Tim Close - CEO Steve Sommerfeld - CFO

Michael Doumet - Scotiabank Jacob Bout - CIBC Peter Prattas - Altacorp Capital Greg Colman - National Bank

All participants please stand by; your conference is ready to begin. Good morning, ladies and gentlemen. Welcome to AG Growth Second Quarter 2016 Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the meeting over to Mr. Tim Close, Chief Executive Officer of AG Growth. Please go ahead, Mr. Close.

Good morning and thank you for joining us this morning to discuss our second quarter. Steve Sommerfeld and I are sitting in our new Hi Roller facility in Sioux Falls, South Dakota. It’s a beautiful morning here after about an inch of rain last night. The crops surrounding Sioux Falls are in great shape as we have toward the harvest. The Hi Roller team has done an outstanding job in creating a production space that now matches the great business they have built over the past 35 years. We are very lucky to have Hi Roller in the AGI family, as they step within the highest standard in dedication to their customers, dedication to quality and dedication to service. Such a simple concept that when executed well creates great value for all stakeholders, starting with our customers, but including the team here in AGI shareholders. It's a message and a model that everyone in AGI strives for and what determines our success going forward. We have our board here in Sioux Falls with us this morning making it a perfect time for us to thank our Hi Roller team for demonstrating the success that comes with an unwavering commitment to customers and quality. Shifting over to our financial results, we are pleased with our results of record Q2 sales of 144 million and record Q2 adjusted EBITDA of 26 million. As always and as expected in agriculture there were variations in our farm and commercial market that we dealt with during the quarter. The U.S. farm market continued to be soft and international commercial projects faced substantial delays and increased competition. Canadian farm, domestic commercial and our European markets were solid, resulting in a good blended result. On a consolidated basis, our gross margins remained essentially flat to last year despite the lower contribution from our farm businesses. For an earnings perspective we’re below last year due to losses on FX contracts and onetime non-cash items. Similar to Q1, we have substantial contribution from recent acquisitions, highlighting our strategy to continue to diversify by product, geography and customer type. After a lot of work and change we are happy to report that Westeel is performing well and achieving the sales and margins that we forecasted at the time of the acquisition. The improvement at Westeel was accomplished in tough market coming off to 2015 drought. VIS and NuVision also performed well, with VIS in particular having an excellent Q2 and first six months. In Brazil, we are investing to transform the business to enhance the focus on cost control and margins while we are building our new facility. Entringer posted slightly negative results in the quarter and we expect that to continue to 2016, however the business will be well positioned heading into 2017 when we shift production to our new facility. Substantial work has been completed on a facility layout and product transfer. We anticipate this facility to be completed by the end of the year and the first product line equipment to be commission by late Q1, 2017. Farmers in the U.S. continue to be reluctant to spend and we anticipate that they will push off line equipment until absolutely necessary. The crops are looking excellent across all the key growing regions in North America, and we are starting to see some signs of an uptick in spending in anticipation of the very large crop. Lower commodity prices are still impacting sentiment and we continue to keep a close eye on farmer behavior to ensure we match production to activity. International project quoting [ph] is active, however we continue to see projects pushed out or decision delayed. We expect many of these projects to move into Q4 or Q1 of next year. Part of our push to secure and grow our European businesses was to diversify our international exposure in new markets and beyond project sales, it was these new businesses that medicated the drop in project sales during the quarter to result in flat international sales as compared to the first six months of last year. We do expect international project sales to return to prior levels as our working markets begin to pay off. Post Q2, we acquired Mitchell Mill Systems, Mitchell marks our first business in Ontario and moves us squarely into Eastern markets for grain, fertilizer feed and food processing. Mitchell also has a plan in Joplin, Missouri focused on structural steel as well as stainless equipment for food processing for customers taking us into additional markets and a new customer segment. Mitchell fits very nicely into AGI, the business is run by Stephen and Todd Mitchell, and was founded 38 years ago by their father. The two generation of Mitchells have built the business very much in the mold of Hi Roller and VIS with a stated commitment to quality, reliability and service. The business had LPM EBITDA of 8 million, was an excellent -- and has an excellent backlog in place. Todd and Stephen are committed to continuing to lead the business and they were a big part of helping us grow our commercial business. We welcome the teams in Newton, Ontario and Joplin, Missouri to AGI. With that I’ll turn the call back to Catharine and take some questions. Catharine, are you there?

