AGT Food and Ingredients Inc. (AGTF) Earnings Call Transcript & Summary

Thank you, Drew. Good morning, and thanks to all of you for being on the call. I'm Harley Ulmer, Chief Financial Officer at AGT Food and Ingredients Inc. Joining me today are Murad Al-Katib, our President and CEO, and Bill McFarland, who chairs our Board. We'll go through a short presentation, then open it up for questions, and we expect to wrap up by 9:15 Eastern Time. Today we'll cover our Q3 2026 results and outlook. We're assuming you've seen the Q3 earnings release, the MD&A and the financial statements, all of which went out last evening, and we'd encourage you to follow along with the slide presentation that's posted on our website. Before we start, the news release and Slide 2 include cautionary language about forward-looking information and non-GAAP measures; we do claim the protection of those cautionary statements for all forward-looking statements discussed today. And with that, I'll hand the call over to our Board Chair, Bill McFarland.

Thanks, Harley. Let me begin by saying the Board is happy with how AGT performed in the third quarter, especially given the tough conditions in the market. We saw very positive movement in every one of our key performance indicators versus earlier periods, including adjusted EBITDA growth, adjusted net earnings growth, and adjusted free cash flow growth. That tells us AGT's focused strategy is delivering. And in time, the market's investors will come to better understand and appreciate the opportunities in front of us. Our strong balance sheet and results, along with how we're executing our strategy, are also building very positive business momentum for the company, including significant new customer wins. Packaged foods and ingredients is growing. The value-added processing business has stayed resilient in spite of geopolitical and logistics disruptions, and the distribution business has posted strong results. I'd also like to confirm that our business plan is unchanged from what we communicated at our IPO; we remain focused on disciplined capital allocation, and future investments will come from free cash flow. And our debt level, which is elevated today, will come down over the next 6 months. I also want to take this chance to congratulate Harley Ulmer on yesterday's promotion to CFO, which is very well deserved. Over many years, Harley has held various senior leadership roles in finance and has delivered. I also want to thank Lori Ireland for her decades of excellent service to the company, and we very much look forward to Lori's continued contribution as Chief Transformation Officer. These changes were planned, and the Board is very confident the transitions will be seamless. I'll now hand it over to Murad to provide details on our Q3 results.

