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

Jacob Bout - CIBC Greg Colman - National Bank Michael Doumet - Scotiabank Andrew Wong - RBC Capital Markets John Chu - Laurentian Bank Keith Carpenter - AltaCorp

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 Q1 Results Release and Conference Call. [Operator Instructions] Mr. Tim Close, you may begin your conference.

Thank you, Joanna. Good morning. Thank you for joining Steve Sommerfeld and I this morning to discuss our Q1 results and outlook for 2018. We have some very brief comments to make this morning and then we'll turn the call back over for questions. Our AGM is later this morning. We're looking forward to seeing some of you in person. This year, we are using our AGM opportunity to speak to the continued evolution of AGI as we broaden our purpose from a regional farm product manufacturer to a complete solution provider of equipment and technology reforms to global food infrastructure. Since our founding in 1996, we've been making steady progress on this evolution, including our expansion from grain equipment into fertilizers, feed, and food equipment over the past 3 years. We typically have our heads down, executing on our objectives each day so the change seems natural and incremental to us. However, we're very cognizant that from the outside, the change may seem more complex. To better communicate our clear purpose going forward, we are launching the communication of our 567 strategy at the AGM today. 567 is a simple formula that communicates the markets we operate in, where we operate, and the value proposition we deliver to our customers. We now operate across five platforms, fertilizer seed, grain, feed, and food. We now operate 6 continents. We now deliver solutions to our customers comprised of seven components: storage, handling, structural, controls, and processing equipment, all brought together with engineering and project management. Our 567 strategy provides the framework for us to define our markets more broadly as providing the world's food infrastructure. But also provides a simple way for us to communicate this strategy. While traditional infrastructure addresses the world's critical requirement for utilities, transportation, and communication, the global food infrastructure is just as critical, or perhaps more so and is comprised of equipment and facilities required to move millions of tons of agriculture commodities around the world, from input production to farms, traders, processors, to ultimately become feed for our animals or food for us. Through development of our 567 strategy, we now deliver more and more of this global food infrastructure. Like traditional infrastructure, these are huge markets that must be continually invested in to account for ongoing deterioration, increasing volumes, changing trade patterns, shaping requirements, and changing technology. Our goal is to increase our market share each year and providing market leading, complete systems and solutions to this global food infrastructure. Our 567 strategy also sets us a strategic roadmap for us for years to come as we build out our capabilities within each platform, each geography and each component. Turning to the quarter, overall Q1 sales grew to 214, up 38% over Q1 2017, while adjusted EBITDA grew 20% to just under 31 million. Similar to Q4, the disparity of these growth rates is due to the ongoing turnaround that the companies acquired last year in the Global Industries acquisition and the launch of our business in Brazil. Excluding these two investments, gross margin and adjusted EBITDA margin performance remains robust and similar to our results in Q1 2017. In our farm group, overall sales grew 43% over Q1 2017 with solid contributions from recent acquisitions. Farm sales in Canada declined slightly after strong results in Q1 2017, as the quick dry harvest last year resulted in some inventory to work through in early 2018, and the long winter resulted in a slow start to planting. As anticipated, the businesses acquired in the Global Industries transaction in early 2017 had a negative impact on farm margins in the quarter. We acquired these businesses in a cyclical low in the US farm equipment market but we had confidence that markets would improve based on core fundamentals, including increasing crop volumes and years of subdued investment. We started to see increasing sales across the U.S. farm platform in 2017 and we expect this momentum to continue throughout 2018. We've also made solid progress in integration, realizing significant cost synergies and bringing together a great team to execute and drive results in this key platform. As we look out into 2018, we see continued momentum as backlogs across farm remain strong, particularly with U.S. markets continuing to rebound. Our commercial sales in Q1 grew 34% over 2017% with a favorable business mix of organic growth contributing 20% and acquisitions adding the additional 14%. Much of the strength in these numbers came from Canada and international markets where quoting activity and backlogs remain very strong. In line with our 567 strategy, we are continuing to invest in our European platform and related sales offices to ensure we have the products, service, and capacity required to ensure we can deliver market leading solutions for our customers in the EMEA region and into Southeast Asia. Food security, emerging market investments, changes in input prices and practices, improving access to capital, change in trade channels and routes, and increasing crop yields are all driving the robust development in the core grain infrastructure in these regions. We are also starting to see increased investment interest in fertilizer, feed, and food projects internationally. With the continued expansion in these markets, we continue to look for organic and external opportunities to add to our international capabilities. Our outlook remains positive for our commercial businesses throughout 2018 with some projects extending into 2019 and all momentum underpinned by strong existing backlog and a high quality pipeline. Steel markets are always interesting and the last 18 months are no exception. Tariff and demand volatility are constant discussion topics in steel and we spend great deal of monitoring market plans that are made of regional steel buy. We aim to purchase steel strategically with a bias for locking in margin whenever possible to deliver certainty in results. Each market is different and there can be a lag in our ability to pass through increases when the slope of steel pricing steepens. However, we've always been able to mitigate steel volatility using pricing, department design, process design, and sourcing of steel. Our business in Brazil continues to grow with incremental improvement each quarter and we expect a positive contribution in the second half of 2018. We've been careful to communicate our slow and steady approach to launching our business in Brazil. We will invest now in taking the time to build our brand, reputation, and relationships while also investing in talent, systems, IP, and training as this investment is more important than the bricks and mortar. The final result of these additional investments is a sustainable, profitable sales and growth in the business. We're making progress on integrating recent acquisitions. CMC and John Deere performed well in the first quarter within the AGI family. The product lines are very complementary and we're very lucky to have the topics with each of these groups have been AGI. There are clear sales synergies across the AGI platform as we incorporate the CMC hazard monitoring centers into our solution and the Junge products enable us to offer a complete fertilizer facility. In summary, AGI is well positioned heading into the remainder of 2018. We have steady sales growth across our five platforms. Our presence continues to grow across all six continents and our systems capability, comprised of our seven components and led by engineering and project management has never been more robust. We'll end there, Joanna and turn the call back for questions.

