Gary Anderson - Chief Executive Officer & Director Steve Sommerfeld - Executive Vice President & Chief Financial Officer Dan Donner - Senior Vice President, Sales & Marketing

Jacob Bout - CIBC World Markets Damir Gunja - TD Securities Inc Greg Colman - National Bank Financial Chris Damas - The BCMI Report

Good morning, ladies and gentlemen. Welcome to AGI’s Second Quarter 2015 Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the meeting over to Mr. Gary Anderson, Chief Executive Officer of AGI. Please go ahead, Mr. Anderson.

Thank you, Elena, and good morning to everyone. With me today is Steve Sommerfeld, Executive Vice President and CFO. And on the line from Winnipeg is Dan Donner, Senior Vice President of Sales and Marketing. Steve and I are doing the call from Chicago where we had our Board meeting yesterday and this provided our Board of Directors an opportunity to drive down to [cadre] last night with Tim Close, our President and Paul Franzmann, our Senior Vice President of Operations. The two of our new manufacturing plant [indiscernible] moved into, a great facility and one that will allow our team down there to grow and improve the business. While we’ve been making commendable strides in the old shop, or I should say maybe two shops, performance to date has not been sufficient to meet our bottom line expectations. This has contributed to our disappointing results in Q2, as has the prior year at our Mepu plant in Finland, primarily the result of a poorly timed EU farm subsidy program within Finland’s domestic market. Otherwise, our business units are in good order, our brands are strong and our marketplace is solid. We’re facing, however, a number of negative macro factors that are challenging the North American market. Cautious farmer sentiments in the US farm market persists; financial constraints among some of our US dealers is hampering their ability and/or appetite to stock at historic levels in advance of harvest; there’s a heightened variability of crop conditions adding to the lack of momentum in the early Q3 of the [rest of world] which should be at all macro levels, a large harvest in the corn belt; and of course, we’ve had a drought in Western Canada, in fact there was record low rainfall in much of Alberta and Saskatchewan from early spring to mid-summer, for many farmers the rain came too late. So as we say, welcome to agriculture. You have to keep a long-term mindset in the strategies to match. That’s why we’ve worked so hard to diversify our geographies and expand our catalog. We’re carefully building a foundation in Brazil that will prepare us for followed many sustainable business in 2016 and beyond. In July, we opened our innovation center in [indiscernible] just outside of Winnipeg, where we will create a focused synergistic environment for new product development that will fuel the strength of our brands well into the future. And our international sales continue to grow and diversify. We had a very strong Q2. Our June 30 year-to-date international sales were up 55% to $52.5 million. Our order backlog is also ahead of last year, heading into H2 and we continue to build toward a record year internationally. By far, the highlight of the quarter was the closing of the Westeel transaction on May 20. We’ve made great progress with integration, completing a revised organizational structure that includes substantial annualized cost savings. I’m extremely pleased with the caliber of the people on the Westeel team. They have demonstrated great pride in their brand and commitment to our customers. Congratulations to those who have kept up to take on the roles in the organization. Cost savings from the restructuring along with some initial supply chain synergies have combined to meet our near-term goal of $5 million in annualized synergies. Our work has now turned to the long-term process of creating revenue synergies and new market development. While the drought in Western Canada has taken some of the wind out of our sales for the remainder of this year, we remain very excited with this acquisition and the benefits Westeel will deliver in the long run. I think Elena, at this point, we will just open it up to questions.

[Operator Instructions] The first question is from Jacob Bout with CIBC.

Just a question here on farmer buying behavior, if I look through 2Q in Western Canada, things started off very well and then we got some dry conditions and then we got some rain. And in the US, that [US year] report that came out looks like it’s going to be a little bit better, I mean are we starting to see any improvement as we move through into mid-August here?

It’s been really slow that shake free, Jacob. It’s understandable on the Canadian side, a lot of that rain came too late. But on the US side, it is a big crop and everybody has been hesitant to make a move, or not enough have been making the move. So anecdotally, this last week we have been seeing some things that indicate that it should be shaking free pretty soon, but they’re not all going to hit in Q3 is another factor. If it is, long run out harvest, we will be okay with that going into Q4 as well.

And then the third quarter guidance that you gave, is that on a same-store basis? Will you talk about third quarter being well below or are you including Westeel on those comments?

We are including Westeel on those comments, Jacob.

And maybe just lastly, maybe you can talk a bit about the Westeel synergies, you talked about the cost synergies of $5 million being realized further quickly, how much more are you expecting on that side and then talk a bit about the revenue synergies that you are seeing today?

The restructuring is complete, so we were very aggressive on that front. We were finished by the end of July. The cost synergies from some supply chain is in its early stage of development and we really haven’t done anything much toward revenue synergies. Those are a little bit longer term situations and going into the fall, we see some programs and stuff, we will see where we could start working on some of that. But it’s early stage on that. I think some of the guys [would ship me] if I put out another target, we are very happy to hit the target we set out when we announced last November that we would have $5 million in near-term, but there is more to come, Jacob.