Thank you so much, Bill. Morning, everyone. Appreciate you being on the call. If you would, please turn to Slide 4 of the deck posted on our website. The third quarter came in solid, with adjusted free cash flow rising to $36.6 million and conversion up to 69.5%. For the year to date, adjusted free cash flow reached $76.4 million versus $52.4 million a year earlier, while conversion climbed to 55.8% from 39.1%. That puts us in position to reach more than $100 million in adjusted free cash flow for fiscal '26, which is an achievable target and a really strong foundation for what lies ahead. During Q3, adjusted EBITDA in our PFI segment rose 14%, reaching $26.9 million versus Q3 2025. That gain came partly from higher-margin U.S. better-for-you products and food ingredients, along with somewhat improved results in South Africa and healthy margins on packaged foods we manufacture in Turkey. PFI accounted for most of the 6% increase in consolidated adjusted EBITDA, which came to $52.7 million — 17% higher than Q2 2026 adjusted consolidated EBITDA. This demonstrates that we bring experience and strong management capability to running the business in a tough, difficult market. That is one of AGT's key strengths. Our VAP segment recorded a modest decline as global uncertainty persisted, while the PFI order book continues to expand as additional U.S. As additional capacity begins operating, the India project is still proceeding according to schedule. In our Distribution segment, we continue to pursue a disciplined asset-light approach; third-quarter 2026 revenue reached $134 million, with adjusted EBITDA of $4.1 million, while adjusted distribution EBITDA for the year to date has climbed to $10.4 million, up from $3.6 million in 2025, driven by stronger results in Canada and India. Looking ahead, we anticipate this segment will contribute steadily to profitability and cash flow while keeping its asset-light classification. Adjusted net earnings increased 109% to $22.3 million, equivalent to $0.32 per diluted share, which mirrors our enhanced operating performance and reduced financing costs; net earnings came in at $12.7 million, or $0.18 per diluted share. Now on Slide 5, we’ll review PFI Packaged Food & Ingredients, which is obviously the growth segment we’re excited about. A 14% increase in adjusted EBITDA versus Q3, and a 12% rise year to date, were clearly strong outcomes. The EBITDA margin came in at 14%, compared with 11.6% a year earlier, which brings us closer to our 2029 segment target of sustaining 14%. I should mention that PFI’s year-to-date margin stands at 12.9%, versus 11.7% during the first nine months of 2026, and margins are influenced by inflation, commodity prices, and the business mix. Higher-margin better-for-you pasta snacks, cereal ingredients and other food ingredients in the U.S. were the main drivers of margin growth, and we also saw a modest recovery in South Africa during the quarter from our bean and seed business. The second Minot extrusion line is now installed, and customers will run that capacity, with export contracts already secured. That should help 2027, because we expect contracts signed recently to take up more than one line's worth of capacity, which builds volume into the newly installed capacity. Our extruded snack product pipeline continues to expand, taking the segment further into pasta, snacks and cereal ingredients. The response from customers to our formulas has been positive, generating additional sales and expanding order books, and AGT anticipates meaningful growth over time. Building the India facility is proceeding according to plan; recent visits by management and conversations with retailers are advancing as we aim toward commissioning during the first half of 2027, and that project remains on schedule and within budget. The drop in PFI revenue is mostly a reflection of weaker wheat prices in our wheat pasta business, and we note once again that revenue isn't a metric we treat as a key performance indicator. What matters here is that volumes haven't declined and overall margins are basically unchanged. Our KPI focus centers on adjusted EBITDA margin and cash flow rather than revenues. Turning to value-added on Slide 6, adjusted EBITDA climbed 25% to $28.4 million. As the segment's recovery gained traction, margin rose to 9.4%. I'd like to remind everyone that when the IPO took place, that segment was operating at 6% — 6.6% — so once again, that's solid, resilient growth in a really challenging environment. Delayed shipments are starting to move, demand has picked up in Europe, the Middle East and North Africa, and AGT anticipates adjusted EBITDA will strengthen as those shipments get executed across Q4 and Q1 2027. Although sales from conventional food security programs came in lower, the fundamental demand for food remains; we've observed increased private-sector involvement in feeding at-risk populations across the Middle East, which widens the channels serving that demand and partly counterbalances the drop in food security sales via more traditional private-sector routes. Food security revenue fell by $94 million in Q3 versus Q3 2025. Still, private-sector channels made up a substantial share, which held the VAP decline to $54.7 million. Food security delivery contracts are now in hand. We anticipate Q4 sales will be nearer to 2025 levels, and we are providing extra food volumes alongside private-sector importers in the Middle East. Talks lately with the customers we serve in food security have been upbeat as well: our 2027 order book is coming together, which gives us better visibility into demand, and the orders in hand are tracking closer to what we saw in 2025. For VAP products in North America, the order book looks stronger because competition from Black Sea origins has eased. In key markets like India, we anticipate demand will exceed 2026 levels as we head into 2027, and we are seeing the impact of the El Niño super cycle. A later North American harvest pushed a portion of sales into Q4, and although weaker commodity prices cut reported import revenue, they matter less for margins and adjusted EBITDA. We keep passing along higher logistics costs tied to conflicts to consumers whenever we can, but the extra shipping expenses—$2.1 million for the quarter and $4.1 million to date—were adjusted for adjusted EBITDA; we expect this kind of cost to be nonrecurring, tied to war surcharges and added bunker and fuel charges that ought to go away as the conflicts resolve. Those costs stem from rapid changes that we can't pass on to our existing customer contract base; on Slide 7, I want to move on to a strong financial position. I'll hand that over to Harley.

Thanks, Murad. As Mad mentioned on Slide 7, our balance sheet and the free cash flow we generate keep giving us the financial flexibility needed to fund organic growth and carry out our strategy. At quarter end, adjusted net debt to adjusted EBITDA stood at 1.25x, though we want to restate that this rise in debt is temporary and comes from deliberate strategic choices to make raw material advances so we can secure the finished goods required to execute our upcoming sales programs. We expect that, as conflicts normalize and supply chains begin to become more flexible again, working capital will normalize and return to lower historical levels, and adjusted net debt to adjusted EBITDA will fall correspondingly over coming quarters. I'd also like to add that AGT declared a dividend of $0.05 per share for shareholders of record on December 31, 2026, payable on January 15, 2027. I'll turn it back to Murad to walk you through a bit more, beginning with Slide 8.

