Tim Close - President & Chief Executive Officer Steve Sommerfeld - Executive Vice President & Chief Financial Officer

Jacob Bout - CIBC Michael Doumet - Scotiabank Greg Colman - National Bank Financial Steve Hansen - Raymond James Keith Carpenter - Altacorp Capital John Chu - Laurentian Bank Andrew Wong - RBC Capital Markets

Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to AGI's Q3 Results Release and Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Tim Close, President and CEO of AGI, you may begin your conference.

Good morning. Thank you for joining us to discuss our third quarter results. Steve Sommerfeld is with me this morning. We will have a few brief comments on the quarter then turn the call over for questions. Let's jump right to consolidated numbers for the quarter, year-to-date, and then provide some color on farm and commercial. Consolidated sales for the quarter were $205 million, with adjusted EBITDA of $36 million, representing 26% growth on the sales line, and flat adjusted EBITDA year-over-year for the quarter. On a year-to-date basis for nine months, sales are up 39% and adjusted EBITDA is up 24%. Adjusted EBITDA margin for the quarter was 17.5% versus 22% in Q3 of 2016. This drop is entirely due to recent acquisitions and the startup project in Brazil. Margins in our farm business are healthy and stable year-over-year. Margins in our core commercial business are healthy and stable year-over-year. We are busy integrating and strategically positioning, growing and changing our recently acquired businesses. The results and margins we saw in the quarter from these acquisitions were in line with expectations, and we have already completed significant integration work that will strengthen margins to the level we expected at acquisition. We saw solid performance in our farm businesses, with strong sales and margins year-over-year. Sales in key portable equipment have rebounded to near-record levels year-to-date with solid performance in Q3. Just to add some perspective here. The last time we saw sales this strong in the portable and farm group was in 2014. At that time this segment was roughly 42% of our sales. Today, the same group is 24% of sales. The farm business is strong. However, we have grown substantially with contributions from commercial and recent acquisitions providing a slightly more complicated story but from a much more robust platform. Canada and U.S. had a solid quarter in our farm businesses as Canada continued to see healthy performance for farms and our business in the U.S. continued to rebound based largely on the replacement cycle for our equipment. The businesses we acquired in the Global transaction provided solid sales in the quarter. Our teams have been very busy integrating the four businesses. We are very pleased with our progress and excited to be working with a talented group of people at all four of the new businesses. At the end of the day, our success is simply a measure of the people we have within AGI. We are very confident that the results of recent acquisitions going forward will reflect the strength of the team at MFS, Sentinel, NECO, and Hutchison/Mayrath. Our integration work has resulted in run rate savings of approximately $5 million, as we leverage the combined platform for purchasing inventories, sales, engineering and production capabilities. This is solid progress. However, the combined teams are very excited about the sales synergies and growth strategies that are coming together as we speak. Let's turn to our commercial group where I will start by reminding everyone that sales in this division are largely project-based. We recognize revenue when we ship projects. These shipments are often dependent upon clients being ready to receive the equipment. These are complex projects that change frequently and are very fluid in terms of design and construction. The projects certainly don’t pay much attention to calendar quarters. All that said, our leaders in commercial are very cognizant of timelines and driving our work to completion to manage our productive capacity, productivity of our manufacturing plants. Our expanding commercial platform in terms of product line, manufacturing capacity, geographic focus and engineering capabilities, will position AGI very well to continue to grow this business and will do so by good margins as we manage our resources vis-à-vis the maintenance and expansion of the Global infrastructure for seed, fertilizer, grain and feed, as well as food processing. Our commercial businesses have strong momentum. However, sales were slightly lower in the quarter largely due to timing of projects. Commercial is strong globally. Our backlogs are at record levels. Quoting activity is at record levels. We are making progress in key initiatives across commercial and remain positive in the continued growth of this division. Let's move over to Brazil for a quick update on our startup operations. With the plant now fully commissioned, we are working to integrate our Global farm and commercial product lines. With the build completed and equipment in place, we can safely say that the most complex part of this project is the vast engineering that goes into product transfer and production startup. Solutions to complex problems can take time. However, our teams are coming together and are making solid incremental progress. During the quarter we also moved out of the old plant and completely consolidated operations in our new facility. This overlap, combined with product transfer activity, led to higher expenses in the quarter. While our sales efforts initially ramped up earlier than planned, we are still in the early days of building our presence in Brazil. The sales ramp up combined with the startup days expenses, led to a drag in our results. However, the startup expenses will diminish over time. We are already seeing our backlog respond to sales efforts. We remain very positive on our long-term objectives in Brazil as the country ramps up the pace of [building] [ph] the infrastructure they require for grain production, export and feed and food processing. I will cap off our comments there and turn the call back to Joanna to field questions. Thank you.

