Tim Close - CEO Steve Sommerfeld - CFO

Michael Doumet - Scotiabank Jacob Bout - CIBC Andrew Wong - RBC Capital Markets

Good morning, Ladies and Gentlemen. Welcome to AGI's First Quarter 2017 Conference Call. As a reminder, this conference is being recorded. I would now like to turn the meeting over to Mr. Tim Close, Chief Executive Officer of AGI. Please go ahead, Mr. Close.

Thank you, Melanie. Good morning and thank you for joining us to discuss our first quarter results. Steve Sommerfeld is with me this morning, and as usual, we'll run through some brief comments on the quarter and then turn the call back over for questions. We had an excellent start to the year, with sales up 30% over last year, climbing to $154 million, while adjusted EBITDA grew to $25.6 million, 30% higher than our record Q1 in 2016. Margins held nicely in the quarter, despite some significant changes in project mix on the commercial side. We talk a lot about diversifying our business to account for the regular oscillation in regional markets for the businesses within AGI. However, we are very pleased to have had broad-based performance from both our farm and commercial groups, as well as solid contribution from 2016 acquisitions. The composition of AGI has been evolving significantly over the last couple years, both in product lines and end markets, so to assist in communicating this evolution we have augmented the presentation of our results to include sales breakdown between our farm and commercial groups. From our roots in portable farm equipment, we ended 2016 and Q1 2017 with just over 50% of our sales on the commercial side of the business. These numbers will vary over time, as our individual businesses grow, as we deal with regional demand factors and we add acquisitions. However, we like having this balance across customers and end markets. Moving over to the detail for our farm group, in Canada, farmers and our dealers have been responding to large crops, significant moisture, and a late harvest in 2016, which grew down inventories and resulted in robust demand for portable handling equipment, grain and fertilizer storage, as well as aeration products. Batco, Westfield, Westeel and Edwards saw strong demand throughout the quarter. We are seeing encouraging signs of improvement in the U.S. Farm markets which started to rebound off the lows of 2016. Falling input prices may have improved some farmer economics in the U.S., however, the large crops combined with slow replacement over the last couple years are starting to drive the rollover of older equipment. With continued robust demand in Canada, and the start of the rebound in the U.S., our farm group grew sales by 20% in Q1. Note that acquisitions in 2016 did not impact our farm sales, so this increase is driven purely by organic growth and improvement at our core farm businesses. Group backlogs coming out of the quarter had materially increased over 2016, and continue to improve heading into the second quarter. These backlogs are strong both in Canada and the U.S., providing good visibility and momentum moving forward. Our farm businesses are benefiting from solid demand, and we have excellent teams and leaders that are delivering for their customers at all of these businesses and efficiently translating the demand into strong results. Steve and I don't have the opportunity to spend as much time as we'd like to at each division, but when we do it is a real pleasure to see outstanding leadership and committed talented people can achieve. Congratulations to the whole farm group on a great quarter. We had a very busy 2016 on the commercial side of the business, which benefited from our recent acquisitions. Commercial sales in Q1 were up 58% year-over-year to a record Q1 level of 78 million. While domestic commercial markets were more or less flat in Q1, we started to see increasing contribution from international project sales. Very nice to see, following a frustrating 2016, as large projects across regions went through lengthy delays. We are now seeing these project sales building nicely, and resulting in materially-higher international backlogs. Domestic projects are also starting to pick up in the U.S. and Canada, with some exciting projects in the queue for later this year and into 2018. Our 2016 acquisitions were completed throughout the year. We are still in a process of integrating and achieving the synergies of these groups working together. We saw a start of that in Q1. We have a lot more potential for cross-selling and bundling products domestically and internationally. The addition of Yargus, Mitchell, NuVision, Frame, and Entringer to our existing commercial businesses has fundamentally changed the opportunities available to our commercial group, both domestically and internationally. We have a lot of work ahead of us to execute on these opportunities, but it has been exciting to see these teams starting to work together to chart out our strategies going forward. Steve and I just returned from Brazil, where we spent some time at our new facility and attended the country's largest agriculture trade show. Most of the production equipment has been installed in our facility and the offices and ancillary buildings are coming together quickly. We start up the grain bin production line next week for the first product to come out of that facility. This has been a massive engineering and construction effort, with a cross-divisional, cross-functional team that came together to bring this to fruition. We have a lot of work ahead of us, but we now have the foundation to pursue our objectives in a country with great potential for AGI. Everyone involved continues to wrestle with language and distance issues, however, great progress has been made. We are very focused on executing our business plan, and again, congrats to the group in commercial, and in Brazil in particular. As busy as our Q1 was across AGI, we also completed our due diligence and strategy developments to enable us to close the acquisition of Global Industries just after the end of the quarter. Due diligence can be tough at times, however, we found a team at Global that is very similar to our own group, with high integrity and great operations. We'd like to thank Jack Henry for working with so well with us, and entrusting AGI with the legacy of his business, and Doug Fargo for the leadership in building a leading team and business. AGI is home to many businesses that were family-owned and founded, and we are so proud to be the custodians of these brands and businesses that have such deep roots in communities across North America, and now around the world. Global is composed of four businesses, which fill in crucial product gaps and just as importantly, add an excellent network of dealers to facilitate our growth in farm storage and permanent handling in the U.S., and in certain key international markets where our development had been in early stages. Our teams are hard at work in our 100-day plan to fully understand and develop our long-term integration strategies for the global businesses. We are seeing significant opportunity for expansion in sales and margins, and we will be providing additional visibility on these metrics as we come out of our 100-day integration plan. A great quarter across AGI with positive momentum across the board. We'd like to thank everyone in AGI for the outstanding performance and commitment during the quarter, and our shareholders for their continued support. We will now turn the call back over to Melanie for questions.