Yes. Thank you, Harley. Our conclusion comes on Slide 8. I want to move into Q&A here; but once more, to be very clear, the strategy we laid out at our IPO remains on track. A solid foundation exists for growth that is disciplined and for creating value over the long term. The mix of healthy margins, capital investments made with discipline and a balance sheet that is significantly stronger puts us in position to keep growing free cash flow while holding our leverage low. So these seasonal increases that are temporary, together with decisions made deliberately, can be resolved and will be; right now we trade at roughly 7x adjusted EBITDA, and we feel the valuation does not genuinely reflect the progress being made across the business or our growth prospects over the longer term. Management and our controlling shareholder, Fairfax, both believe AGT is a compelling investment opportunity; we are committed to building a sustainable business for the long term and to managing market opportunities as well as risks prudently for the benefit of all shareholders. Just to add, with the conflicts — upon us, a Middle East conflict, trade wars and geopolitics around the world, we have been resilient, we are strong, we are disciplined, and we are building that value. With that, I will open the call up for questions.

I'd like to congratulate Harley and Lori on their new roles and appointments. Murad, perhaps I could begin with a clarifying question. That strategic investment in inventory — is the aim to guarantee sufficient product is available to satisfy demand from your packaged foods and ingredients customers, or simply to make sure you have enough on hand given supply chain delays affecting customers in value-added processing?

Yes. That's a good question, Luke. It would be — I suppose it would be — the majority would fall under value-added processing; so it's largely tied, Luke, to the Black Sea region. The Russia-Ukraine crisis escalated, along with the sea of AO crisis. Look, those of us actively engaged in that region follow the geopolitics and the disruptions on a daily basis, more particularly where the logistics chain is concerned, rather than worrying about who is fighting whom on the political side. We forecasted this, right? We see it. We need product out of Kazakhstan; that's a very important area for us. So as for the Central Asian Republic, we made the decision a decade ago not to be heavily invested in Russia and Ukraine because of problems on VAT and getting your money back out of government taxes and those kinds of things. So the decisions that were taken, Luke, involved prepaying, getting our inventories in place, getting them into positions where we could move them without dependence on the sea and on Russia, and moving them through alternative ports, which lengthens the cycle. We have — this product is sold, like we're not speculating on product. In the PFI segment, we have taken decisions on Durham wheat to make sure we can maintain our margins from alternative origins related to Durham, including a much more active Canadian program in Durham into Turkey this year. So all of these things are — we see them as temporary. We see them as resolving, and we see them ultimately as strong strategic decisions that in the end will pay dividends on our margins in the coming Q4, Q1.

That's quite useful; now for my follow-up, I'd like to dig into the food security business. More specifically, you mentioned — I believe — that the private sector is kind of stepping up, or rather that you're selling more to those groups instead of the aid agencies themselves. I'm just curious: has that ever occurred before in your business? And second, what are the implications, if any, on the margin side, and in terms of timing versus tender, of actually being in a position to supply those customers? Anything at all we should keep in mind going forward if this lasts longer than it maybe has historically?

Thanks, Luke. It's interesting. We've actually mentioned this a number of times when people get fixated on the size of food security and say, look, you have all this concentration risk in food security. We've consistently said, look, this is basic staple food demand. If the aid agency isn't putting it out to tender using donor funds, the private sector will step in because people have to eat — these aren't optional purchases when you're talking about lentils and Bolger and pasta and < > and rice, the items we actually produce. So we've witnessed this before. This is in fact the cycle we observe. The private sector is strong. When conflict breaks out, aid organizations move in, since someone has to assess demand and handle distribution in a war zone. Later, once owners disengage or the fighting ends, private companies return; our position is strong thanks to where we operate; we are familiar with each region and each customer. We have lasting experience in this industry. I like to point out that our co-founder Hussain has spent more than 40 years in this business, and I have spent over 30. So we are witnessing it firsthand. As for margins, we sometimes find that private-sector margins can match or perhaps slightly exceed others. Naturally, we favor food security deals done in big blocks, since those are simpler for us to handle given how large our infrastructure is—but we're fully prepared and able to do it, Luke. We're observing quite brisk import activity at Israeli ports, at the Palestinian ports, into Saudi Arabia and Jordan, all steering clear of the Strait of Hormuz. Every kind of food product is something the Middle East imports on net, so that's something we must keep in mind. The Turkish land border is quite busy as well, and governments remain active—the UN is still purchasing, they're still present. We've been successful in some recent tenders and expect more wins ahead. Still, governments at the regional level are quite engaged — Algeria, Iraq, Kuwait, and the Bangladesh government. All of this, I mean, is going to keep going. Every country around the globe, Canada included, puts food security and food inflation at the top of its list.

