Tim Close - CEO Steve Sommerfeld - CFO

Jacob Bout - CIBC Peter Prattas - Altacorp Capital Greg Colman - National Bank Financial Nelson Mah - Laurentian Bank Marc Robinson - Cormark Securities

All participants please stand-by, your conference is ready to begin. Good morning, ladies and gentlemen. Welcome to AGI’s Fourth Quarter 2015 Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the meeting over to Mr. Tim Close, President and Chief Executive Officer of AGI. Please go ahead, Mr. Close.

Thank you, Melanie. Good morning and thank you for taking the time to participate in the review of our Q4 2015 results. As you can hear I'm battling a bit of a sore-throat this morning and so my voice is fading in and out, I apologize for that upfront. I'll try to -- I've few quick comments off the top here and then we'll open the call up for questions. Today feels a little odd for Steve and I, as this is the first call since Gary Anderson's retirement. I had the pleasure of participating in many Analyst calls over the past few years and it's always been inspiring to see the passion and excitement that Gary had to talk about the business that he, Rob and Art Stenson founded 20 years ago. I think Gary is as excited about AGI and our potential today as the three founders were in those early days, setting out to consolidate the short line agriculture sector. Steve and I along with the rest of the AGI team share that same excitement today as we see an abundance of opportunities to continue to grow our business. There are perhaps a few differences to those early days as we are more focused today on global growth into EMEA, South America and Africa as opposed to hoping to one day grow beyond the city of Swift Current, Saskatchewan. But we continue to have the values, the ambition and the commitment that Gary built into AGI from the beginning. We’d like to thank Gary for his outstanding contribution and commitment to AGI. I'm humbled to step into his position, but also consider myself very lucky to count Gary as an advisor and the friend. Turning over to our Q4 results, 2015 was a challenging year as we dealt with the impacts of a drought in Western Canada and subdued demand in the U.S. Just to add a little perspective, 2014 was a record year for our farm businesses, so the headwinds in 2015 have been highlighted by the 2014 comparisons. As expected the weakness caused by the issues in 2015 carried into Q4 and our adjusted EBITDA of just under 13 million was roughly in line with Q4 of 2014, despite the contribution from our newly acquired Westeel business. Westeel was significantly impacted by the drought in Western Canada that caused the Westeel Canadian Q4 results to be well off normal levels despite strong results from our Frame business in Italy, which contributed 1.9 million in Q4. Our international business was very strong in Q4 as it was throughout 2015. Westeel's two Italian subsidiaries contributed significantly with large projects in Africa and in the Middle East and along with our continued momentum in Eastern Europe and Latin America our offshore sales increased 89% in Q4 and 54% in fiscal 2015. After comprehensive analysis we've decided to exit the likes of livestock businesses as well as our portable dryer business in Finland. These two businesses have struggled to breakeven over the past five years and in fact typically have been a drag on earnings. This move allows us to free up management time and focus for our core businesses. Our mixed results in Q4 and in 2015 in general for our commercial and farm businesses across geographies and product lines and types of customers, highlights the importance of our growth strategy. Going back to Gary, Rob and Art in Swift Current in 1996, the basic strategy was to mitigate the risk of agriculture through geographic, product and end user diversification and growth. The announcement last night of our acquisition in Brazil is a continuation of that original strategy as we gain exposure to the new markets, new customers, crops and demand characteristics. The purchase of Entringer marks a new chapter in our growth in Brazil. A theme we've talked about for so long I think we're starting to bore some shareholders. This deal brings manufacturing capabilities within Brazil and sets the platform for us to pursue significant growth in a market we were otherwise blocked from participating in. Brazil is one of the top markets for agriculture in the world and we are very excited to welcome Entringer to the AGI family. The Entringer deal marks the execution of the balanced entry into Brazil that we've discussed in the past. After looking at many options for M&A in Brazil we fine-tuned our priorities down to a simple recipe. We wanted to buy small customer focused business with an excellent operations team and high quality product line to service as the basis for us to build a new multiproduct facility focused on productivity. The Entringer business delivers in all of these objectives included a well located piece of land to build the facility to accommodate both the farm and commercial product lines of AGI and Entringer. We are well advanced in the design of the new facility and we expect to begin construction in Q2. The Entringer family have built this excellent business and will join AGI to build out this business in Brazil. With that we'll turn the call over for questions. Melanie back over to you.

Thank you. We will now take questions from the telephone lines. [Operator Instructions] The first question is from Jacob Bout of CIBC. Please go ahead.

Congrats on the brazilin acquisition, I know it’s been a long-time coming.

I think going back to a very long time and I know you kept reminding us of that Jacob.