[Operator Instructions] And your first question comes from Jacob Bout from CIBC. Jacob, please go ahead.

Talk a bit about Brazil and just how much of the drag in EBITDA was in the quarter?

We haven't disclosed the specific drag but it's a small but meaningful part when you combine it for the quarter and over the course of the last three quarters. But that, as mentioned, is largely due to those engineering expenses and some of the sales growth. So we are seeing good volumes pick up into Q4 and into Q1 of next year.

So when do you think it's going to turn positive?

2018.

First quarter, second quarter?

Hey, Jacob, it's Steve. So I think it's important to keep in mind that in Brazil Q3 was really the first quarter where we had moved all production from the old plant to the new plant. You could say that we have finally fully commissioned it and now we are undergoing engineering process. We do expect to be EBITDA positive in 2018. Now which quarter, we are a little hesitant to give specific guidance. Brazil also was a lot about commercial project, farm and commercial, so the timing impact Brazil as well. So for the 12 months we expect positive EBITDA quarter-to-quarter, little hesitant to provide guidance.

But it sounds like it's more backend weighted though?

Somewhat expected, yes.

And then just turning to global. The $5 million in synergies short-term, you are mentioning. When is that expected to be realized and then what is the expectation longer term?

All right. Well, many of those synergies are realized and now it's just a matter of having them reflected in our results as we progress. The synergies were largely personal related which have been realized and purchasing synergies also, which as time goes on will be realized.

I guess what I am getting at is, so what do you --

There is scope for a little bit more in terms of -- as we move into production and sales synergies over time, Jacob.

Okay. And then you talk a bit about -- you said in commercial in your opening remarks here that bookings and backlog up substantially. Can you provide some framework what it's like -- what it's up year on year?

Yes. Overall, in commercial it would be -- in terms of percentage it would be a double digit percentage increase year-over-year.

Okay. And maybe just last question here. Just the expansion into fertilizer feed and food, where are you at with that?

Fertilizer platform coming very nicely and work underway to expand that into international markets in close about Brazil. And feed are coming together again very nicely and looking at different projects around the world, domestically and around the world. And product line is organically and through acquisitions is quite robust. And food mapping outer strategies for the short-term and short, mid and long-term and feel pretty good about where we taking that business.

Thank you. And your next question is from Michael Doumet from Scotiabank. Michael, please go ahead.

So I wanted to follow up on global. Just to make sure I understand the timing of the cost reductions. Now were the $5 million of run rate synergies reflected in the quarterlies result or was that partial, and should be incremental to Q4 in 2018? And then also you alluded to incremental margin expansion opportunities. How should those flow through in 2018?

So the synergies that we have referenced in the MD&A, the $5 million, were partially recognized in Q3. Full effect will be recognized in Q4 in 2018.

Okay. Was it a small portion of that $5 million, Steve, just to get a little bit more specific, or majority?

That would be of a smaller portion.

Yes. It would be smaller portion. And then that would be an annualized number as we move through some of the short-term expenses, the changes that were made and then fully realized over 2018.

Okay. That’s helpful. I appreciate that. So just turning on to your Canadian business. We have seen lower sales due to dry weather conditions. I think that catch, or caught some of rise of price. How would you characterize the dealer inventories at this point?

Overall, certainly a dry harvest can have some impact there. Overall, our dealers are doing a excellent job in managing inventories and we have seen that take place now. And so I would say that there might be pockets where they are a little bit higher than normal but overall normal would be a good description.

Okay. Fair. And we have also seen three years of pretty heavy investment in the business. So as we move into 2018, how should we think of CapEx and are there any additional growth projects you guys are currently exploring.

That organic CapEx or growth will come down substantially going forward. And there's been a couple -- we have built a couple of plants to expand capacity and then built Brazil. There is nothing in the magnitude of that in our plants.