Specifically what are you looking at out of the supply chain and then maybe just a follow-up here plant configuration, is there anything you are thinking at this point as far as the Westeel plant?

On supply chain, there are some things on steel buy, although this is maybe not the best year to be trying to work through all of that, because obviously with the drought, sitting on a little extra inventory, some of it – there is a long list of little bits and pieces, a lot of them relate to little bit engineering work to do to maybe synchronize some things between a couple of plants and that kind of thing. And then, of course, we have our site set on how we can grow some revenue synergies now that we have [indiscernible] in our catalog. So I guess that’s the other piece of our focus.

And then on the plant configuration, more automation or that type of thing?

Again, we are a little bit early to make any promises on that. We’re certainly looking into – we’ve had people lot from the States and we’ve been working between the two plants, looking at to add some things. But a bit early, I think, to say whether or not we’ve got much there.

The next question is from Damir Gunja with TD Securities.

Can you just remind us now with Westeel, how much steel are you buying and I realize you are in a difficult time now, but I think into next year have you made any commitments yet on purchasing, just trying to get a feel for maybe that being a potential source of tailwind for you?

I will answer the second part first. We haven’t made commitments into next year yet. We are working through current commitments and all of that. But I don’t know if we’ve ever disclosed how much steel we buy, Steve?

Obviously the amount steel you buy depends on your forecast. Unfortunately for us, price of steel has behaved pretty well in Canada this year and again decreased a little recently. Once we get into preseason, we will have a better idea of our needs for 2016. So what we are waiting to see is how our dealer network in Canada, talking Westeel now, deals with its inventory level through the summer and we’re encouraged on that front. Our distribution network is experienced and disciplined. We don’t expect they will have a large carry over into Q4, which for us should indicate a decent preseason, which would then in turn require us to commit to more steel in 2016. But sitting here in mid-August, it’s a little too soon to say what that commitment might look like.

And maybe on the international side, can you guys just give us a little bit more commentary around coating activity by region and how things could possibly shape up maybe into next year for 2016?

I will ask Dan who is in the line to speak to that, Damir.

I think we’ve talked in the last earnings call about our efforts to try and diversify our international business away from that concentration in Russia and Ukraine, so if I just take a look at year-to-date high likelihood category which is sort of our short-term indicator where the business will come from. Last year at this time, about 54% of our international business was Russia, Ukraine. Now, it’s 18%. And what’s kind of stepped up has been Southeast Asia. Southeast Asia looks to be about 46% of that high likelihood category and then Latin America at about 35%, the balance in some other areas. So we’re seeing some real good activity in the other regions that we’ve put some efforts behind. We still see the same strength in coat activity in Russia and Ukraine, it’s just rebalancing itself more towards the A, B, C, Ds away from the regional players.

And just to clarify, maybe I didn’t [indiscernible] the percentages Dan that you read were for the high likelihood coat activity for the second half of...

Exactly, which is that sort of short-term indicator where business will come from.

The next question is from Greg Colman with National Bank Financial.

Just a clarity, I know, Jacob asked this question early on the call, but when you’re talking about Q3 year over year, just to be clear, when you say you’re going to be down substantially year over year or significantly, I believe, is your exact language, we would want to adjust up the reported Q3 from 2014 to include what would be Westeel and then take it down from that?

Actually we were comparing Ag Growth Q3 2014 to our Q3 2015 that would include Westeel. We did not adjust the prior year to add Westeel to it.

To be clear, last year reported was $26.7 million and we would say that this year, based on your commentary, would be – is there significantly or substantially below those levels?

That’s correct, based on – but we note, what we’re forecasting for the next six weeks, like Gary said, there is some uncertainty in the forecast now that we move into preseason or sorry, the in-season as far as what sales might hit yet in Q3. However, I don’t know if that’s going to move the needle enough to change our outlook for Q3, but it maintains for Q4 as sales do seem to be shaking free finally in the last number of days really.

No problem, just wanted to be clear on what you were comparing to year over year, that’s all. Talking about the impact there with little bit more challenging conditions coming through obviously in North America and Canada specifically with the drought. Can you talk to us and give us a little bit of a history as to the duration this kind of weather impact would have as we go into harvest and beyond [indiscernible] couple of quarters or some activity or could it stretch out a year, a year plus.

Historically, it depends on how well the distribution channels [indiscernible] inventory going into the situation, so in Western Canada, we’ve had some channel players cancel orders, it’s been riding off of what they did in preseason, they haven’t been ordering much so as well as there’s been spotty crops in parts of Western Canada where they’re able to move some things around, which would help as well. So they are all seasoned veterans who try and manage their inventory levels to minimize the impact into the next year or so. I think they’re going to do a fairly good job on that. When it comes to the US side, there isn’t much historic precedence for the way the farmers have been sitting on their heads for our type of products. We get for the big ticket items, but they put their wallet on the dress here [indiscernible] quite a while and now realizing there is a big crop and now they have to do something. So again, the dealers, ones that had some constraints on them, they didn’t overbuy even in preseason. So I wouldn’t expect there’s going to be any carryover issues in the US at any of our – I don’t think.