Maybe to talk a little bit about the products that you are going to be producing from this facility and maybe talk a bit about the distribution of it within Brazil, do you have all of those details worked out right now?

Yes. The product lines will be a combination of our commercial product lines. All of our product our commercial product lines will be built in Brazil as well as a combination of the farm product lines that Entringer has as well as contribution of some of the farm product lines that we have around the world. Out of the gate we’ll have less of a focus on portable equipment and more of a focus on the Brazilian styled farm facilities which are typically a small sort of permanent facilities.

Okay and then on the distribution side?

Distribution, Entringer has a very good distribution model and they also do installation. So they have more of a turnkey approach which was one of the attractive things of this business. It allows them to ensure the installations goes very smoothly to ensure quality of the end product and is a unique capability versus the competition in Brazil.

Okay. And then just earn out that you have with them what is that based on is that profitability or?

Yes its EBITDA based and it some -- sort of stretched targets for them to hit over the next few years but we anticipate that they will get there based on volume of business and what we’ll also been with the business.

And then if we think about the tariffs that are in place in Brazil with this acquisition do you bypass all of those tariffs?

That's right.

And does that also mean -- because I know were doing some commercial port work, will there also be kind of a lift in margins with some of the commercial work that you are doing at the ports?

Well we've been selling a very small amount of commercial into Brazil right now and so it wouldn’t have a material impact, the commercial product that's going in there is a very small component of say High Roller or Union Iron [ph].

Okay my last question, just is on your 2016 guidance you are talking about first quarter a little cautious there, but as you look at 2016 versus 2015 it sounds like you think it's going to be up year-over-year. And just wanted to understand, what are the drivers that you are looking at that give you that confidence?

Yes, sure. Hey Jacob its Steve and by the way for those who don’t know I’m Steve Sommerfeld, the EVP and CFO at AGI. So looking ahead to the balance of 2016, we can break it down into a few areas. The commercial business, its remained very strong in 2015 and we open 2016 on a strong footing, especially internationally we see growth again in 2016 over very snipping growth that's Tim mentioned in his opening remarks. On the farm, we mentioned the few statistics in our expectation regarding acres planted and intentions of farmers. Really today the thought we have to look to, the general sentiment that we are getting from our field, it's a cautious opening to 2016 but we believe once the new crop season begins we will see some increases over 2015 actuals and the same goes for our Westeel business. We guided towards a weaker Q1 of 2016, that play out that way and again the work we’re doing and the discussions we’re having with our distribution, we believe over the balance of the year we will see some year-over-year increases in that business as well.

Thank you and congrats once again, I think Rob would be very proud.

Thank you. The following question is from Peter Prattas of Altacorp Capital. Please go ahead.

Good morning guys and congratulation on new moves in Brazil there. My question relates to that, firstly, can you maybe give us an update as to what that total CapEx budget would be for 2016 given the investments you plan there this year and how you view your balance sheet in lieu of that, in terms of your borrowing metrics as a result of that?

Yes, sure. Thanks Peter, its Steve. So on the CapEx front, our guidance and our historical numbers are on the maintenance side of 1% to 1.5% of sales, it's still true after including the acquisition of Westeel and the more recent acquisitions. On the maintenance side that's a good guideline, on the strategic overall CapEx the project in Brazil will be by far our most significant item in 2016. We have a few kind of typical type projects, kind of in that $5 million range that we had every year that we consider to be growth and the third one, I think maybe that you would take into consideration is with regards to our Frame operation in Italy who are currently operating out of a building they lease. The building is being leased by the government who has it sort of under bankruptcy protection from Frame old current I guess, so we have an opportunity to buy that building in 2016, it likely will and that will add to another few million dollars to our CapEx. On the balance sheet side, I think we included some relevant numbers in the MD&A, our leverage covenant is again in that 2.5 range, which is very comfortably below our 3.25 threshold. We have plenty of head room there, we don't anticipate having to tap our revolver significantly in 2016. We've $58 million of cash on our balance sheet at the end of '15. So, we don't anticipate any balance sheet issues, happy to talk further about that. Our payout ratio also was disclosed in the MD&A, a little higher than usual at 84%. We expect that LTM to return to more typical levels and watch that payout ratio come down. I'd also like to note, in that payout ratio we had some pretty significant losses on that back in 2015. We'll have them again in 2016, but if you want to look at a more sustainable payout ratio, that FX loss on those old [indiscernible] money hedges increase our payout ratio probably by 20 points. So, normalizing for it we're more like 60% payout ratio.

And then my second question is related to North America, one challenge I have is gauging the dealer inventory levels of your products and I know from your commentary in the past, they were elevated, I guess throughout 2015. So, can you provide any metrics on where dealer inventory levels maybe currently and if they have in fact been coming down materially at all and does that give you confidence, they will be in need of restocking here in the coming months?