Thank you. [Operator Instructions] The first question is from Michael Doumet of Scotiabank. Please go ahead.

Good morning, gentlemen, nice quarter.

Good morning.

Good morning. So, you highlighted growth of 18% year-over-year in your U.S. farm sales. I believe backlog was also up. Just regarding the demand strength, can you provide some color on whether you're seeing dealers restock, is it a reflection of higher end-user replacement demand, and/or both?

Hey Michael, it's Steve. This time of year, early in the season, pre-seeding, really what you're seeing more is the dealers reading their local market, reading their customer base, and beginning to stock their inventories to what they expect will happen in the year. So, it's not so much the end user today, although there is some as farmers move grain they've stored over the winter. Right now, though, it's more about the dealers preparing for the season.

Okay, and just as a follow-up, can you comment on inventory levels at the dealer channel compared to previous years?

Well, compared to last year, I would suggest they're not that different. The dealers have been very cautious for quite a while now on inventory levels, and being sure they don't have more than they need for that season. So, they would be moderate, perhaps, is the right word for it. They're certainly not high. They would probably be about where they were last year.

All right, thanks, Steve. And just turning to your international sales, you noted that you anticipate backlog to increase substantially in the near term, or may increase substantially in the near term. As we think of a pickup in activity, can you comment on how much you expect to see in 2017, and how much of that could flow into 2018?

Well, like we talked about 2016, quarter-after-quarter and in Tim's opening remarks, he referenced after a frustrating 2016 it's nice to see some backlog building. And we're kind of returning to the levels that we experienced kind of pre-that 2016 slowdown which again resulted really from delays in customer commitments in certain projects. So in 2017 we're seeing a return to kind of previously-achieved levels. What we have in the books today is primarily 2017 business although there's some larger projects that we hope to win that will see sales in the latter half of this year, and early in next year.

Thanks guys. I will pass the baton.

Thank you. The following question is from Jacob Bout of CIBC. Please go ahead.

Good morning. I had a few questions on Global. Maybe first off, how long do you think this integration process is going to take? And maybe talk a little bit about the ability to expand out of Nebraska into other areas of the U.S. with this Global brand?

Good morning, Jacob. The integration it's a little bit different on every acquisition but the integration is – I mean, we're already achieving some good key parts of that integration. But we like to take a full 100 days to fully understand the businesses and then develop, collaborate with our new colleagues on developing the plans going forward. So coming out of that 100 days, we'll be able to provide better visibility on sales synergies and where we'll take the business going forward. Within Global, there's really more than – there's a bunch of great brands in the four different businesses and those brands are well-established across the U.S. into Canada, and some of them internationally as well. It’s really the – so those brands have got good dealer support and great customers. In some cases, there's pockets that are regionally stronger of course, but it's a little bit different across each of the brands. But those brands fit really nicely, or complement our brands and our distribution much better than we had thought to start with, so really nice to see across the board.

Yes, I guess I was specifically thinking about the bin lines that they have at Global.