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

Hi, good morning. So strong organic growth rate overall for the company, I'm calculating close to 8%. Maybe just talk a bit about the sustainability of that going forward.

Hi Jacob, good morning, it's Steve. We were very pleased with the organic growth in Q1 and it was widespread really across many aspects of our business. As we noted in our disclosure, the U.S. farm business is showing definite signs of a recovery, both on the portable business [ph] and in our grain storage systems but, along with global. Our international, as we've been messaging I guess for a little while now, certainly has a lot of legs behind it. Backlogs are up considerably across our business. So the organic growth we saw in Q1, we believe will continue throughout 2018.

Okay, and maybe just specifically on the U.S., you talked about strong portable sales, but organic growth is actually negative there. What's the offset?

The offset is domestic commercial. So our growth in portable farm equipment was significant. I believe we disclosed the overall farm sales growth at 17%. Q1 commercial year-over-year was down. We don't believe that's an indicator of all of 2018. That commercial business can be a little bit choppy as it's largely project based. Q1 2017 had a couple of larger projects in it that made the year-over-year comp a little more difficult, but our backlog today in our commercial U.S. business are very similar to our backlog at this time last year. So we don't believe that Q1 being lower than Q1 2017 is something that will persist throughout the current year.

Okay and just lastly, you talked about steel. What's the lag on increasing pricing to reflect higher steel prices?

Hi, Jacob, pricing has already been adjusted and started late last year and then has continued to adjust throughout this year and different amounts across product lines and different - in regions across North America principally. And as you know on the commercial side, those are priced to current steel costs in each of the markets we're in. So there's the overall lag can extend through the - into Q3, but we started mitigating that last year and continue throughout this year.

Thank you.

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

Hi, thanks very much. I wanted to start by just having a couple questions on the margin side. Is it safe to say that Q1 margins represent a low point for the year based on your expectations on Brazil and integrating the U.S. acquisition?

It's Steve. Yes, that's probably not a bad place to begin. We believe margins will improve throughout 2018 both in Brazil and with our global acquisition. Both of those platforms have to make sales buildup in their backlog and we expect sales to increase throughout the year. The U.S. farm market appears to be improving which will benefit margins and we have a number of other initiatives, too long to list, in both of those areas. In Brazil, we're certainly focusing on the cost and future profitability, and as we close, we expect to be profitable in the second half of 2018. And in the U.S., our global platform, which is fantastic business, we're getting them deeper integrated into our purchasing programs, into our sales programs, and believe we'll see margin benefit from both of those initiatives in 2018.