Through this year, CapEx has run at roughly $25 million each quarter. Should we expect Q4 to close out the year at that same level?

Yeah, Zach, the projects we have left are basically finishing up India and those. After that, you'll see a highly disciplined CapEx plan for '27, '28, '29. So we'll be sticking to the knitting we laid out at our IPO. Again, disciplined capital allocation out of free cash flow. We aren't taking on big amounts of leverage. We don't foresee any material acquisitions on the horizon. Packaged food and ingredients will account for the big bulk of the spend; so we'll keep to the modular CapEx plan, with roughly 75% allocated into the PFI segment. 25% will go toward cost reductions, automations. Our cost structures must stay competitive so we keep improving that margin in the VAP segment. And I'm seeing fairly strong VAP margins, as you can see, that improvement from 6.6% at the IPO to 9%. That is, of course, our long-term target. Year to date, our target is around 7.6%, up from 6.6%. A 1% margin improvement in that area will bode well once that segment has more fluidity in its revenue, which we do expect, hopefully, to see as this conflict continues to resolve. So Q4 will kind of finish off at a similar type of level, but then you'll see a curve coming quite materially down next year, back to that kind of, call it, $50 million range; so $50 million to $60 million is what we expect to keep spending. But again, it depends on free cash flow. Fairfax, our major shareholder, has been very key in enforcing the message. Free cash flow funds our CapEx, free cash flow funds our debt, free cash flow funds our dividend, and that's what we'll continue to live by, Zach.

That's useful. And then, with — I know your guidance is for 14% margins in packaged food and ingredients, and we reached that level this quarter. Given how the new capacity at Minot and Turkey is ramping up, how do you expect that margin profile to trend over the coming quarters?

Yeah. You know, Zach, we've been quite clear on this. Year-to-date, 12.6%. I believe you have 12.9%, I can't recall the precise figure, but it's below 13%. Look, strong improvement from 11.6% at the IPO to the mid- to high 12s. That's our first step up. So in our MD&A we were quite prescriptive in stating that our target is 20%, 29%, 14%, and we want to reach a point where this isn't a variable margin, correct? When we say that's our target, that means it will hold quarter after quarter, with upside to our margin and very little downside. So there's work ahead to keep that going. Again, what you're seeing today is roughly our current progression in our run rate. We'll do everything we can to keep making progress on those margins in '27 and '28, reaching our 2029 target.

Let's start with PFI. As that order book grows, how spread out is the added demand you're seeing, both across customers and across products? For example, is most of the new volume coming from pasta, or are snacks and cereal ingredients getting to be just as significant there?

Yeah. I'm glad — Frederic, I couldn't have hoped for a better question; that one's excellent. Look, we built this because we understood these segments, and we've discussed gluten-free pasta, as if we were a pasta maker. We're doing a terrific job landing business with major brands, major private label, and major quick frozen industrial players in gluten-free. We'll continue pushing that expansion within the U.S. Yet we consistently stated during the IPO that we viewed snacks, breakfast, and bakery as key areas, along with texturized protein for meat—though that last one is smaller. Over the past six months, however, we've witnessed substantial diversification across that portfolio. And we pursued it quite intentionally. Our R&D innovation efforts over the last two years were designed not just to strengthen the pasta operation, but also to make sure the snack and pellet side of the business became far more advanced. So as we've maintained throughout, we don't refer to this as our Nutrition segment—we call it our better-for-you segment. Consumers are seeking better-for-you snacks. Customers are asking for morning options and meals that are healthier, and they're asking for them to be better for you. Protein and dietary fiber aren't a passing trend—they're core nutrition. So yes, the order book is far more balanced now. Looking ahead to how we use Line 2, we're aiming for a shift in which our non-gluten-free pasta accounts for no less than half of total demand. That distributes the risk across customers. It distributes it across segments, and in the end it delivers growth that's much more balanced.

That's quite useful, and as a fast follow-up, you mentioned in your comments some improvements in South Africa. Could you perhaps go a little deeper into what's mainly driving that?