I mean would you care to provide a range of expectations for 2018 on CapEx.

Our maintenance CapEx guidance remains the same. 1% to 1.5% of sales typically is I think where it falls out. Right now we are sort of in the middle of our 2018 budgeting process and like Tim said, no there is nothing on the driving board of the magnitude of Brazil. In any given year, you are going to expect pro-CapEx projects in that $10 million range but we don’t have a specific number today to provide.

Thank you. And your next question is from Greg Colman from National Bank. Greg, please go ahead.

I wanted to start with a little bit of questions on global. When we look at the outlook, you talk about normal seasonal weakness in Q4 for global. I am wondering if you could just help show to us what is seasonally weak for this company as we still get familiar with it. I mean if a normal even loaded year is 25% EBITDA per quarter, is Q4 like a zero from global? Could it be a negative or is it still positive but just very low?

I think the best way to think about Global is the farm environment in the U.S., while we have seen a pickup in portable driven by replacement, is still quite subdued when you move into other parts of the permanent storage spend. And we expect to see that turning we also expect to see expansion of the Global businesses within that market. So I wouldn’t think of it on a seasonal basis. I would think of it as improvement in margins based on the integration work we have talked about and then a longer term turn in the farm spend in the U.S. over time.

Okay. I guess coming back to initially when Global was purchased earlier in the year. You guys gave some good ranges as to what their trailing three-year average EBITDA was, which has been trending down just because of the environment in the U.S. If you layer on the $5 million in annual synergies, you can kind of get to somewhere around $10 million on a full year basis. And if we think of the impact that’s going to have on Q4, could it be a negative impact if we are doing year-over-year comps in 2016 of Q4 to 2017 Q4. Could that Global be a draw even with their synergies because of their seasonality or is it still going to be a positive EBITDA contributor?

Well, I mean we are not providing specific guidance, Greg. It certainly would be a small positive EBITDA contribution to what you may consider modeling in. It wouldn’t be a significant contribution in Q4. Global historically is quite heavily weighted to Q2 and Q3 as some of our foreign businesses are also.

Got it. That’s good color, Steve, I appreciate it. Switching over to Brazil for a second. Just want to carry on with the discussion earlier with Jacob. The comment of sometime in 2018 pressing through to positive EBITDA and 2018 on a full year being positive EBITDA, seems to be pushed out somewhat from commentary earlier this year. Is that an accurate read and if so, what is the main reason for the push out in profitability? Is it just the timing on the commercial projects or is that always what you are expecting and that’s an incorrect read on my side?

Maybe a little bit of both. But we expanded this sales network more so and earlier than we thought. And then we have also decided to bring more of our products to Brazil sooner and those together mean increased expenses in Brazil, offsetting some of the margin or the sales there and so as the way, the breakeven point or the positive contribution. From a long term perspective though, we are very confident it's the right we will be doing.

And then just finally last one from me on commercial and the backlog. You mentioned the record backlog and then sort of gave us some rough quantification of double digit percentage year-over-year. How far out is that backlog cover on your commercial revenue sales? Are your commercial sales -- excuse me, is it sort of the thing that covers months, quarters, weeks? I am just trying to get a feel for how much is in there? Does it cover most of the 2018 expectations?

There is projects in the backlog that stretch from Q4 to Q4 of next year, and then heavily weighted in terms of near-term quarters and less that’s in the outer quarters.

Okay. And can you just give us a little bit more color on the recently consummated contracts to Black Sea in South America. Maybe in terms of, in size and contribution to the backlog or timing.

Well, I would characterize it more as EMEA and there is good activity in Europe, Middle East and Africa. There is small, medium and large size projects that are moving, that we are doing on right now. So it's nicely diversified across that space.

Thank you. Your next question is from Steve Hansen from Raymond James. Steve, please go ahead.

Just a couple from me on Brazil. I think in the past you described credit conditions as being challenged on their, to some of [indiscernible]. Trying to understand your efforts there to help farmers out or what you are seeing at least in terms of credit availability for farmers and their ability to spend. And then similarly on the commercial side, large port infrastructure changes going on down there. What are you seeing just on that broader infrastructure push for the larger commercial side.