Thank you. We will now take questions from the telephone lines. [Operator Instruction] Our first question is from Michael Doumet of Scotiabank. Please go ahead.

I’ll start off with, could you talk about order trends in the United States and in Canada over the course of the quarter and maybe into VIS one? And how dealer inventories may have shifted or changed over the course of the time?

Sure, Michael it's Steve speaking. Starting in the U.S. like Tim said in his opening remarks, the farm business in the U.S. remain quite soft in Q2, I think not surprisingly like our cycle really is sort of Q2 through Q3 year-over-year, but Q2 of '16 really kind of end of our four quarter cycle in the U.S. and we didn’t see enough uptick in demands, really in Q2 based on the old crop cycle. Now we are getting at Q3, more recently we’re starting to see an uptick in demand. Dealer inventories remain, I would say slightly elevated in the U.S. What we see next -- over next few weeks, I think will be very important, we are seeing, again in the last kind of couple of weeks in August moving off dealer lots.

Okay, just kind of improvement there. Maybe you can give us a sense on the U.S. on the farm side of the business, how would you compare current sales levels excluding the inventory impact versus maybe what your long term views of that business are?

Well, again and I think they're softer than they should be given the conditions out there today. I think Tim said it right, what we're seeing right now is that farmers are reluctant to spend, the commodity prices are lower even than they were last year at this time. They look around; they see a lot of our inventory at dealer lots, a fair bit of competitor inventory at dealer lots and I think what we're really seeing is on the grain and auger side, farmers, if they can make it through this harvest they will do that, if they -- again the trouble during harvest with the grain auger, they are quite comfortable that there is ample supply nearby and it won't cost them either disruption in their harvesting process. I think maybe where we’re trading [ph] more is like we've kind of talked about over the last couple of quarters that we're turning more into kind of our third quarter weighted business whereas, in '13 and '14 we were probably a little spoiled by the FDA [ph], but we had it in Q2 and earlier in Q3. I think that's sort of the dynamics that are happening in the U.S. right now on the grain auger side.

Maybe just turning it over to discussion on steel prices, you've indicated that you've done some smart pre-buying, how should we think of higher steel prices falling through the P&L, I mean how long of a buffer do you have in terms of inventory and what are your comfort levels in terms of passing those higher costs through to your customers?

Michael we're constantly working at steel as you can imagine, we now buy a lot of steel in North America, in Europe and in Brazil, is starting to grow. So, we're constantly managing that supply and taking -- trying to take advantage of good pricing when we can. We have very good steel contracts negotiated and so, it's a constant dynamic in our business. We manage through it based on -- with our customers and we feel pretty good about where we're at but recognize that there is a lot of volatility in steel over the last couple of months two-three months and going forward.

Thank you. Our next question is from Jacob Bout of CIBC. Please go ahead.

Just going back to the steel, so are you anticipating there's going to be some lag between rising steel prices and rising in bin prices?

Well, as you know, the market is pretty dynamic and it's a very competitive market as you know throughout the U.S., internationally, we're -- we now have the capability to supply bins from Europe, from Canada and very soon from Brazil. So, we take all that in consideration and the competitive environment we're dealing with as we handle that steel supply.

And maybe I'll just add on to that a little Jacob. As you know even within North America, different types of steel, at different pricing dynamic -- in our business, particularly on the commercial side, it's not a pricing model, where it's price list, you’re up quoting projects, those quotes typically stay alive for 30 days, before we have a chance to re-price. So, it’s really is -- the impact of steel will be different on the different parts of our business and like Tim said it's very volatile right now on the kind of the forward looking curve on steel, there're different opinions on what may happen in the balance of '16, so -- [Multiple Speakers].

I guess what I'm getting to close is to -- are you expecting some type of margin compression in the second half as a result of this rising steel prices?

Yes, I think in the MD&A we highlighted that that's a concern and it always is. It’s something we have to manage through, and particular focus on controlling costs in Westeel and is a big -- I shouldn't say that, it's always a concern and always something that we're keeping a close eye on. So, I don't think it is -- there is -- he price is moving up, but it's not substantially different than typically years, there is some ups and some downs. So we feel good about where we’re at though and our ability to make the right moves to match margins.