Moving gears a little bit onto the international, thanks a lot Dan for the color on the high likelihood coat activity, that’s very useful. Just diving into Ukraine specifically, we’ve seen a bit of a quiet resurgence in activity there with FDA agreement signed and Target announcing $100 million spend over there, just wondering if there’s anything maybe not in the high likelihood coat activity, but are you seeing stuff on the ground which suggest this maybe the medium likelihood or the low likelihood of it picking up materially as they look to rebound from a year or a year plus of really obviously challenging conditions?

When we talk about the high likelihood, high likelihood of closing and shipping in 2015, so to Steve’s clarification of what that category means, we have items in the high likelihood category for 2016 activity in Ukraine. And as I mentioned, it’s rebalancing itself towards the multinational traders, specifically port facilities, there is still the same demand on the Black Sea to be able to handle that volume agreements coming out. Then I saw just in the news today actually [indiscernible] announcing an investment in Russia. So I think maybe people are starting to adjust to the status quo and the reality of the way things are in Ukraine and Russia.

Just to summarize it back, actually if I’m interpreting correctly that the adjustment to the current activity and maybe a little bit of stabilization, so just we could see an uptick over the next 12 months versus the last 12 months just as we start to see the multinationals get back in and get engaged?

I think that’s a fair interpretation of what I said.

[Operator Instructions] The next question is from Chris Damas with BCMI.

Could you refresh my memory what the typical dealer is that holds your portable grain storage, is it CAT dealers, is it Deere dealers, is it independents, how would the split be?

Sure, I don’t mind refreshing that at all. On the US side, it’s all of the above, in essence there is quite a few single lines category probably in terms of volume of products sold through, that would be the short line dealers. Those that are not carrying a mainline like a John Deere or whatever. But there is a number of dealers that handle our product that do carry the mainline as well. So those are the ones that will be under constraint probably in that 35%, 40% range in the US, I would say. In Canada, it’s very, very low, virtually all of our product gets sold through the bigger channels like Federated Co-op, CPS, USA, Flaman Stores, there are some independent dealers probably more so in Manitoba and you will see a few...

What about the Rocky Mountains service?

No, we wouldn’t provide either Rocky Mountains or service this product.

Tractor Supply?

No.

So out of those 35% to 40% in the US, how many are they Deere versus CAT versus Komodo or somebody else?

I don’t have that available. I would say it’s a mix, probably based on market share probably more than anything else.

The other one is I get the impression that steel costs are very sticky and you source in the US for a lot of the steel for [backtone] twister and I guess just about every – a lot of what you do has steel components?

We do a lot of steel buy, yes. Canadian companies would buy primarily from Canadian sources.

Canadian?

Yes. And our US companies would buy from US sources.

Well, there is no secret that Chinese steel is getting cheaper, I’ve got articles saying there’s been a lot of import competition from China in the US with Chinese steel and we just saw the one being devalued, so it seems to me in this era of high USD and low commodity prices, the same cost cutting and consolidation. So at what point do you try and take out some of that excess cost of goods sold by switching to offshore steel?

You have to also consider supply chain and the timing. And when we bought Twister back in May 2007, they were buying steel from a mill in Taiwan, and it’s about a five month lag from when the order was placed and the steel arrived. And that’s a little long just in terms of supply chain alone, trying to stay relevant with the rest of your competitors. So there is some downward side to some of us as well. And anecdotally last weekend [indiscernible] I was talking to a young fellow that he was telling me about pipeline steel and some of that is coming from China. He is a welder and he said it doesn’t weld up the same way – there is kind of the variability from mills and things, we’ve got very good standards in North America and a good solid supply chain. I’d be a bit hard to press to think that we would be moving that way.

Well, some of your advantage of the Canadian dollar depreciation is nullified by sourcing in the US?

The US dollar denominated commodity, that’s right, so it’s not – currency is not advantage or a disadvantage, it’s equal.

Where does Westeel get their steel, Steve?

In Canada.

I didn’t know we had any steel producers left, was Brafasco still operating as US steel?

And there is others.

I know you can’t control the weather, farmer behavior, so this could be another 2012 in reverse?

A little different, but the drought in Canada – I wouldn’t call it a drought anymore given the recent rains, but the poor growing conditions when it mattered in Canada, that’s the real event, that’s the [indiscernible] to get through now for the next couple of quarters.

From my context, the farmers in Illinois have been sitting on their heads because they are underwater?

Yes. There is variability in crop in the US; there is no doubt about it. We talked about it all the time and do think it’s a factor on the buying behavior in the US, although the overall crop forecast may now be 13.7 billion bushels and we were a little surprised the increase that – because it’s I think exceptionally good in some areas and not really all that good at all in others. It is impacting the overall buying pattern by the farmers so far in 2015.

There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Anderson.

Thanks, Elena, and thank you everyone for participating on the call or listening in. We look forward to catching up with you down the road.

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