Steve, it's Steve. On the credit side, the farm business of ours, as you know the interest rates in Brazil are dramatically decreasing. Every meeting the central bank announces pretty substantial decrease and I believe they are targeting, by the end of the year for their base rate to be around 7%, just half of what it was. That’s certainly a positive factor for the farmer thinking on capital expenditures. We are seeing some more evidence of BNDS, the government financing arm, financing coming through to farmers which have been quite slow to proceed through the system in the last couple of years. So the credit environment in Brazil does seem to be improving. On the commercial side, yes, all sorts of projects. Port projects as well as in land, commercial business. And we are very actively porting and gaining some business.

Okay. Helpful. And then just as you are evaluating the Canadian landscape, given some of the dryness we have seen, sales are a little bit softer on the recent side. I mean how do you characterize, looking to fourth quarter and first quarter there? I think in your commentary, you suggested you would be up against some tougher comps. I was just trying to get a sense for some of the moving parts there beyond just the aeration side.

Right. So the harvest in Canada pretty abruptly which it does quite frequently. So as we noted in our disclosures, aeration, storage, and some handling sales, the end season selling period ended abruptly also. We are into our [preceding] [ph] programming now which we are half way through. It looks a little difficult to give precise guidance. Like Tim said, you will see some pockets in Western Canada where things ended a little earlier than others and their maybe -- we would consider to be minor inventory carryover. Now as we look into 2018, we don’t see a significant impact from the 2017 weather on our '18 sales. Our guidance in the MD&A really was, just trying to be fair and balanced I suppose. And 2017 certainly was a very strong year on the farm in Canada. It's a tough comp and we don’t want that expectations that will look [indiscernible].

And just last one, if I may. It's just on the portable side in the U.S. It sounds like the demand there has been very strong. I think last quarter you referred to the fact that you had actually increased production rates for the first time in several years. How does the capacity situation stand down there? Presumably there are still no issues but I just wanted to get a sense for where you are at relative to potential?

No, we have plenty of capacity. The harvest in the U.S. in certain regions is quite late. The team in [indiscernible], at Westfield in particular, are very busy filling last minute orders. Capacity is not a concern.

And your next question is from Keith Carpenter from Altacorp. Keith, please go ahead.

Just a couple of questions. I wanted to come back to the Global. Can you guys quantify what percentage of Global EBITDA you would expect in Q2, Q3 versus Q1, Q4?

Hey, Keith, it's Steve. We haven't provided that guidance. I think you need to look towards AGI's farm business and how it's weighted towards Q2 and Q3 and the business in the U.S. will be similar. Like I said earlier, I would expect a significant contribution from Global in Q4 '17.

Okay. Tim, sorry if I missed exactly if you are talking about year-over-year in Q3 versus last year. But on international business into 2018, I think, and correct me if I am wrong here, I think you guys had said there is the potential to see whether it was good or well in the double digits, or something of that natures on year-over-year growth. Is that a view you guys have for 2018 on the international?

In international commercial business, that’s right. The growth rates we talked about were in terms of our backlog in commercial. So it's up substantially which positions us really well getting into 2018.

Okay. On your comment on, I guess, Steve, just on Canadian farm. When you look at the Canadian farm going into 2018, is it a comment of, hey, they did really well in 2017 and therefore we would be a little more -- we would be remiss if we said there wasn’t a risk that we could get to that, or is there something specific you see in Canada that potentially concerns you.

No, there is nothing specific in Canada. The farm market in Canada remains very healthy. The comment really was to provide the market with a different perspective not to get ahead of itself and expect year-over-year significant increase. It's early days and we may well beat our very tough 2018 comp. just trying to be measured on our outlook.

Okay. I just had two questions left. If you have any comment directionally on EBITDA margins as your overall business in '18 versus '17, with product mix and expectations. Would you see that moving up, being flat or maybe there is a mix where you would see that going down even if sales went up.

No, I think the comment we have in our MD&A and today, I mean it's the things that were creating a drag on this quarter's margins, we expect to diminish going forward and the underlying margins in farm and commercial are very stable, very strong. So we expect to be, seeing the things we have working on, initiatives we are working on, the integration we have been working on, have a positive effect on margins going forward.

Okay. And then just my last question. On NAFTA, let's just say for the sake of this quarter that NAFTA is abolished. When you guys look at your overall mix between U.S. and Canada and what you can do in your flexibility, can you just comment on, under that scenario how you would deal with that?

