Tim Close - CEO Steve Sommerfeld - CFO

Michael Doumet - Scotiabank Jacob Bout - CIBC John Chu - Laurentian Bank Securities

Good morning ladies and gentlemen. Welcome to AGI’s Fourth 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 at AGI. Please go ahead, Mr. Close.

Good morning and thank you for joining us this morning to discuss our Q4 and 2016 results. I have Steve Sommerfeld with me this morning. We will have some very brief comments and turn the call back over for your questions. It feels like 2016 was a long ago after very busy start to 2017 focusing on integrating our recent acquisition by welcoming new employees, customers and partners to the AGI family. Q4 of 2016 capped off an active and exciting year for AGI. We completed five acquisitions in the year, sold two non-core businesses and launched AGI's largest growth CapEx project with our expansion in Brazil. This growth took us into new end markets and new geographies, expanded our product lines, our sales reach, our capabilities and delivered on our goal to diversify our business, enhance our value proposition to our customers and increase our valuation for shareholders. 2016 also mark 20 years in business for AGI, 20 years ago we were a small company with one product line and focused on the Canadian portable grain handling equipment market, today we are a global business increasingly diversified across the fertilizer, feed, farm and farmer commercial grain, feed and food processing equipment markets. We see robust strategic opportunities to continue our growth in each of the five segments we are currently in as well as adjacent markets. Q4 sales increased 10% over the last year, reaching 126 million while adjusted EBITDA rose 30% to 18 million. Sales for the full year 2016 grew 25% to 546 million along with the 37% increase in adjusted EBITDA taking us to 100 million for the full year. Our EBITDA margin for 2016 was 18.4% for the year, a 170 basis point improvement over 2015 despite a slight drag on margins due to our startup activities in Brazil. Our balance sheet is in good shape with our senior debt and total debt levels at very comfortable levels. Our payout ratio fell to 67% in 2016 continue to improve into Q1 and we are very well positioned to continue our growth profile going forward. Our strong Q4 results were largely due to a continuation of the trends we saw throughout 2016. In our farm business, we continue to have strong results in Canada and significant weakness in U.S. Commercial results in Q4 were mixed across our divisions and geographies after strong performance earlier in 2016. Outlook for Q1 and 2017 is positive in our farm and commercial groups in both domestic and in international markets. Canadian farm markets have been very robust moving into 2017. We are also seeing signs of improvement in the U.S. farm market. It is still early in the new crop cycle, however our total farm backlogs are up over 50% year-over-year. This comparative is off a low base however it gives us reason to be optimistic going into the spring. After several depressed years in U.S. farm market, we are very encouraged to see increased activity in this core market. In commercial markets we're also seeing our sales and backlogs grow internationally in most markets including EMEA and South America. Domestic commercial markets are very active in Canada, somewhat slower in the U.S. Overall, we feel good about our commercial businesses and outlook for the rest of 2017. In Brazil, we have made a decision to significantly increase our sales staff as we have begun commissioning equipment lines in a new facility. The market is still challenged with a recovering economy and political headwinds, however grow a large crop and a strong U.S. provides farmers with improved profitability. Our quoting pipeline more than tripled in this short time that we have had our new sales force in place. We are confident that this convert to an increasingly backlog on a reasonable timeline. We will bear the cost of this higher sales force in the near-term, however, it will prepare us well as we expand our capacity in our new facility. Acquisitions completed in 2015 and 2016 contributed significantly to our results. We are executing on our core strategy of growth through acquisition and strong operational execution to organically grow our businesses. We have a phenomenal team across AGI, we are urgently improving every aspect of our business daily. Steve and I would like to thank our shareholders for their strong support throughout 2016 and our employees for their outstanding performance and commitment to AGI. That will end our comments and turn it call back over to Catherine for questions.

Thank you, Mr. Close. We will now take questions from the telephone line. [Operator Instructions]. And we have the first question from Michael Doumet from Scotiabank. Please go ahead.

So the first question, you commented that so far this year orders for your U.S. farm business have increased 30% and that your backlog is up significantly from this time last year. Could you comment or what the drivers are there and if we’re just seeing an adjustment in dealer inventories or we're seeing a pick-up in end user demand?

