Tim Close - President, CEO & Director Steve Sommerfeld - EVP, CFO & Corporate Secretary

Jacob Bout - CIBC Capital Markets Michael Doumet - Scotiabank John Chu - Laurentian Bank Securities Andrew Wong - RBC Capital Markets Matthew Pallotta - AltaCorp Capital Steven Hansen - Raymond James Ltd.

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

Good morning. Thank you for joining Steve Sommerfeld and I this morning to discuss our Q2 results and the outlook for the remainder of 2018. Just a few brief comments this morning, and then we'll turn the call back to Joanna for questions. Earlier this year, we launched our 567 strategy to better communicate the ongoing development and transformation of AGI. I have warned everyone that I would use every opportunity to reinforce this message to ensure we are providing clarity on our strategy, vision and priorities. We are building out five strategically linked platforms across six continents with an ultimate goal of providing total solutions to our customers within each platform, by bringing together the seven product, service and technology components required to build the world's food infrastructure. Our five platforms tie together systems from the beginning of the crop cycle with solutions for fertilizers and seed, breakthrough to managing the crop postharvest on small to large farms. We then follow the grain by providing systems to local elevators and large export and destination ports worldwide. Recently, we have added our fourth and fifth platforms to continue to follow that grain as it is processed into the feed for animals or food for the world's population. At all points along this global journey, our goal is to provide complete solutions for our customers, including the design, engineering, technologies and project management that will differentiate the AGI from our competitors and earn sustainable and repeat business with our customers. While Farm and Commercial grain systems still form roughly 70% of our sales, we are already seeing the benefits of the additional platforms with revenue and earnings growing in each quarter due to the exposure to the start of the crop cycle, a lower reliance on a particular harvest season, geographic diversification and the addition of our food platform, which does not have the seasonality of the other platforms. As we continue to deliver on our 567 strategy, we will continue to see the reduction of the impact of seasonality. However, we are also reducing the impact of agriculture and economic cycles as we target the world's food infrastructure as our addressable market. The global food infrastructure comprised of all the equipment and technologies required to move and process millions of tons of agriculture commodities on a daily basis is driven by basic fundamentals of population growth and increasing global wealth. Global growth and demographic stats are well understood. However, I want to directly link them to our 567 strategy. Each year, the world adds approximately 80 million people. The vast majority of the current 7.6 billion people continue to consume more protein and constantly change diet and product preferences. These two basic facts require larger crop growing in more parts of the world along with constant change in growth in feed and food processing facilities. When combined with required maintenance CapEx to sustain the existing infrastructure, we have a market that must be invested in through cycles and seasons. Our 567 strategy is built on these basic facts. To deliver on our strategy, we will continue to develop our complete systems capabilities in each of our five platforms. In each region and our path towards that goal, we'll continue to see organic growth and strategic acquisitions. In line with 567, we completed the acquisition of Sabe a couple of weeks ago. Sabe fits into our food platform, design and manufacturing and installing commissioning processing facilities in the pet food, feed and food industries. Sabe joins Mitchell Mill Systems and Danmare in our food group. And located in France, Sabe extends our geographic capabilities as we aim to become a more relevant partner with our customers, who are themselves very global. Sabe is a strategic addition to the group that brings all the elements we look for in a new member of the AGI family, including an excellent group of very talented people who consistently deliver high-quality projects, leading to their customers placing a great deal of confidence in the Sabe team over and over again. We are very happy to welcome [indiscernible], Patrice, Johan and the entire Sabe team to the AGI family. Our teams are already busy on the integration and collaborating on initiatives to work together globally. Switching over to discuss our second quarter. We saw the concrete evidence of 567 coming together to deliver solid results with sales increasing 18% to $262 million and adjusted EBITDA up 23% year-over-year growing to $49 million, producing an adjusted EBITDA margin of $18.7 million, up slightly from Q2 2017. We saw strength across much of AGI in Q2 with solid results in our Farm group, which had significant sales group - growth in the U.S., stable sales in Canada and healthy EBITDA margins despite a volatile steel environment. Our Commercial business also had solid growth in Q2, driven by robust backlogs coming from a strong Canadian market and record international sales. Outlook and momentum continues to be positive across AGI. Farm markets are stable in North America with a good-sized crop expected to be harvested somewhat early despite a late start in most parts. Commercial backlogs remain robust. We continue to see positive conversion of our pipeline into backlog domestically and internationally with 2019 projects starting to build. We are investing in our capacity and product lines across our Commercial group globally to manage the long-term growth of our business and ensure lead times remain reasonable, and we remain responsive to our customers' ongoing investment programs. The overall slight adjusted EBITDA and margin gain versus Q2 2017 was due to solid performance across AGI and was achieved despite a continued drag in Brazil. Annual margins will continue to be a product of sales mix and volume. We do see upside potential in the near term as Brazil continues to improve with significant sales growth and improving productivity in that operation. We also see additional room for margin growth in our fertilizer platform and the integration in growth of recent acquisitions that are growing our controls, technology and project management capabilities. We remain in a very comfortable position from a balance sheet position, with our debt ratios relatively flat, senior debt at 2.1x adjusted EBITDA and 4.3x inclusive of the convertible debentures. Our payout ratio continues to decline nicely to 36% over the first half of 2018, down from 49% for the same period of 2017 and 44% on an LTM basis versus 52% at this time last year. We'll end our comments there and turn the call back to Joanna for questions.

