John Holliday - CEO Manon Lacroix - VP, Finance

George Doumet - Scotiabank Michael Van Aelst - TD Securities Stephen MacLeod - BMO Capital

Thank you, operator, and good afternoon ladies and gentlemen. Joining me for today’s conference call is our Vice President of Finance, Manon Lacroix.

In keeping with our usual format, I will start with commenting on some of the highlights for the quarter and provide some updates on our key strategies. Thereafter, I will turn the conference call over to Manon, who will review the financials in more detail and talk briefly about the outlook for the new fiscal year.

We will then open up the phone lines and answer questions, any questions you might have. So I’m pleased to share that the second quarter volume increased by approximately 9,100 tons versus last year’s comparable quarter, strong sales demand across the industrial liquid segments accounted for the growth.

On a year-to-date basis, the company has sold approximately 13,400 tons more than in fiscal 2015; industrial sales represented the largest portion of that increase. Is also satisfying to see that all measured segments, industrial, liquid, exports, and consumer exceeded prior-year shipments.

The growth we have experienced is largely a result of customer demand, existing customer demand. We continue to believe the business is benefiting from several trends.

First, the conversions of generally weaker dollar combined with a positive spread between the number 11 and number 16 commodity markets makes it increasingly attractive for Canadian value-added exporters of sugar containing products to expand their production at Canadian plants. Given the sugar usage of the Canadian value-added exporters represents a significant portion of the total market demand, changes in trend in this segment has a material impact on the industry.

The second change we are observing is a trend by food and beverage companies to reformulate to more natural ingredients. We have and continue to see this trend manifest itself as the substitution of high fructose corn syrup for natural refined sugar.

Traditionally, the substitution has been driven strictly by economics. Today we are seeing consumer preferences influence the conversion decision and that’s where the economic threshold where companies will convert.

We’re also extremely pleased to report growth within our business that will bring stability and additional tonnage over the next three years. The company was able to leverage long-term relationships with existing companies and we acted quickly when the market conditions brought upon an opportunity to enter into two, three-year agreements one with a liquid customer and one with an export customer after a combined total of 45,000 tons per year commencing in fiscal 2017.

Due to the historical export volume, we anticipate the net incremental volume impact of this new business should be 35,000 tons per year. As important, as the contracted volume itself is a validation of the potential for Lantic to find material and sustainable growth for our business outside the traditional hard spot domestic marketplace.

Before handing the call over to Manon, to provide more detail on the financials, I wanted to provide a brief update on Taber and our key operating strategies, specifically operational excellence, market access, and acquisitions. Taber’s beet harvest and subsequent slicing campaign completed in early January.

Equality and plant reliability were good resulting in a total production of approximately 90,000 tons of refined sugar from this year’s crop once our thick juice run is completed later on in the spring. With the affirmation to additional business, we have increased Taber’s beet contracting program from 22,000 tons to 28,000 -- sorry 22,000 acres to 28,000 acres for the 2016 crop to be harvested in the fall and sold in fiscal 2017.

Our operational excellence initiatives continue to be a priority for the business. We continue to benefit from increased scorecarding and standardizing our business around best practices.

Capital spending for fiscal 2016 will increase versus prior years consistent with our plan. We will continue to invest to increase client reliability and continue to update buildings and operations to reduce our operating costs.

In the second quarter of fiscal 2016, the market access strategy benefitted from the signing of two material three-year contracts. Our short term focus will turn towards executing on the new business, mid-term we will investigate prospects for market access associated with the potential ratification of CETA that is expected in the fall of 2016.

During the quarter, the company continued to look at acquisitions; this remains the priority area for our business. And lastly before passing the call over to Manon, I wanted to confirm during the quarter that corporation declared a quarterly dividend of $0.09 per share for a total payout of $8.5 million.

Manon?

Thank you, John. I will now go over the second quarter results in more detail.

Adjusted gross margin for the second quarter increased by $3.3 million to $20.4 million. This represents a 19% increase versus the comparable quarter.

The increase of approximately 9,100 metric ton of sales volume contributed significantly to the improvement year-over-year. In addition, byproduct revenues were higher than the second quarter fiscal 2015 due to timing.

Finally, the Taber factory operated well and the quality was good during harvest and throughout the sizing campaign, which helped reduce overall beet cost. On a per ton basis, adjusted gross margin for the quarter was $126 per metric ton compared to $111.88 per metric ton for the second quarter last year, an increase of $14.12.

Once again the additional volume was beneficial to generate efficiency gains with the highest throughout at the Montreal and Vancouver refineries thus reducing the fixed cost per metric ton. In addition, as I just mentioned, the overall performance of the beet campaign contributed to reduction of the beet cost and therefore increased the adjusted margin rate per metric ton.

Administration and selling expenses for the quarter were comparable to the same period last year. However distribution costs were $0.5 million higher than last year.

Transfers between our locations continued during the second quarter in order to manage the strong demand. Adjusted EBIT for the quarter was $12.7 million compared to $9.9 million last year mainly due to higher adjusted gross margins.

