very confident that that capacity will be filled.: Okay. And just last question for you guys, I know the U.S. farmers have a really good crop on their fields right now. That should benefit your processing margins in Q4 and onwards. But can you talk about the impact of the grain prices falling? How is your inventory carry, particularly on corn? And do you expect you could see some lower pricing on your consumer products next year? Is it really just the raw green sales that will get impacted? : Christine, we’re going to turn that over to John Ruelle, who is kind of the in-house agronomist. : You had quite a few questions in there, but we did experience some impact, as Rik mentioned, on our input sales as the late wet spring did cause some acres to not get planted. So we’ve really turned our sourcing group on and are expanding our sourcing to different geographies, both North America and around the world. So specifically to buy commodity, I think corn and soybeans for sure, we’re very confident that we’re going to be able to fill supply gaps. Across all commodities, current contracts, we are confident that we will cover. I think, the last one you mentioned was corn, what specifically question – was your question there?: Yeah, yeah, no sorry. Just with the corn price really coming off, I was just wondering like your inventory carry before the new crop comes in, could there be an impact on I guess inventory charges?
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: Yeah, and I think what you’re seeing now on the board is indeed corn going lower, but don’t forget that I think acros s the USA, it was a very late planting season that we referred to in our last quarterly call. So even though prices are going a lot lower right now and remains to be seen whether or not we get an early crop or not, that could still damage the yields. So, I wouldn’t – if I would be a betting man, I wouldn’t be betting yet at this moment. : What I think to that end is well, there – we’re in specialty crops, so the – what the Chicago Board of Trade may be doing is not necessarily a direct correlation to our specialty crops. So I think as far as a crop year to crop year issue, we did have some issues last year when we converted from old crop to new crop with having to cover new crop sales with – or I’m sorry, old crop sales with new crop pricing, we’re pretty balanced in that regard heading into the fall.: Okay, okay, great. Thanks guys. : Thanks a lot. Operator: Our next question comes from the line of Scott Van Winkle with Canaccord Genuity. Your line is open.: Hi, thanks. Congratulations guys. Very good quarter.
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: Thanks Scott.: Going into this year, I figured we get into the middle of this year and that grains and food group would be down year-over-year as you lost the kind of basic input sales. How have you – can you give me thoughts on kind of how you’ve overcome last year’s scenario going into this year? : I’ll offer a couple of comments and then Rik will jump in, but I think it goes to a couple of things. One is the capabilities of our global supply chain, as John just mentioned, to fill supply gaps and so we’ve done a nice job there. Second, a lot of growth has come from the value-added side, which – since we add more value it carries a higher value-added sale value. So those are the two keys that I would suggest. Rik, do you have further... : Well, the only thing I would say is that, again, I think I referred to this in our last quarter. If you look at organic feed, that is a significant portion of the raw grains that we sell. The prices are a lot higher than they are this year, the volume is about the same, and we’re able to carry the same kind of percentage margin. And I think that’s really kind of a driver on both the revenue as well as on the margin side.: Should we think about that as a kind of natural hedge? : In which way, Scott, I’m not sure I got you?: Well, I’m thinking does the feed kind of offset – do they run in different directions where one side of the business may be a little short while one’s strong. Is there a correlation, a negative correlation between the two or is this the way it, one so strong this year it’s offsetting the other?
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: The real strength in feed just comes from the demand for natural and organic poultry and meat and that sort of thing. John, I don’t think there really a hedge against each other... : No, I think the real drive for the feed business is demand for all the products, feeding cattle for beef and poultry and eggs, all those animals that are being fed to produce the products down the organic chain, it’s really what drives demand for that. : And as I mentioned last time, what is good to see is that a couple of years back, I guess, when the price for organic feed went up, all of a sudden demand came down. This time, demand is strong. And that is also because we have programs i n place with retailers where we supply their suppliers of poultry, eggs, et cetera. So that’s leading to more stability, I guess, on our volume side.: Perfect. And then on the ingredients segment, any changes in the customer roster there, any opportunities, new moves happening? : Yeah. I think we’re making very good gains on the fruit side, with dairy, Greek yogurt specifically, and pancake segment continuing to grow. I think on the fiber side, we have seen weakness in some of our really big customers on the cereal side, on the bread side. Of course, [ph] house (32:02) is going out of business hasn’t helped either, and – but at least we are now making it up with new business that we’re landing with other accounts and with other products.: Great. Thank you very much.