Right. So hi Michael, it’s Steve here. So just to clarify, that comment was North America, Canada and the U.S. So the backlogs and new orders in Canada are up significantly, which is not unexpected after a very strong 2016 and it shows the optimism for 2017. But encouragingly the backlog and new order were up in the U.S. as well. As Tim noted the prior year comp was not a high bar, but what we've seen so far in the U.S. is encouraging, we’re getting some of the anecdotal signals from our dealers and our sales people. That the mood in the U.S. is perhaps increasingly positive. Early days, but it’s encouraging to see what we've seen so far this year and as we said in our MD&A, we’re cautiously optimistic regarding the farm business in the U.S. in ’17.

Okay, great. And maybe just to dive a little deeper and get your views on this. But I mean, do we need to see a recovery in farmer income to see the growth comeback or do you think that maybe you've been just seeing a replacement demand in the U.S. for your U.S. farm business could be supportive of growth in ’17 and ’18?

Yes. So we don’t believe we need a significant improvement in farmer net income to increase the sales of our portable halving equipment. We’ve maintain that grain volume is the primary driver sales of that equipment. Farmer and his income certainly impacts some buying decisions in a particular season. But the replacement cycle remains, the replacement cycle. All their equipment will need to be replaced, if they are low cost piece of equipment relative to many other farm input. So farmer income especially at the operating margin level are improving. I think the general consensus is they'll be slightly better than previous years. So we think the environment today is suitable for at least a slight recovery in our business in the U.S.

Okay agreed. And maybe just one last, but could parse our U.S. farm declines since 2014? Just to give us a sense for what that recovery could eventually look like?

Right, so I think consistent with a lot of other Ag manufacturers, and we haven't -- I'm just trying to be careful a little bit with respect to what we've disclosed in the past, but the farm business in the U.S., I think industry-wide, you can say is down 30% plus since kind of the 2014 which was the very strong year in a number of areas. So the potential of recoveries is quite significant. If you look at our U.S. sales in 2014, we didn’t segregate new acquisitions between farm or commercial then, but you'll see a very strong year and a lot of that was on the back of our farm -- U.S. farm business.

Okay and I appreciate the color Steve, just in terms of that business. Maybe one more question before I pass it on. Just for your international business, would you break out for us the backlog by geography and maybe talk about the cadence of the backlog execution through 2017?

Right, we don’t disclose regionally. As per Tim's comments, the early strength we're seeing which is also encouraging is in South America and continuing on from last year EMEA. So right now our backlogs are largest in those two areas. The cadence quarterly like -- if that's your question, that you would expect to see more of it in the back half of '17 and Q2. The backlog really is beginning getting now just to sort of grow and the customer commitments that we were talking about later in 2016, it seemed to be coming together now so there is always a lag between when that customer equipment is finally made and when we begin to deliver. I think you can expect to see the project sales EBITDA around the second half.

Okay perfect, thanks for that guys appreciate it.

Thank you. And the next question is from Jacob Bout from CIBC. Please go ahead.

Just wanted a point of clarification, so the 30% increase in the North American orders, is that on an apples-to-apples comparison? Or is it any type of acquisition in there?

Well, that’s farm business. Although it is apples-to-apples, I mean the farm acquisition in 2015 are in both periods, our acquisitions in '16 were post Q1, number one and commercial. So it is apples-to-apples.

Okay. What are you guys expecting for organic growth in 2017, if you look at North America internationally?

Well, organic growth I mean -- we don’t have a specific number to give you this morning. I mean we are carrying growth of those -- the farm businesses, we have got specific projects and targets for reach of our product lines and commercial side and farm side. So it's a -- we don’t talk too much about specific or by product line, but we do have good aggressive targets for each of our business leaders to grow their business organically and in North America, Jacob and in our international market. So it's sort of single-digit type growth, but good healthy targets for each of the businesses.

And then some questions on your trade sales for the fourth quarter. So when I look at -- I guess first on the overall sales excluding acquisitions. International was down quite sharply from last year, maybe talk a bit of what was driving in that and then if we compare, so sales will actually down above 13% of trade sales excluding acquisitions, but EBITDA was up roughly about 4 million in EBITDA. So just want to understand what some of the drivers are?