Now turning to the year-to-date results. Adjusted gross margin was $46.2 million compared to $42.4 million last year.

The adjusted gross margin rate amounted to $145.02 per metric ton versus $138.91 per metric ton in fiscal 2015. The improvement in the year-to-date results for both the adjusted gross margin and the adjusted gross margin rates is explained primarily by the second quarter positive results that I’ve just described.

Administration and selling expenses at $8.6 million were $2 million lower than the comparable period last year. As we discussed in our first quarter conference call, the company reversed a $1.2 million non-cash accrual for the termination and settlement of the Western salaried defined benefit pension plan.

As we mentioned previously, the company no longer has any obligation to work this defined benefit pension plan, including the impact of this pension plan settlement, administration and selling expenses -- sorry excluding the impact of this pension plan settlement, administration and selling expenses were $800,000 lower than last year. The decrease is mostly explained by a reduction in consulting fees which were incurred in the first quarter of fiscal 2015 to complete the process improvement review at the Montreal refinery.

Distribution expense year-to-date were $5 million versus $4.2 million last year. The year-to-date negative variance is also explained by the additional transfer cost between the various locations.

Adjusted EBIT year-to-date was $32.6 million compared to $27.6 million, an increase of $5 million or 18% mainly due to higher adjusted gross margin and lower administration and selling expenses. Excluding the mark-to-market adjustments on the interest rate swap, finance costs were $100,000 and $300,000 lower than the second quarter last year and year-to-date respectively.

The overall amount drawn under the revolving credit facility was lower due to a lower inventory level. During the second quarter, the company repurchased and cancelled 97,800 common shares through the normal course issuer bid.

Year-to-date the company repurchased a total of 178,600 common shares. For the quarter, free cash flow amounted to $6.1 million versus $5.1 million in fiscal 2015.

The increase is mainly explained by higher adjusted net earnings, slightly offset by higher capital expenditures, and repurchase of common shares, as opposed to issuances of shares in the comparable quarter last year. Year-to-date free cash flow amounted to $20.6 million compared to $19.9 million in fiscal 2015.

The increase is once again explained by higher adjusted net earnings, partly offset by higher pension contribution, higher capital expenditures, net of operational excellence, CapEx, and repurchase of common shares. I will now discuss the outlook for the second half of fiscal 2016.

As we just reported industrial sales volume was strong during the second quarter and we expect that the positive change will remain. In addition, we anticipate that the second half should slightly exceed last year’s comparable period after removing the impact of the additional shipping week in fiscal 2015.

In total, we expect industrial sales volume to exceed last year’s total volume despite the fact that fiscal 2015 included an extra shipping week. As for the other three segments we expect that all of them will be comparable to last year once adjusted for the 53rd week.

Overall sales volume for fiscal 2016 is expected to exceed fiscal 2015 even without adjusting for the additional week of last year. As John just mentioned, the company secured new liquid and export business that will generate an increase in sales volume of approximately 35,000 metric tons from fiscal 2017 through 2019 versus our expected sales volume for 2016.

This incremental volume will commence in October 2016. Our expectations for administration and selling cost remain unchanged and we anticipate it will be lower than last year due to the positive variation in the first quarter relating to the pension fund settlement and lower consulting fees.

In addition, the fourth quarter of fiscal 2015 included costs that are not expected to reoccur such as the accrual for the Western salaried pension plan termination, consulting fees for the Western salaried pension plan termination, and CITT proceeding, recruiting fees, and bad debt expense. With regards to distribution costs, we expect the second half of the year to be slightly lower than last year, but we anticipate overall distribution cost to be higher for the full-year.

With that I would like to turn the call back over to the operator for the question session.

Just looking at the adjusted gross margin rates 126, that’s not a level we’ve seen in a while for the Q2 quarter. Can you may be comment on the sustainability there?

I’m just looking for a sense of how much of that is higher throughputs versus the higher product, byproduct revenues, and the lower beet costs?

Yes, typically the second quarter is usually lower because of the mix. But this quarter I mean the overall for the full year, Taber ,the fact that the crop operated well, you will feel the benefit for the rest of the year, also the higher throughput in Vancouver and Montreal will carryforward so there should be a lift overall for the year.

That’s really helpful. More near-term I think we’ve seen a reversal on the number 11 versus 16 spread and the stronger Canadian dollar since you last spoke last quarter.

Can you may be comment on just looking at the near-term export opportunity right now, what level should we be looking for further additional demand?

Yes, I will tackle that. Just as we’ve described in a couple of calls that relationship between the number 16 and the number 11 market and in addition the currency has a impact on the opportunities to pursue business in the United States or further offshore.

At this juncture the window of opportunity is limited with the current spread and the current currency.

Yes, and George if I could add also the overall we expect for the year, the export volume will be comparable for the full-year.

Okay, all right. Thanks.