We don't have metrics per say and I guess I need to speak to it at a little bit of a higher level. I can tell you that it's playing out as we expected, the elevated inventory levels are probably a little more pronounced than Canada compared to the U.S. and more pronounced especially with our Westeel business. So, our pre-season programs, both sides of the border were roughly in line with our expectations. They were down from a very strong competitive to a year ago. We are working through that inventory, we are getting into the season now where we’ll start receiving orders from our distribution that are for the new crop year type orders. So, that's -- it's sort of a vague answer to it, I think you were looking for more specific numbers, but really all I can reference is what we are seeing in the marketplace and it is playing out as we anticipated.

Thank you. The following question is from Greg Colman of National Bank Financial. Please go ahead.

I'm jump around a little bit because a lot of people have touched on quite a few areas that I wanted to dive into. Starting with Westeel, you were talking about the distribution channels there, and a bit of an update, can you -- if I dive into that a little bit more, could you give us an idea when you expect it to return to normalized levels? You said that you're going to orders coming through the channels in the near term, so is it something we’re going to probably see it level out in Q2 or Q3 or could it be all the way through to harvest?

The guidance for Q1 again as you implied was a weaker Q1, it's little hard to exactly time when we'll see the quarter-over-quarter increase. We expect at the beginning of Q2, again a lot of that may depend on the weather, how winter in Western Canada ends and the spring planting begins. Beginning in Q2 and especially in the second half we expect to see increase in that Westeel business.

Okay that’s good color, thanks Steve. On Westeel, this is more of a history lesson now, can you remind us how much of that -- how much of your EBITDA Westeel contributed? We know obviously on the revenue side you break it out quite nicely, but in Q4 in 2015 how much EBITDA did you get from Westeel?

Well we, we got more than we guided towards after Q3 because of the inclusion of Frame. So, in total Westeel line is two Italian subsidiaries contributed to EBITDA roughly 3.5 million, 3.6 million. Frame had an exceptional contribution of about 1.8 million which is quite an unusual quarter for them as far as volume, they have some big orders, international kind of revenue recognition and everything sort of ended up piling into 1Q. So, but all in, 3.6 million.

Got it, and that 2.6, half of it as you mentioned, is that Frame which is -- which was, an exceptional quarter was just in the quarter, it's not expected to kind of continue into Q1 and beyond?

Hi, Greg, sorry and, not at that same pace. They've got a very good backlog and same good volumes, but that would be a very -- that Q4 result was an unusual quarter.

Got it, that’s good color. Moving on into Brazil, just checking a few boxes, when do you expect the deal to close?

That's closing today.

And you mentioned that the price includes BRL30 million and then the 50 million earn-out, is there anything on top of that? I'm just focusing on the word includes, I just wanted to make sure that 15 plus 30 was it and there is no more than that?

No, that's it.

And how long do the stretch targets for the EBITDA go? Are they kind of one year out, two year out, five years out?

Three years.

And then finally on the U.S. $27 million facility, you mentioned at Q2 start in your opening comments, when do you anticipate it to be finished?

Within 2016.

So, it's going to be producing kind of late 2016?

Yes, we've got an aggressive plan to -- design work has been -- wherever that facility landed it was -- the design work has been we've been thinking about that for quite some time. So we’re well advanced on that -- sorry excuse my voice guys it's a bit of a struggle today. We expect to be breaking ground relatively soon and then have it opening up still within 2016 and there is a bit of commissioning and there is always equipment we we’re coordinating and lead times on equipment, but we want to have it open in this calendar year.

Tim maybe I'll give your throat a break for a second, just an FX question for Steven, you said that significant FX loss likely in the year, would you be willing to quantify that all if we stay at kind of the current Canadian dollar levels? And just wanted to confirm that that's a non-cash impact, but just wondering here from you.

While there is a cash impact, so the impact from 2015 on our foreign exchange hedges when they matured to compared to spot was roughly 15 million. And when I made the adjustment to our payout ratio a minute ago, with and without those hedges, that's the 15 million dollars which we consider to be a cash loss in 2015. Based on current spot of roughly 133, we expect to incur a similar type loss in 2016 around $15 million. Our hedge book beyond 2016 is very small, in fact it’s only I believe a few million dollars in Q1 of 2017, so we have one more year to work through these type of the money hedges which are impacting our results and our payout ratio, but it's a statutory item and beyond 2016 won't be significant.

Got it. And that just leads into my last question than I'll wrap it up. On working capital side, I'm pretty sure that those cash impact show up on the working capital side, there is a lot of moving parts this year, going into Brazil, Westeel, kind of starting to hit its stride hopefully. A little bit of growth in the Frame maybe and commercial looking pretty good, should we expect another year of sort of working capital draw constitute maybe 20 million or 30 million, or is there likely to be a harvest coming out that, I mean I'm trying to -- I'm throwing dark here. So I'm trying to look for a -- hoping a guidance somewhat of your forecast.