So I’ll start off, the international sales decreased compared to '15 is excluding acquisitions again is the project sales that we’ve been talking about last couple of quarters not coming to fruition in time and really to impact 2016. Sorry Jacob, can you repeat the second part of that question?

Sure. The second part was just the, looking at sales were down, but EBITDA was up. And just want to understand what some of the moving parts are?

Right. So the EBITDA excluding acquisitions was relatively flat to the prior year. The increase in EBITDA, had a large part to do with the acquisitions we’ve made in 2016. And those would be our business in Italy, as well as the recent acquisitions in the commercial space in Canada primarily in the fertilizer, they all contributed nicely to Q4.

And when we think about your -- the acquisitions that you've made, you've made quite a few. What type of synergies, should we expect or maybe another way of looking at it. How do you think about it from a margin expansion perspective?

Yes. I mean, roughly speaking we expect our margins, the margins that we saw reporting here for '16 to continue. I mean there is opportunities in the recent acquisitions to -- not so much on cost synergies, but income revenue synergies as we sell across the platform and bring together similar businesses with leverage their capabilities or their manufacturing -- their product lines and manufacturing space where it be in domestic or international markets. So if we more -- best way to look at it is a continuation of the type of margins that we're reporting right now.

Last question here. Maybe just talk a bit about the ramp in Brazil talk relatively?

It’s been coming together nicely, the facilities on track, all the equipment is showing up on time. Facility is looking great, the team is coming together really nicely. We have expanded it somewhat more than and maybe sooner than we had initially knocked out, but that’s just to ensure that our pipeline is in place for the commissioning and the opening of the plant and each of the product lines, as we stage our way into that facility reaching full capacity or full operation. So Brazil is looking good, the market itself as that all the long-term keep fundamentals that we’ve always talk about so, there is -- it's a difficult market, a different market I should say and every market around the world has got its slight nuances and Brazil is no different. But the team is in place and we are very encouraged by where we are sitting today.

Thank you very much.

Thank you. [Operator Instruction] We have a question from John Chu from Laurentian Bank Securities. Please go ahead. Q - John Chu So just on the fertilizer sales that you are seeing in Canada, can you maybe just give us little more color in terms of how well that’s going and maybe what that represent on the percentage of the overall Canadian sales, I mean is it meaningful yet and if not can it be meaningful in next year or two?

It's fairly early days, as far as our 2016 results go, John with yard, it's been closed in November and mid-July, the new division [ph] contributed more significantly because it's part of our family beginning April 1. We haven't disclosed results from those divisions specifically. I think I have seen in other notes maybe one of yours to that sort of the run rate EBITDA or our longer EBITDA from those divisions could approach $15 million to $20 million. That’s based on their historically, but as we believe we put together market leading platform like Tim just said with sale synergies, we believe we can become a pretty big part of our story.

Okay and then just on the Brazil, you mentioned that you expanded it a bit sooner than you thought based on the pipeline that you are seeing, can you give us a sense of how much you have expanded that by from the original plans?

We expanded our sales team. It's more of an investment in people earlier than we may have mapped that out six months ago, but the plant is tracking very well as far as becoming commissioned on time and we felt the time was right to pull the trigger and get the sales force trained and out there, so that when we are in full production that we have that healthy backlog.

Okay and then just on steel pricing, can you give us a sense in terms of what you may have done already to combat raising prices for this year, if anything?

Yes, we look at steel prices every day and our -- across our businesses, they are sitting with a good amount of steel, good supply of steel, but there is certainly upward pressure on steel pricing. So we will look to see how that continues over the next several weeks and make corresponding adjustments to each of our businesses.

Okay and one last question, is portable grain handling, is that something that’s generally recorded in your backlog or in the order activity?

Right, so when we are talking about the backlog on the farm side that includes portable equipment and storage.

Okay. Great, thank you.

Thank you. Mr. Close, there are no more questions registered at this time. So I would like to turn the meeting back over to you sir.

Okay. Thanks Catharine, I appreciate the time everybody takes to participate in these calls and listen to us talk about the business and look forward to talking to everybody in future going forward. Thanks very much and we’ll close it up at that.

Thank you. The conference has now ended. Please discount your lines at this time and thank you for your participation.