Just one quick one if I may just following up on the commentary provided I guess with your prepared remarks and also with last quarter on acquisitions. May be give us a little bit more there and little bit may be just a sense of the appetite for the larger M&A, is that still on the table and may be what you’re seeing out there in terms of multiples?

Okay. We will comment, make some comments on that question as well.

Definitely we made acquisitions a bigger priority for the business. We are looking mainly in North America but ultimately we’re going to judge any acquisition by these four kind of key areas one, the synergies it would create; secondly, access to new markets geographic or adjacent categories; thirdly, its impact on creating or strengthening our leadership position; and fourthly, any sustainable competitive advantage it delivers.

Our objective is to acquire business that will have a material impact on EBITDA and is immediately accretive to our business. We believe we have the strength in our balance sheet to acquire business using the traditional debt financing and we would be willing to increase our leverage, if necessary, to approximately three times EBITDA but would be looking for to deleverage or deleveraging that as soon as possible after the acquisition through the acquired business not through refinancing.

That’s really helpful. Can you may be just comment on lastly on multiples in general, like what you’re seeing out there in terms of multiple, how they’re trending and where you’re comfortable with paying?

It’s really -- it’s very much business dependent on the earnings, the risk. So I don’t think there is a straightforward answer to that question.

Yes thank you. Can you talk on the acquisitions can you talk a little bit how Rogers could leverage this Canadian based add value to an acquisition that they make outside of Canada?

I would prefer not to comment, I -- without specific subject matter I’m not sure how I can effectively answer or address that question.

Okay. I guess I was just trying to figure out if you would be able to sign more export contracts or at least export more product into the U.S.

so that and further process it somehow?

Again it’s really acquisition specific. So I couldn’t give you a general answer to that.

It depends on what sort of acquisition you’re looking at, there might be some that would provide us with greater access, direct or indirect access to ship our sugar containing products or sugar containing products outside of the country or potentially sugar itself. So not really products will give you anything specific.

Okay. Over the last 12 months well and you’ve talked about some of the benefits of the stronger Canadian dollar, the weaker Canadian dollar sorry for the last 12 months.

Can you -- how about on a margin standpoint, have you been able to take advantage of the I guess the more challenging environment for importers to try and negotiate a little bit more reasonable margins in your domestic business?

Well on the negotiation with our contract and with our customers, we have some customers that we have one-year and others are in multiple years. So it’s not something that we could talk or think and change from one day to the next.

While obviously we will always try to maximize the profit for the continuing price and minimize the impact from importers.

Just so I’m clear on your new contracts, the export business that you signed the new export customer that’s -- did I understand that that is going to take up the 10,000 metric tons of normal exports or 11,000 whatever it is now and plus extra on top of that that’s why it is only net 35,000 in total for the two contracts?

That’s right, if you’re talking about the normal 10 being the U.S. yes that’s right.

I just had a question, just a follow-up on the new volumes that you secured, is there are you able to provide a breakdown between I guess with the HFCS substitutable business being the liquid and then export little breakdown between the volumes that are attributable to each?

You could say it’s about half.

Okay, okay, great. And then pricing on those contracts have they already been established or is that to comment at a certain time in terms of down the road like as a renegotiated, is it renegotiated annually or I’m just trying to get a sense of margin wise are you sort of locked in currently or those going to move over time.

And then I guess along those lines can you provide some color as how the margins on the contracted volumes would compare to kind of your current margins on both liquid and export?

We can touch on some of that, some of the questions. So those contracts are firm contracts, they are fully priced and so that’s one aspect.

I think one of the things to mention about that why we were able to do that is we do have a three-year agreement with our growers which has benefited us in the ability to leverage that price certainty to establish from contract positions without any margin risk. On the margin side, I don’t think we want to comment specifically on that.

The dollars have been hedged and ultimately it expects for the next three years.

Okay. Okay.

And then just on the volume outlook for the base business in 2016, just so I understand it correctly, on the industrial side you obviously had a strong second quarter, so do you expect that in the back half of the year you will continue to see that level of growth or do you expect that growth in the back half of the year just or any declines will not be enough to offset the growth that you’ve seen in the first half of the year because I think on an annual basis you said that you do expect to be up on a full-year basis. So I was trying to get a sense as to what the back half looks like?

Yes so ultimately the 53rd week of fiscal 2016 is causing us some grief in trying to explain this. But ultimately the second quarter was definitely a strong quarter industrial wise.

And now looking at the second half for industrial, if you remove the additional week, we’re going to be slightly above. So overall because of the strong first half, we are still expecting that our sales volume will be above last year, even though you’re really comparing 52 weeks in the current year versus 53 weeks last year.

So we expect to be above.

Okay, okay. And then for the other just trying to get like Symantec in the outlook section.

Do you expect that consumer liquid and exports will be flat when you take out the extra year from last year is that the way to re-bet?

Yes, I think for the full-year they will be comparable, yes.

All right. Well thank you very much everybody and at this time we look forward to talking to you in the third quarter.