And thank you, thanks for that. In your prepared remarks, you mentioned that your margin expectations in Q1, sort of excluding the impact of Brazil and some of the U.S. acquisitions, met your expectations and looked pretty good year-over-year. Would you be willing to share with us what that looked like, removing the lower margin impact?

Well, sure. As we disclosed, excluding global and Brazil, our margins were down just over 1% compared to - our growth margin was down just over 1% compared to 2017. So that was the result of a few different things. But primarily, as Tim mentioned, it has to do with the time and price increases in steel against our price increases on sales, which of course we want on our backlog, and there's certainly lag between the time our sales price increases are announced and they take effect. So we saw some impact of this in Q1. There may be a lingering impact of it in Q2 and we have been very pragmatic and strategic regarding our steel procurements and feel well positioned for 2018.

Got it, then just finally, staying on backlog - or, sorry, staying on margins but focusing on the backlog. How should we be thinking about the margin profile embedded in the backlog versus your trailing margins? Is it the sort of thing, which would be accretive to the margin profile, keeping in mind the steel dynamic as well or is it going to be more of a headwind on the margin profile, the backlog it is?

It's really different when you think about the different aspects of our business. So the commercial domestic and commercial international, where we're quoting, and we can be well protected from volatility in the field through adjusting our real time. The lingering effect would be slightly on the farm side. There may be a lingering impact into Q2 on some of the farm backlog business that we're still working through, prior to our most recent sales price increase. So we don't expect it to be significant. The backlog is well priced and we'll have healthy margins.

Would it be reasonable to assume that the margin profile in the backlog is similar to the margin profile you've been experiencing for the last year?

Yes, that would be reasonable to assume.

Sorry, just one last one on Brazil. Could you walk us through the steps between the profitability profile now and the positive profitability contribution you expect in the back part of the year? What are the major hurdles between those two data points? Is it just a matter of increasing sales and level loading facility or is it something more complex in order to swing more meaningfully onto the positive side?

It's a combination of a little bit of everything. It's increasing sales for sure and then it's also increasing productivity across the businesses we move through the startup phase. So we have alto of new products there, a new plant, which requires new systems, new processes, new staff and we're investing while we're launching the business there and sales are increasing. We're also launching essentially a new brand in that market, training an entire sales team, a production team, a planning team, engineering team. And at the same time, transferring - continuing to transfer our IP from five different facilities to Brazil. So it's key that you understand the core drivers of the results in Brazil. We continue to invest in building that brand and doing the training we need across that business.

So Tim, it sounds to me it's more like sort of a startup cost related drag rather than something sort of permanently structured into the facility. Is that a good characterization of what that profitability drag is?

Absolutely. Move through that startup phase, there's a lot of costs you don't incur as you get up and going and just sort of steady state.

Thanks, that's it for me.

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

Hi, good morning guys, a nice quarter. So Tim, you talked about the strategy, gave some pretty color at the opening remarks. Just want to go back to that maybe before I jump into the quarterly questions. So you mentioned that you want to position the company to work on complete systems for your customers. Just a question on how much do you currently do as it relates to complete systems and how do you plan to execute the transition, and what's the overall opportunity?

We very purposely use the word evolution. We've been slowly adding to those capabilities in each year and we make more and more of those - or being able to offer more and more of the complete systems. And then over the last couple years, with the additions we made, particularly around engineering, controls, and planning, we've been able to bring all of the individual pieces of equipment together to offer complete systems and be able to do it in grain on the farm, to be able to do it in grain in commercial applications, and then extend that to the other four platforms we're in. So it has been incremental, but over the last 18 months, we hit an inflection point where the last critical pieces have come together of those seven components to be able to now sell them as complete systems and move away from selling individual products.

And if we were to user the baseball analogy that I think everybody enjoys using, in what inning are we in, in terms of being able to expand that customer?