Sure. And once more, even though South Africa sits within our PFI segment, they still depend on raw material sourced from the Southern Africa region. So the packaging we produce for big South African brands such as Tiger Brands and Pioneer Foods, along with the South African retailers, still depends on material grown in Western Cape and Malawi and Tanzania and Mozambique. Weather problems across 2025 and 2026 brought some fairly significant harvest delays, and some unusual seasonal patterns genuinely held back our earnings in '25 and '26 relative to 2024. We did see a recovery, a modest one, in Q3, which had been projected. Q4 should bring another modest recovery, in our expectation, and we're hoping 2027 brings earnings that are more normalized. It looks as though things are returning to normal. That segment, I mean, isn't usually so underpinned, but those weather events, floods and rains arriving at the wrong moment, were truly unforeseen. They hadn't occurred in years, and we hope they won't recur. South Africa ought to be a steady contributor to the PFI segment. It won't be the big growth driver. The big growth driver, as you know, is the India Past commissioning, and the big growth driver is that acceleration of the U.S. strategy. That's where our focus will remain.

Just one quick thing, coming back to working capital. Clearly there was a bit of a build in this quarter. I just wanted to ask how we should think about when that unwinds during 4Q and into early 2027? And then on leverage, over what kind of time period should we expect it to return to the levels we saw earlier this year?

Harley, would you like to take that first, and then I'll chime in?

Yes. Yes. Thanks. For us, Q4 and Q1 tend to be the seasonally heaviest shipping windows, and working capital levels run higher in step with that. So from our normal cadence, this wasn't entirely a surprise. Now that the prepayments are in place, we do expect — you'll see it in working capital — they begin as prepayments, then move through into inventory, and after that they convert into shipments and contracts in Q4 and Q1. Given that cadence and conversion, we expect debt to decline over the next 4 to 6 months in line with how we work through this peak shipping period. That pattern is typical for us. This year, as Murad mentioned on this call, we had to make these strategic decisions so that supply would be secured. The just-in-time inventory concept is a difficult one at present, given the world and the friction in the supply chain; we knew the sales contracts were there on the other side, and we had to lock in that supply. So this was a deliberate decision. It was funded through the syndicated credit lines, and other working capital type facilities will come into play, and that will help convert it into cash and bring down that overall debt profile over the next 4 to 6 months. Anything else to add?

Yes, my expectation is that this will show up across the coming two quarters. Once more, I can't pinpoint whether the split between those two quarters will be even. It will work its way down. This is about conversion. We aren't accumulating inventory on speculation; we're accumulating it because the goods are already sold. And I think those of you familiar with a sector where you grasp global trade — the disruptions we're witnessing stemming from the broader crisis in the world today have stretched out transit times considerably. As Harley said before, you can't operate an integrated supply chain manufacturing operation on just-in-time, since there's no longer any predictability about what just-in-time even means. Because of that, certain adjustments are short-term, and businesses that see the situation clearly and possess the strength to pivot will capture the sales, carry out those sales, secure the margin, and in the end hold on to their customers—since they can be counted on. That is exactly what we hear from our customers: they tell us we are dependable. Even under the hardest circumstances, we keep our customers' products available on the shelf. That is ultimately what they rely on us for, and that is ultimately how we create long-term value in this company. Go ahead—do you have a follow-on?

Yes. All right, that's really helpful context. And just to follow up, specifically regarding India, where commissioning is anticipated during the first half of next year. I was hoping you might give a bit more detail on what the commercial ramp is expected to look like there, and then how much of a contribution should we anticipate in '27? Or does it lean more toward '28 before reaching full ramp?

Yes. That's a fair question. India will definitely contribute in the second half. But once more, when you begin to consider that these lines aren't the type you start up and shut down, then start up and shut down again. What you're aiming for is to have them operating and reaching 50%, 60%, 70% utilization as fast as you can; so a Q3 contribution is coming. In Q4, we anticipate it will begin to be genuine full commercial production. But once more, you'll reach something close to a full run rate in 2028 on that; and once more, that's what we did anticipate; and once more, what matters most to me is that despite all the logistics delays and all of the additional costs, this project is on budget and on time. So senior management visited India 2 weeks ago and spent a number of days on the ground, and everything is in hand. Customer order books are progressing. Naturally, as we said earlier, the European free trade agreement with India was very key. We're expecting, once more, the Canada, India agreement to be announced in December when Mr. Modi visits Canada. And we are expecting with the — we're hopeful that the U.S. and India trade regime will have more clarity now that the midterms are over; so overall, things are shaping up very well for that to be a very good contributor in 2028.