And then maybe also the guidance you provided, you talked about based on the same store basis you expect EBITDA to be flat, you are expecting some significant contribution from your recent acquisition. So I am assuming that that is going to be the Mitchell, the Entringer and the VIS, can you just quantify how we should be thinking about that, is that a kind of a onetime -- what type of sales or EBITDA we should be expected from that?

Right, I think what we pointed toward, Jacob, were the metric we provided when we announced the deals. Tim provided sort of an LMP [ph] number for Mitchell in his opening comments today and it's really NuVision and VIS, Mitchell, you are right that we expect will add to our 2016 EBITDA. Entringer, I think we spoken before, we don’t expect the positive contribution to EBITDA from Entringer, prior to completion of the new facility. We expect really $0.5 million loss or so per quarter the balance of ’16 from Entringer.

Okay. Are these similar margins to your bin operations, or would it be to your portable grain handling?

The new acquisitions are on the commercial side of our business, their gross margin would be typical with our kind of our blended commercial side which is generally in the 30% range.

And then just maybe talk a bit about the opportunities in Eastern Canada with this Mitchell acquisition. I mean historically we have talked an awful lot about Western Canada and the U.S. but maybe just to expand a bit on Western Canada and the opportunity there with this Mitchell acquisition?

Well, it’s as you can see a robust market in Ontario across all of those segments and really you need to look at all four that we mentioned. Grain being a good one across the farm region, but feed we’ll see as well. Feed and the food processing space take us into some new customers, some new direction for us, some new products. So Eastern Canada also into Easter parts of the U.S. and Mitchell has a very good market share in those markets as well as into the U.S. and in an around there the facility from -- in Joplin, they do reach in the international markets as well and they get down to Mexico and places like that. So it put us into the Ontario, Eastern North American markets as well as other new segments.

Okay, thanks guys.

Thank you. Our next question is from Peter Prattas of Altacorp Capital. Please go ahead.

I was a little surprise, I guess by the flattish guidance for the on farm portable and you do state there that there is potential upside in your guidance given the size of the U.S. crop, it will depend of course on the conditions of harvest and what not, I am just wondering how much upside there may be to your guidance if things materialize favorable as hoped and is it more likely to help you in the fourth quarter rather than the third quarter? Thanks.

Right, that’s a good question, difficult to answer however. Q3 of 2015, if you recall was on the farm of a really weak quarter. To our guidance on flat with farm year-over-year is against a fairly low comp. Particularly there is some upside, I think you are right the upside is more likely to appear in Q4, sitting here where we are in August of Q3, like I said earlier the augers are beginning to move off dealer lots, the pace as which that will happen is very hard for us to say. The conditions out there are fantastic, everything is lining up very nicely, again I’ll just point back to the demand dynamic side I spoke to earlier, it feels like to us that the farmers will try and not spend if they can try to get through another season without additional purchase.

And maybe just to add on that, I mean don’t get us wrong the high volume created by a crop this size is very good for us, long term. And whether that wears out or increases in demand in this quarter, next quarter or into next year, I mean it's very good -- very good story and very good conditions for us generally speaking.

Thank you. [Operator Instructions] Our next question is from Greg Colman of National Bank. Please go ahead.

Just a couple ones here, guys in your outlook you highlighted Entringer is not cited to contribute positively to EBITDA this year until the build out is completed. I'm just curious on that, their rest of the facilities or [indiscernible] facilities, acquisitions GJ, NuVision, Mitchell, we can kind of go through and do the add up of what you were guiding for in the past, but is there anybody that's performing above or below initial expectations. I mean an aggregate is probably like you're looking at, but I'm just wondering how those individual acquisitions are just taken out, good guidance on Mitchell, I guess I’m basically focusing on NuVision and GJ VIS.

I think we talked about this a little bit Greg, and I appreciate the success, can be tough for you guys to do, but you know they're all performing well, and we commented on this in the opening remarks, they've had a very good first six months, they've integrated very well and seeing a lot of activity. Mitchell as I mentioned has a very good backlog in place. So, I think the best way to look at it, they're all very recent, so I think they’re -- you can look at our guidance and around the time of acquisition and we expect them to continue to do -- to run at that pace in the short term.

Can you just remind us when you expect the plan to be finished for Entringer?

We'll be actually building itself, will be done at the end of this year, maybe take into beginning of next, but the shell itself is emerging from the corn fields right now and our contractors is doing a very good job to bring that along quickly. And then we'll start commissioning equipment immediately as soon as we have that shell up. And so that takes a bit of time as you can imagine, but the initial product lines will have and the equipment to that -- for those product lines we'll commission by the end of Q1.