[Operator Instructions]. And your first question is from Jacob Bout from CIBC.

Just a question on your guidance on Brazil. A little more favorable outlook than what you were thinking three months ago?

Maybe, but we've seen a nice increase in sales in Brazil, sales activity in Commercial and Farm side, but as they - as we gain sort of more visibility and work through the start-up process, we see a lot of positive results in Brazil. So it's getting its traction and the team is coming together, productivity gains are advancing, so it's - but I'd say sort of all incremental as we've been guiding to and just steady progress on getting to the productivity and levels that we expect.

And the big sellers there are the large bins, high roller, some of the shaker tables or are you doing more of the portable now.

No. That's still exactly what you identified, the Farm system. So bin, [indiscernible] cleaning, cleaning equipment, dryers. So a complete Farm system. And then on the commercial side, yes, high roller and other - the other components, similar components that go into the commercial operations.

Okay. And then just moving to your outlook for the Farm. So you're expecting basically flat year-on-year performance for the second half of the year, but you talk about U.S. backlog being up. So really what's happening in Canada to offset this?

Jacob, it's Steve. Well, in Canada, we're really working against a very strong 2017 comparative. And as Tim mentioned in his opening remarks, particularly in Canada, we've had a very hot kind of finish to the season here. And there will be an early harvest, which shortens our end season selling. And those factors combined offset against a very strong U.S. environment as you noted to kind of guide towards a flat second half.

Is that more on the portable side or on the bin side?

That's all in, yes. All Farm.

Okay. And last question here just on the higher EBITDA margins. What are the big drivers there? I think you talked a bit about mix. And then how sustainable is that on a go-forward basis?

Yes. The drivers forward is just good solid volumes and performance across the whole business. So it really is a - it's a combination in any quarter in a year, but we saw positive combination in Q2. So along with the sort of integration and development of the acquisitions over the last sort of 18 months, so just nice healthy incremental growth and improvement. How sustainable? I mean, we're at levels that are sort of target levels that we've identified over long term, but every quarter is different though. That sales mix is different. So we're still - we look at it on an annual basis, and we expect that it will be up and down in any given quarter, but the identity - improvements we identified - the Brazil - swing in Brazil and continued improvement in fertilizer, we expect to add to our ability to maintain those sort of margins over the long term.

Your next question is from Michael Doumet from Scotiabank.

So yes this is obviously a topic for discussion within the space, but we're seeing lower commodity prices weigh on farmer sentiment. And I just wanted to get a sense of maybe if that was - if you're seeing some of that in the results or maybe in revising previous estimates? Or if you think maybe this could have any impact and what you guys think could be a more full recovery going forward?

Michael, it's Steve. I think the answer for that is no. We haven't seen a significant change in sentiment over the last number of months, if you're referring to kind of the impact of the [indiscernible] tariff. It has been a low price environment for a while now. And as we've discussed in previous quarters, the U.S. farmers in particular have kind of had batten down the hatches and tried very hard to limit CapEx spending. However, in recent quarters, the turnaround, the nature of our portable grain handling equipment as it's a replacement item, a low ticket item and is required to be replaced. And quite honestly, the crops are, again, year-over-year quite large. And the requirements for storage in a low commodity price environment increase. The farmers are incentivized to hold their crop and the two primary products of ours in the U.S. portable grain handling and grain storage systems have decent tailwinds behind them.

Okay. That's good to hear. And maybe just switching gears to the price cost gap trend as it relates to steel. There was some pressure on the quarter. Does that improve immediately in Q3 or does that sort of grind back into the results as you pass through higher costs in the subsequent quarters?