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: Take care, Scott. Operator: Our next question comes from the line of Tim Tiberio with Miller Tabak. Your line is open.: Good morning, guys. My question I guess is more around the future business that you’re contracting in the aseptic beverage. In the pouch business, you’ve obviously made very good progress on the operational side. You’re filling in these production lines. But as we look forward and you’re judging these new contracts, are you still happy with the margins that you’re winning on this new business versus the initial business t hat you were ramping? Is that still kind of getting you to the operating margins that you’ve been talking about on the consumer product side? : Yeah, I think there is a couple of things there. First of all, we are going into some new categories and if you think about nutritional categories having a lot higher retail shelf price that also leads to higher margin there already. And I think it’s also in a way diversifying into adjacent categories and potentially diversifying als o our customer base, which we’re actively working on both of those. I’m a firm believer that even though aseptic traditionally, and including this year, is one of our strongest performing businesses that we own, there’s a heck of a lot of potential for more there.: Okay. I guess if I can put it another way, it’s great that you’re ramping these lines very quickly, but it doesn’t sound like you’re feeling the pressure that you have to give up margin just to get this new business in the door? : I think that’s a valuable statement.: Okay. Thank you for your time. Great quarter.
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: Thanks a lot, Tim. Operator: Our next question comes from the line of Brian Freckmann with LS Capital. Your line is open.: Hey, guys. How are you? : Brian, how are you doing?: Good quarter. You guys talk about – well, on the call it seems like you guys sort of used the word consumer products and then I would say throw in aseptic in that in sort of stripping that out of grains and foods. I’m glad to hear that you guys are going to change the way you’re going to report from I guess it’s sourcing, value-add, and consumer product is that, is that, packaging, is that correct? : Yeah, that’s right.: Is aseptic going to end up in consumer packaging?
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: Yeah, exactly. What we’re doing, Brian, is we’re realigning internally and as we’ve built this business over time, we’ve had a number of operating segments as we’ve built the company. And the real meat of our company is we do sourcing and supply, we do value-added ingredients and we do consumer packaged products. And what we’ve been doing internally is realigning how we manage each of those categories from the raw materials right through to the consumer and our go-to-market. So as part of that realignment, our Consumer Products Group will manage all of our basket of consumer products that we take to the market... : Including aseptic. : ...including aseptic. So the same people that are working on pouches, beverages, et cetera, will also work with our customers on aseptic beverages. And so it makes our key account planning much more streamlined, it makes our billing processes with the customers much more streamlined, it makes our ability to service the customers better. So we’ve been involved in doing that and as part of that, we have an obligation and then it’s what we wanted to do and the nice by-product of that is that will streamline our reporting. So rather than seeing our aseptic beverage business, which has traditionally been in our grains and foods segment, you’ll see it now as part of consumer packaged products... : As well as grain snacks : ...as well as grain snacks. All of the roasted soy and sunflower, and corn, et cetera, which is in the grains and foods business today, you’ll now see that in the consumer products business. And so we’re simplifying, as we indicated in our comments, we’re simplifying our structure to get to our customers better, to better align with our strategy and the wonderful by-product of that is that it will simplify our reporting in our segment reporting for all of our – all of the shareholders and users of our financial statements. So our target is to be completed with our internal realignment by the end of this year. It’s a massive – not a massive undertaking, but it’s a large undertaking across the organization and we’ve been working on it hard all this year. And what we expect will happen is that for Q4, we’ll report in the new segments and provide a bridge to the old segments.: Okay, so you guys will do that by – it’s great to hear. So one more quarter of the old and then fourth quarter we’re going to get the new reporting? w w w . Ca l l S tre e t. com
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: Yeah. The only thing that could stop that is if somehow we’re not finished with our internal realignment, but our goals and right now we’re on target to do that, so that would be the – that’s the plan. : And I just wanted to make it absolutely clear that when I talk about consumer products growing 9% and having a 350 basis point expansion on the operating, that actually excludes aseptic. I’m not tossing aseptic in there at the moment.: Yes, I was going to make a big reach here and sort of say if you put your kind of hat on and said if you were throwing in aseptic into that and just a casual guess, I promise I won’t you to it, but what – if you added aseptic to your consumer business or you sort of thought about the consumer business as it will be versus sort of what it is now, what is the growth rate – what has been the growth rate at least maybe this last quarter? Maybe what do the margins look like right now? : I would say that if our aseptic business is just about double the size of our consumer products and the margins there would make consumer products look even more attractive than we already have in our own internal forecast for the future.: Well, guys, I mean obviously I think there’s a lot of people on this call who are very excited about that business and the future there. So, as soon as you can get those out, I think that would be great to see. Thanks, guys. Good quarter. : Take care.