So, would that be a good time for us to, little bit positive EBITDA contribution would be Q2 of next year?

Yes, that's very good way to look at it.

Just switching up a bit taking a look at the results themselves, you gave us some great disclosure as to your sort of acquired EBITDA and total -- revenue, acquiring total revenue for the different segments. And we back into that it looks like, it serves your core AFN [ph], your same-store sales internationally was down materially year-over-year, from somewhere in the 20s to kind of sub-10, I was just wondering if you can give any color on that, was that a large project moving through last year that resulted in that decrease year-over-year or was there a big pause or am I doing the math wrong?

No, you're doing the math right correct, its Steve here. I mean and have you have the right, when we ended 2014 we had a pretty significant backlogs in our international business and as a result the first half of '15 was very-very strong. We didn't enter 2016 with that backlog. And this just happens in our international business, it kind of ebbs and flows a little bit and the way we're sitting right now, we expect likely to have that backlog entering 2017 and maybe it's an every other year thing. We'll find that out. But you have it right, '15 we entered with a nice backlog, had a great first half, we didn't have that this year. As Tim mentioned in his opening remarks, our international customers are -- and then again it happens, a little slower to commit this year. We're still have a very active [indiscernible] log, quite optimistic that we'll close some very good business in second half of '16, how much of that we'll ship in '16 versus '17 is uncertain right now.

And is that just because you're dealing with a business that is probably commercial and you're talking about chunky projects?

I guess we're trying to distinguish between a couple of things here and the project sales are exactly that they’re -- you'd sell, you sell a lot around one specific project and if that gets delayed or pushed up, so do -- obviously all the sales are on that project. And so that's what you see, that makes up a big part of what we've been selling from our Winnipeg office into those markets, but -- and that's we've been pushing to establish our businesses in Europe that are now focused on sales that are other than projects and that’s where we saw very good success in this quarter that made up for that shift or the delays in the project sales. And that’s an achievement we have been working towards for loyal and for exactly those reasons to have some of the smaller single product sales that argument and they are project sales.

Was your -- I guess, it’s probably going to be almost impossible answer, I’m going to try anyway. So if we look at the international sales in the second quarter, was that almost entirely not project driven, individual sales, individual farms that kind thing?

In the MD&A Greg, I am sure it's got a chance to go into it, but --.

Unfortunately not.

We do disclose within the third [ph] acquisition on the international side. Our international business that are some acquisition are primarily non project. And those would be to single product sales, not so much to farms, but to commercial customers outside of North America.

Got you, so if I look at the split for the quarter it was about 22 million acquired and 9 million like not acquired, and acquired would be those single product sales?

Primarily, yes.

Got it. Okay, that’s great. Moving over to North America stuff, and I may have missed this certainly on the call, sorry about that. But have you talked about Westeel progress in terms of sales in the U.S., and if not what's Westeel progress in terms of sales in the U.S.?

Yes, the focus -- it's slow going and slow progress in terms of the U.S., that’s a very -- has been a very weak market and so we continue to look at increasing sales there. But it's hasn’t been the focus and it's more or less in line with what we expected.

What the path to market there, is it just catalog entries in existing sales channels or is it establishing more the Westeel, a landmark?

It’s the strategy we are constantly working on, Greg.

Okay, I’ll leave with that. And just, this is it for me, sorry for all the questions here, but last bit is just details on your commercial fertilizer progress. You have given us some color to how the acquisitions are going there, but have you been able to plan many or any, I guess inquiries as to chunky orders on that side, how is that market opening up for you?

That’s coming again well, we are seeing some good sales of Westeel, fertilizers bins and VIS is doing very well and continues to be active in fertilizer space. Mitchell will augment that in the Eastern markets, they will work very well together. And then we look around globally at that space and there is going opportunities for us to sell into pretty much in every market wherever there is production, there is going to be significant fertilizer use and we’re well advanced in developing those strategies.

All right, well that’s it from me. Thanks guys. Congrats in the quarter.

Thank you. We have no further questions at this time. I would now like to return the meeting over to Mr. Close.

Well thank you, appreciate everybody joining us this morning. And we will cap it off there and look forward to seeing people in person over the next few quarters. Thanks again. Take care.

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