That's a good question. It's pretty early days. We're a very small percent of the global food infrastructure, a tiny percent of it. So at the risk of overstating it, we're in the first inning, in our mind, pretty predictable first part of this inning, though. We brought together a lot of great products and capabilities. So there's a lot of growth ahead of us. We spent most of the first 22 years being grain and most of the first 22 years in handling equipment, most of the first 22 years just in North America, so lots of growth ahead of us.

So maybe just jumping into the quarter, you indicated in your MB&A that you expect the three divisions at global, which I believe represents a significant majority of those sales, to trend toward a consolidated margin in the short term. You indicated last year, you realized I think $5 million in cost synergies, and I assume you're implying a little bit more there. Could you give us a sense of how much is cost savings and how much is maybe increased operating leverage as we think of margins trending there?

Yes, so the cost synergies was mostly 2017 story and then as we moved into the back part of 2017 into 2018, we're now seeing sales synergies as we expand our products through their networks and their additional new products, CGI, across the broader network. And then we apply some sourcing synergies and that's what we're starting to see the impact of now. So steel and components are significant and we continue to realize those as we move forward.

Okay, helpful. And maybe just one last one before I turn it over, I think the recent acquisitions increases the working capital requirements in Q1 and Q4. We saw that in this quarter. With higher steel prices and a pretty healthy ramp up in sales for the remainder of the year, what should we expect in working capital for the balance of the year?

The working capital did increase in Q1. Really, there were a number of reasons for it. It's not only the higher price of steel in our inventory, but it's partially due to the effect of a very late spring where we ended with more inventory at our warehouses and at our manufacturing facilities, finished goods than we would have expected otherwise, taking all of this into account. So as our business ramps up, it does require a draw on working capital and I think you can expect to see that draw continue through Q2. Typically, what you'll find with AGI is in the second half of the year that turns to a positive cash generation for us and you'll see that working capital come down in the second half of the year.

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

Hey, good morning. So just with the volatility around steel prices, I understand the quoting strategy. It tries to limit that impact, but obviously as steel prices go up, your prices go up. So I was just curious what kind of feedback have you had from your customers and have the higher steel prices impacted on demand?

So similar to many other industries, our entire industry is reacting to the higher input costs, not only our direct competition but other manufacturers that would provide equipment to our customer, be it on the farm or at the commercial level. So price increases are not being poorly accepted by our customer base. It's an industry wide requirement. So we're obviously very sensitive to our customers and our dealers and how their demand may be impacted at the farm level. And it's all very collaborative in a sense where we're certainly not aiming to profit from an increase in steel prices. So we're always very conscious to stay in line with our competition and to proactively communicate with our customers the impact of steel. So it hasn't had a dampening impact on demand. We don't believe that it will and we're, again, being very conscious of our relative position with our competition.

Okay, thanks. And really, I was just more focused on the broader themes of just rising prices.

I think just to add to that, it speaks to the critical nature of the equipment. Backlogs can speak to demand and we've got very robust backlog. On the farm, the equipment side is, relative to the entire spend on farm, is fairly low and a critical piece. You have to have the equipment for the crops. So if you're going to have the crop, you need the equipment. Likewise, with all of the eight commodities if they're going to exist, then they need to be stored, moved, and conveyed, blended, and you need the equipment. So yes, nobody likes increasing prices but the investment in the equipment is critical and a must do.

Just looking at Canada, I think you guys said that commercial equipment demand was really strong. What drove that? Was that related to some of the rail challenges this year over the winter?

No, it's been a robust activity in commercial markets across Canada for 18 months and a lot of activity in build out. Changing trade patterns have been partially responsible for that. It's like we keep going back and it really is - you have to look at it in a global perspective and that spend is going to change region year-over-year. The spend is going to be high in every year, but as traders address their infrastructure unique to region. And over the last 18 to 24 months and into 2018, 2019, there's a lot of activity in Canada.

Great, thank you.

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

Hi, good morning. Maybe want to ask that steel pricing question a different way. With the steel prices rising and the industry consequently raising their prices, are you finding that customers are actually buying their equipment now at anticipation that prices are going to rise further down the road? So are some sales potentially being drawn forward?