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: Thanks, Brian. Operator: [Operator Instructions] Our next question comes from the line of Ron Reuven with Reuven Capital Investments. Your line is open. : Hi, Ron. Operator: Ron, your line might be muted?: Yes, sorry about that. Hey guys, good quarter. : Thanks, Ron.: So just want to know as far as the business obviously it’s stabilized dramatically and now it’s back on a growth phase. Where do we stand in regards to starting to give projections for the next year as far as earnings and op margins? : Yeah. Well, as Rik said, we’re going to do our budgeting and planning process for next year and we normally conclude that late November type thing. So at that stage of the game, we’ll have a better view upon what next year looks like. But we’re cautiously optimistic.: Okay. And in regards to the longer-term goals of getting to 8% operating margins, 10% EBITDA margin, are we still on target? Is this something that is... : Yeah, no change to those targets. As we’ve stated, our targets are for 8% operating margins, 10% EBITDA margins and 15% return on net asset margins. w w w . Ca l l S tre e t. com
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And we want to exit 2015 on those rates, so we can see the full benefit in 2016. All of the core strategies that we have are focused on that, obviously moving up the value-added chain and all of the investments and the bulk of our energy being associated on adding value clearly drives margin, shift – mix shift, and which drives margin shift. Rik talked about the fact that as part of our realignment, we’ve brought in another senior operational resource to really work on the leverage side of this business, which is also critical to achieving those targets and then continuing to grow our revenues. Our assumption is that our revenues can grow 10% a year at the same time. So you’ve got the contribution from new business that comes at a higher margin because you’re utilizing the platform that you have in place. We’ve got higher value-added product mix, which is extremely important and we saw some of the benefit of that starting to show through in the Consumer Products Group this year. And then lastly, leveraging the platform, which is doing more with less and streamlining costs wherever we can and we have resources in place to work on that. So all of those targets remain in place.
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: In regards to the Mascoma write-down I guess, as far as the – I guess it’s being compared to the public companies that haven’t done too well. I mean do you see this as somewhat of a permanent loss or in essence, meaning [ph] permanent evaluation (42:22) on it or I mean do you see this – is Mascoma still growing where you think that it’s eventually going to turn around and the value of it will increase? : A couple of things, Ron. When we did this transaction back in 2010, it was all non-cash and following the rules of reporting, we had to record a gain, which we normalized at the time. And our position at the time and our position today was that Mascoma is a good company, doing good things and they’re a real business and they’re continuing to build their business. So we remain optimistic on the prospects for that business as much as we can know from being minority shareholders. Having said all of that, correct to your point, the markets for the public companies in this space are down significantly and we felt based on our evaluation that it would be prudent at the time as much as we’re optimistic about the business, it’d be prudent to take the external factors into account and then mirror that up with what we know about the business. So net -net, it was non-cash. We normalized [indiscernible] (43:38) that obligation.: Got you. Okay, terrific quarter guys and looking forward to next one. : Great. Take care, Ron. : Take care. Operator: Our next question comes from the line of Keith Howlett with Desjardins Capital Market s. Your line is open.: Pretty close. I was just wondering on the product formulation and new product development, as you realign your segments, is there any change in how you’re going to develop new products? : Yeah, well, I think it is, as we’re changing these segments, first of all, I think the most important change that will happen is that, as Steve alluded to already, I think it puts us especially with retailers and that is a significant part of our business, puts us in a better position to have account management with those people because we will be able to sell a broader portfolio of our products over there. And if you think about the R&D side, the R&D side is, to some degree, already kind of linked across our company, if you like, but that will become only w w w . Ca l l S tre e t. com
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stronger as we go forward and making sure that our pipeline of R&D project is aligned to what our customers really want. So I don’t really see too many significant changes on the R&D side. I see it more on how we can serve our customers better side.: I know some of the other companies may be larger in scale like Maple Leaf, centralized their development to try and put all the people together. Is that – I know you’ve, in the past, you’ve indicated that they all work together anyway. Doesn’t really need to be physically together. Is that still your view that it can be in different locations? : We’re having a debate on that as we speak and we’re looking even at least bringing some of our people together. But it’s always – there is always a trade-off about it you can bring all your R&D people together and you can do great R&D, but you got to make sure they stay connected to the business as well. So – and that’s exactly the exercise we’re going through right now and we should have more clarity on that as we go into 2014.: Just as we look to the 2016 targets, what would the – do you think roughly speaking would be the gross margin rate that would accompany the 10% EBITDA margin? : That really depends a lot on the segment of where we do business in and the highest being in our consumer products and the lowest being in our grains and foods and the mix of the business adheres towards consumer products, that’s how you’re going to reach the 10% EBITDA.: Thanks very much.
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: Great. Take care, Keith. Thank you. Operator: I’m not showing any further questions at this time. I’d like to turn the call back over to Steve Bromley for closing remarks.
Steven R. Bromley, Chief Executive Officer & Non-Independent Director Well, thank you very much. I appreciate everyone – we appreciate everyone joining the call today and look forward to speaking with you again in early November. So hope everyone has an enjoyable rest of the summer and we’ll look forward to seeing you soon. Thank you. Operator: Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.
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