I wouldn’t anticipate a significant working capital drop over the course of four quarters. What we are doing in North America and at Westeel in particular is bringing forward some steel purchases that take advantage for other current market. The pricing is very attractive right now in steel and with Westeel in particular the locking in the input cost of this steel is very important. So you may see more of a drop from it early in the year, but over the course of 12 months I wouldn’t expect there to be a significant drop. I don’t believe Brazil moving to that will significantly impact our working capital in 2016 as we finalize the construction of the plant and start to really reproducing our AGIs commercial and our North American commercial type equipment in Brazil you may see and not may happen in Q4, depending on timing here, if some working capital increased to kind of get us to the point where we can begin producing commercial.

Got it. Alright, thanks guys. That's it from me.

Thank you. The following question is from Nelson Mah of Laurentian Bank. Please go ahead.

As Steve, can come back to your outlook. I mean I guess the reason why I'm just wondering about, corn pricing is low, farmer income is low, then you look at like on the Westeel side right GSI or Ag Co. came outs and well 2016 was not that great, so I was just wondering how you have a -- how your outlook compares to maybe those type of things going on.

What that -- the lower commodity prices continue to have the obvious impact on farmer income, significant differences in our product lines, the portable side, GSI doesn’t have portable equipment and we continue to talk and explain how that portable equipment is -- there is less sensitivity to those purchases and it's more of our replacement cycle based on the conditioning of the equipment and they are low ticket items. So we've seen less of an impact then certainly last then the mainline agriculture equipment manufacturers have seen. Still and with the crop being and the planting's being roughly the same and maybe down a little bit, that's where we have our confidence that the market is still healthy and incrementally see some growth. Our storage business with Westeel is exposed to -- we have majority of that, a vast majority of that is in Canada very, very small amount of sales into the U.S. storage market. So our exposure to that market the GSI is talking about is very limited. This different demand drivers in Canada including different crops and different crop cycles and weather cycles up here and so that’s where we can say, is we expect Westeel to normalize or start to normalize towards average levels.

Okay. So something like this, global is more weed out there and the pricing is lower so therefore Westeel will still be impacted though right?

I think we're still saying, I mean you've seen some of that in Q1, some of that headwind from 2015 and we’re saying it’s going to start to incrementally get better throughout ’16 over what was really a an abnormal year in '15 driven mostly by the drought in Western Canada.

[Indiscernible] you know from Q1 '16 to approximately Q1 '15 that inclusive Westeel in both right, so it's apple-to-apple?

That's right, apple-to-apples.

And then lastly on Brazil, like what's the market share of your acquisition versus something like what your competitor [ph] would have?

Yes, it's small, it's a small business and it’s exactly what the business that we wanted. We looked at a lot of businesses in Brazil including looking at Cappeler [ph], ultimately we like this strategy much better with that sees us a better facility, better equipment, better productivity than the competitors. Entringer would have somewhere around 5% of the farm market. And they've just started in 2015 to start to sell in to some of the commercial sectors to the co-ops and the in-land commercial businesses. So, the commercial business is growing very rapidly in Brazil since 2013 regulations around some of the port ownership regulations changed. And so the combination of the farm equipment from Entringer and then brining our commercial equipment will expand that -- the scope of that potential market share.

Was there ever a bid process on this?

No.

Thank you. [Operator Instructions] The following question is from Marc Robinson of Cormark Securities. Please go ahead.

I'll be brief here guys, and you're going to be ultimately spending it looks like upwards of $50 million with the facility and the acquisition in Brazil. So, can you just give me a sense perhaps of what the IRR targets or return on capital targets might be so we can try to get a hand on what 2017 contribution might look like?

The targets for 2017, we expect the business to start having a good contribution in 2017 as we grow into that farm and that commercial business. So, we're not -- I think at this point we're just giving some high level guidance and explanation of the business and as we fine tune the projections in Brazil we can, we'll be talking more about it.

Do you have sort of an internal hurdle that you use in order to figure out whether the allocation of that capital is prudent?

Absolutely, we expect to have better returns through this strategy, then say otherwise buying that market share. And so you could look at it from the multiple perspective, this, the growth that we'll see or the results we'll see in EBITDA going forward, we expect to make the cost look very attractive.

Thank you. There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Close.

Okay, well I’d just like to again thank everybody for participating. Again I apologize for the state of my voice and -- I'll be healthy and ready for discussion throughout next week. So, thanks again and take care. Bye-bye.

The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.