Hey, John, it's Steve. I would suggest the opposite actually. I think there's –and I don't believe it's a material consideration, but it's a good question. If it's anything, it's an anecdotal story that I've heard from our sales people is that there are some farmers maybe that are delaying purchases because they believe steel is going to come down in the second half of the year. And I think if you surveyed our industry that would be the general expectation that steel prices have maybe hit a peak and should decrease. I don't believe I've heard an instance of farmers pulling purchases forward.

Okay, and then in your release, you mentioned restructured sales strategy. Can you elaborate on that?

As we integrate businesses, we take a look at how we're delivering or how we're going to market in each region. And so with the acquisitions last year were pretty significant in terms of sales volume in the U.S. in particular. So we looked at the themes there and found better ways to go to market, give back to our customers, both on the farm and in commercial space.

And that's fairly recently you've been doing that then?

Yes. It's never done. We've added some really fantastic people to the sales team in North America and internationally and that's ongoing, something we look at most weeks.

And I guess that ties into the statement you made earlier about investing in the European platform. Is it just a function of adding people or is it more you're doing to invest in that European platform?

No, we're doing both there. We're investing in expansion of our production facility and the equipment in that facility.

And that's the Italian facility?

That's right, yeah. There's two businesses in Italy and we're investing in both.

And then maybe just give me a sense in terms of following the Westfield acquisition and to some extent, Global, in terms of being able to offer - and you're talking about offering the complete solution now. Are you finding that you're winning a higher percentage of your bids than you did previously?

No, absolutely. The total systems capability drives - when you're able to bundle and offer the solution or the full system and solution, it certainly drives an increase in success. Yes.

And then just lastly, in Brazil, we're seeing lower interest rates. We're seeing an increase in the loan program there. Are you seeing a material impact to those programs in terms of your ability to win sales where you submitted the order activity?

Lower interest rates certainly are helpful and they've come down significantly over the last 12 to 18 months as you're aware. The announcement of the government programs is also very helpful. Just is important is how quickly those funds become released to the farming community. So that's a work in progress. We're in part waiting for further announcements from the government on certain other programs. But at the end of the day, we're really building our business not to be reliant on government subsidies at the farm level. We're introducing certain plans and programs that we believe will incentivize the farmers to look past government subsidized interest rates and we need to build our business for the long term because those government programs will come and go. And we want to build a sustainable, long-term, profitable model in Brazil.

Okay, great. Thank you.

Thank you. Your next question is from Keith Carpenter from AltaCorp. Keith, please go ahead.

Thank you. Hi, guys. Just a couple of questions here, was there any delay - given the delayed spring here in North America, was there anything, even if it was psychological, was there anything that would have delayed the farmers' timing for looking at what they require from you guys on the farm side to say that, maybe your Q1 would have been a little bit better and therefore something went into Q2. Can you comment on that at all? And if so quantify it?

Hey, Keith, it's Steve. The answer to your question is yes. I don't believe I've characterized it as a material impact but there certainly were some instances where farmers and dealers were reluctant to delivery of equipment because they're under three feet of snow and that's not an unreasonable request. So it's reflected somewhat in our inventory levels at the end of Q1, both at the warehouse, like I mentioned earlier, and at our manufacturing facilities. Those sales will be realized in Q2, now that the snow has melted and the farmers are in the field. So again not, I wouldn't believe, a material factor but it will lead to some sales increase in Q2.

My other question is on your outlook during this quarter, very similar to what you guys put out in March, if I could ask it this way. If you look at, whether it's farm or commercial across any of your regions, looking at it today versus two months ago, is there anything where you're incrementally more positive than where you were two months ago across any of those regions/segments?

The momentum in the international markets continues. It's a very active pipeline, high quality pipeline in more geographies than we've ever been in. So it's nice to see the build of that pipeline and start to turn into additional backlog and new geographies.

Okay, perfect. That's all I have. Thanks.

Thank you.

There are no further questions at this time. You may proceed.

Okay. Well, thank you for your time this morning. Again, look forward to seeing some of you at our AGM and we'll close off the call there. Thanks, Joanna.

Thank you. Ladies and gentlemen, this concludes today's conference call. We thank you for participating and you may now disconnect.