Yes, the bins, you're right, they'd be – regionally there's some strength there in Nebraska and that surrounding area. So it's part of the integration that we're focused on is expanding that network. It's certainly one of the key parts of our planning.

Okay, and in Brazil it sounds like this plant is ramping up. Can you just talk a bit about how you're pre-positioning some of this product? I know you've talked in the past about commercial but are you pre-positioning more now on the on-farm? Are you at these conferences you're at in Brazil, are you providing product for those?

Yes, yes, we are. This is the short answer. We've brought on a large team of salespeople, and it was great to spend some time with them last week. We're training them on AGI, AGI products, and how and what we sell, and they've been active well in advance now of the plant opening and building a pipeline that we're actively working here to turn into backlog, so that the plant hits the ground running as we start to open up different production lines. So we are doing a lot of positioning or sales, sales efforts, across farm and commercial. Farm in Brazil is slightly different than - materially different than North America, where there's a lot more portable equipment sold in North America, so you can go down to your local dealer and grab an auger or conveyor. In Brazil, they look a little bit more like small commercial projects, where there's lead time involved in planning the site. They're almost, right now currently they're almost all small permanent facilities. So you have to plan the civil works and the construction, and that leads to longer lead times at the farm level. So it's less of a product on the shelf and much more of a planned and designed spend.

Okay, that's helpful, and then maybe just lastly talk a little bit about the expectation of the impact of steel prices and how that plays out for the remainder of the year?

Sorry, you broke up there, Jacob. Can you repeat that?

Yes, the question was on steel pricing and what the impact would be for the remainder of this year?

We're well-positioned with steel across our businesses. It's something we watch very closely, and it translates into on the commercial side for instance, as you know, we re-price commercial projects pretty regularly and frequently to reflect steel. It's a complex environment. Right now, steel's been increasing throughout the year and coming out of last year. You'll have noticed some pretty significant movement in iron ore and zinc, and nickel and all of that is – we're not necessarily seeing it in pricing just yet, but long story short is we're well-positioned for the current year and positioning our strategy and positions for going into the end of this year, and the beginning of next year.

So, how are you covering that off? Is that hedging or is there some lag effect between potential?

No, it's largely taking physical position in steel, at every one of our businesses. Each of the supply arrangements are different. Some of them we take physical at our facilities and some we have good agreements with suppliers to hold and supply later.

All right, thank you very much.

Okay, thanks Jacob.

Thank you. The following question is from Andrew Wong of RBC Capital Markets. Please go ahead.

Hi good morning, so I mean we've seen a lot of good M&A activity in the past year, year-and-a-half, a lot of significant acquisitions, new product lines, new businesses, new geographies. I think you mentioned even in your comments, maybe you haven't been able to spend as much time as you'd like with some of the businesses. Do you think maybe you need to take a breather here, and slow down a little bit on the M&A side and just focus on integration, and on the businesses? Or do you guys have the capacity to kind of just keep going ahead with some of these acquisitions that you've been making?

No, the pace of 2016 was certainly very active. Yes, we don't plan on doing that many acquisitions in 2017. Some of them were smaller, but still take significant effort from our teams and groups to integrate, and we try to account for that in how we structure these deals and how we staff and support each of those businesses. And we've built up our teams pretty significantly in commercial, over the last year to account for that growth and added some really fantastic talent at every level throughout the business to enable us to absorb those businesses successfully and grow those businesses immediately and gain the benefit of synergies between those groups working together. So we are, we probably don't say it enough but there's some fantastic people that have joined our business to structure the business and account for that, the growth going forward for what we have, as well as what we have on the drawing board, or our plans going forward. On the farm side, we did a lot of that in 2015 as we brought on Westeel, and now we're doing more of it as we bring on Global. So part of our disclosure here, showing the farm and commercial group, is these are both sides of the business, or both groups are really significant businesses in and of themselves and are now we're staffing to accommodate for the size today and the size going forward. I shouldn't – It's not that Steve and I don't get to the businesses, it's just a matter of scale as we grow around the world. It's physically impossible to be everywhere at once, but we still like to lead at the businesses with our groups and teams. And so, we spend a lot of time traveling to do it face-to-face and we'll continue to do that, despite how hard it can be. But yes, so we certainly have the talent to accommodate what we have on our plate today, and to look for future both organic and acquisition-based growth going forward.