Yes, I guess hypothetically if trade were to be suspended between U.S. and Canada, we have very robust capacity in both countries.

Okay. And then would it be, just a further question to that, would it be a relatively, I don’t know if painless is the word, but relatively an exercise where you can move some capacity within countries.

Yes. In that hypothetical scenario, there would be certainly some adjustments that we would need to make between in the plants we have. But we build all product lines on both sides of the border, so we can make those adjustments, have the equipment to make those adjustments, have the people and the capacity to make those adjustments, in what I would say is a pretty unlikely scenario.

Thank you. And your next question is from John Chu from Laurentian Bank. John, please go ahead.

So my first question is on, I guess, Brazil. You mentioned earlier that you had higher expenses related to ramping up your sales staff and introducing more product into Brazil. So does that mean that you are seeing more demand for a line or product portfolio and hence that’s why you are driving that faster?

It's a good way to put it. We see a good demand for product lines across farm and commercial and fertilizer. So that extends from new products to Brazil through to traditional, our Brazil operation or product suite. So there is no lack of demand in Brazil, it’s a matter of how and when farmers and commercial operations move forward with, moving out the capacities they need.

And how will you describe the quoting activity in Brazil at this point in time? Has it been continuing to increase?

That’s exactly, right, yes.

Perfect. And then just on the Global Industries. You mentioned that there is additional margin opportunity on the lean manufacturing and on the manufacturing processes. Where about are you with that stage and when can we hope to see some margin improvement from that and how long does it take?

Well, it's an ongoing initiative. That’s ongoing throughout AGI, really. But we are focusing more resources towards Global because it's new. And you will see incremental improvements over the quarters. There is no immediate expectation of a significant increase in margins.

Okay. And you gave a percentage increase on the backlog that you saw on your -- on your record backlog. Can you give us anything in terms of the quoting activity? Just to have a ballpark and how much you think that’s up.

Well, we haven't disclosed, John, specifics on the quoting. It's a very robust -- as we have been seeing for several quarters now, the international business project backlog is up considerably and the activity continues to be very robust heading into 2018.

Thank you. Your next question is from Andrew Wong from RBC Capital Markets. Andrew, please go ahead.

Just following up on the U.S. portable demand side. Can you help quantify what that improvement in U.S. portable sales looks like, that’s 5% better than last year, 10%? Just trying to get a sense of scale because it does sound like it's moving. It's just hard to tell what the numbers are?

Hey, Andrew, it's Steve. We haven't disclosed specific product line sales year-over-year. You can characterize it as up fairly significantly. If you look at our farm business and we have disclosed it, and that would be a place to start, the portable increase is certainly a part of the increase year-over-year.

Okay. In terms of, as a percentage of your U.S. businesses, what percentage would portable be, roughly with all the changes that have been going on recently?

Right. I mean it can vary so much quarter to quarter. Little hesitant to provide specifics but unless you take Global out of the equation prior to global, we had some storage business in the U.S. but not significant but the majority would be portable handling equipment.

Okay. And then just on the 2018 guidance, as you are saying EBITDA is higher year-over-year. How much of that would be driven by the organic from the legacy business or versus some of the acquired businesses. Just trying to get a sense of Global versus base business [legacy] [ph]?

Well, we tried to describe the different components in the MD&A. It really is a combination of a number of things including organic growth but also the synergies at Global, improved results in Brazil, international business. So it really is many things contributing to what we as a very healthy year-end 2018.

Okay. Maybe just following up more on Brazil. Have your competitors actually done anything in response to your entering that market?

Yes. No, absolutely. I mean it's no different than any other market. There is good and strong competition in Brazil and there's certainly a competitive response.

Can you characterize that a little bit or it's a little bit too early to say?

Well, as you would expect, they are looking to compete on every level and we have a lot of respect for our competitors and good to see good, healthy environment in Brazil. But, no key specifics to give you but we continue to believe we have a nice niche in Brazil and we can continue asserting that business over time.

Thank you. [Operator Instructions] There are no further questions at this time. You may proceed.

Okay. Well, thank you very much for joining us this morning and we look forward to seeing people over the following quarter and into next year. Thanks. We will cap it up there.

Ladies and gentlemen, this concludes today's conference call. We thank you for participating and we ask that you please disconnect your lines.