Okay, that's great, and are there any areas that you feel like maybe the portfolio needs a little bit of boost? Maybe geography, or product lines, or anything like that? Not even sure if you'd really be able to share with that, but anything would be helpful. Thanks.

Lots of things we're looking at, and we really define our business now as field-to-consumer as opposed to just grain. And that means there's five different segments to our business, and it starts with fertilizer and seed and grain, grain is both farm and commercial and then it moves to feed and food markets. And, there's fantastic opportunities for us to grow our business across all of those different infrastructures that are required for conveyance of bulk, or bulk commodities, bulk agriculture commodities, or processing of those commodities. And so, we look at the business that way, and we've spent a solid part of 20 years on the grain farm and commercial, but over the last 18 months or so have moved more into the seed fert. Fert was a big priority in 2016, and also moving into the feed and food side, over some of those recent acquisitions. So, I think it's important to highlight that we have really five different platforms within AGI that we're focused on growing.

Okay, and just a last one here, on the dividend. You guys have done a really good job keeping that dividend as you guys have grown, and a lot of growth we've seen in the past year. The market fundamentals are starting to look like they're improving, cautiously optimistic. What are your thoughts around the timing of maybe dividend increase, or balancing that off with growth? I know maybe it's a little bit too early, but I appreciate any thoughts. Thank you.

Well, I think it's exactly what you said, it's a matter of balance, and coming out of the recent acquisitions, Global was a decent-sized acquisition for us. So, we'll focus on the integration in the near term, and see as that comes together, and balance it off against capital allocation across the whole business. So, it's something we look at all the time, and keep that balance in mind.

That’s great. Thanks guys.

Thank you. Operator Thank you. [Operator Instructions] The following question is from John Chu of Laurentian Bank Securities. Please go ahead.

Good morning so, just on the U.S. market and the signs you're seeing of an early recovery, just curious: are you seeing that on the global industry side. Because that business is a lot more on-farm than your typical business so, I'm just curious if you're seeing any signs of that, and if you can call that?

Sure. The short answer is yes. Global operates in the U.S., in similar markets to ours. Their backlog compared to the same time a year ago are higher. So we're seeing that modest signs of recovery with the global business as well.

Is the magnitude of what they're seeing more than what you're seeing in your business or about the same?

The increase in the backlogs are similar to what we're seeing in our business, yes.

Okay, and then in terms of the commercial projects that you're – In terms of North America versus international, obviously you're seeing more international. Can you remind us just the margin profile of the international projects, versus North America? I think the margins are a bit lower, to just try to understand how that might play out going forward.

Typically, they're not. Typically, the international margins in the commercial business will be similar to North America. What varies between the commercial business is a project-to-project sales metric. You know, some projects are heavier on storage. Some are heavier or have a different mix of handling equipment. So, there's always going to be differences, period-over-period in the commercial business. But it's not so much geographical, as product mix.

Okay, and then just lastly on Brazil, did you feel that you were handcuffed in terms of bidding on projects, given that the facility wasn't fully completed? And if so then, are you more encouraged now that the facility, at least on the bin side, seems to be going into production soon? Just kind of curious on your thoughts on project wins, and what may or may not be handicapping you there.

John, it's really a matter of capacity. Remember, we do have a small plant now and that we're producing out of. So, you'd be, I guess a better way to put it, maybe would be just simply capacity. We could only that plant can only produce so much at a run rate that's well below our facility that's about to come online. So as that comes online, it allowed us to ramp up sales efforts in order to fill a pipeline and so we'll be able to deliver in a commercially-acceptable time frame. So that's really what drove it and so bottlenecks or constraints would have been on commercial equipment, and having that all out of a very small plant. So the facility comes online, we'll remove all those constraints.

Okay, last question. You mentioned that the farm-on-farm sales in the U.S. was all organic for Q1. Can you give us a sense of what that was on the commercial side?

The on-farm comment, John, was North America.

Oh, sorry okay, and woe to me.

Both countries were up, Canada and the U.S. with regard to the commercial business in the domestic sales were somewhat flat in Q1 year-over-year, but as Tim mentioned, the backlog and the potential for that commercial business in North America in 2017 is very encouraging. International business was up slightly quarter-over-quarter, but probably the more important point on it again is some of the deferred projects coming to fruition for sales later in the year and sort of the building momentum in that piece of our business.

Okay, thank you.

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

Okay, we'll close up there. Thanks very much for the time this morning and look forward to talking to everybody over the next few days. Take care, bye-bye.

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