Well, I mean, this is kind of an ongoing situation I suppose. I mean, we have - we are constantly in the steel market. Steel prices recently have leveled and perhaps softened a little. We've passed through a number of price increases in 2018 as have our competitors, timing of those as we honor our backlogs and the timing of the higher input prices in our cost base play themselves out throughout the year. So I don't think you'll see a market different in Q3. It will be a factor that will impact our results for the balance of the year as we work through both factors.

And can you make the argument that just given the manufacturing basis is - or at least a good chunk of it is in Canada that you're advantaged versus your U.S. competitors?

Advantaged in which way?

In procurement of steel.

Yes. Steel - it really depends on the month, the situation, the product line, the SKU of steel that you're talking about. Steel marched up in both Canada and the U.S., and the current trade disputes and - or even in any particular quarter, I mean, there's different movement in those SKUs and volumes dependent on just such a wide variety of factors. So hard to say that we're advantaged in any given product line or position and any particular advantages often offset relatively quickly. So I'd say, it's more of a level playing field.

Okay. Fair enough. And look, I'm going to try to squeeze one more in. But in your Brazil outlook, I think you added the start-up cost component to your EBITDA outlook. So can you just maybe give us a sense for what those start-up costs would look like or would be in the fourth quarter or at the end of the year?

Yes. I think just in general identifying those, those start-up costs are a pretty generic basket of productivity gains or increases and then the costs associated with establishing the business, building the sales team, building the brand, and just we're segmenting those and then managing them down as we build the business over time.

Your next question is from John Chu from Laurentian Bank.

Maybe just on the U.S. stores demand. It seems like that's picking up based on your commentary? Well, not too long ago, the outlook seemed to be a bit more muted. What's driving the - that? Is it just the lower prices or is it just pent-up demand?

John, probably both. The storage environment in the U.S. was quite weak for a couple of years after the initial commodity prices decreased. When we bought MFS and the Global group in 2017, it was really at sort of a low eb in the U.S. We're seeing a recovery in that market. It has - it certainly is not back to where it was. But it's both. I mean, it's underinvestment for a period of time, leading to pent-up demand and these low price environments and some uncertainty the farmers are more incentivized to store.

So what's the readthrough then for Global Industries as a whole? I mean, are we getting close to where the margins were several years ago or is it still work in progress?

Well, the margins are work in progress, but they've certainly improve significantly from the date of acquisition. Those margin improvements though, I think, would be more related to changes we've made within the business and the slight increase in sales volume. The - there are more margin gains to come as sales volume kind of return to historical levels, and we continue to implement our lean manufacturing practices and other best practices in the business.

Okay. And then, you mentioned you're starting to build your 2019 backlog. Can you give us a sense of how the backlog for the next year compares to at this point last year?

So that reference would related to the commercial business. So we haven't disclosed amounts - the point of the comment was it's a very robust environment in Canada and internationally. We continue to close deals, convert that pipeline into quotes and we're in an H2 now and some of that business is heading into 2019. And the differentiator will be - when we enter fiscal 2019, we'll enter the year with a strong commercial backlog, which we didn't have in fiscal years prior.

Your next question is from Andrew Wong from RBC.

So just wanted to hear your thoughts on the dispute between Canada and Saudi Arabia? Do you see any impact on your sales in that region or any impact on Canadian grain outlook?

Andrew, as far as sales into Saudi Arabia, we have - well, that's not a significant market for us. The - probably the most significant Saudi influence in our business would be the presence of G3 in Western Canada. They are a very active player in the grain handling business with some significant expansion plans in Canada. We don't know anything - we don't know. We haven't received any indication that their plans have changed and we hope to participate in their growth in Canada. Regarding sales into Saudi or other parts of the Middle East, we don't believe there will be an impact.

Okay. And I was actually kind of surprised to see your SG&A actually down this quarter even with the acquisitions and some other people noted your margins are actually really good this quarter. How much of that was driven by synergies? How much of that was driven by kind of cost-driven initiatives that are more organic?

It's a combination of a number of things. We had a couple of onetime reductions in our SG&A related to a bad debt reversal and some other accounting and legal reversals. Those weren't overly significant. I think it relates more to kind of overall cost control. We continue to build-out our team and invest in people and at the same time are paying close attention to the other line items on our SG&A and controlling those costs.

Okay. And just looking at the cash flow balance sheet. It looks like working capital has just gone up a bit in the first half of this year when you compare to last year. What's driving that? Is it acquisitions or sales, so you need a little bit more working capital?

Yes. Not the acquisitions so much. It's really a few things that's - inventory is up quite significantly and added a number of locations. Brazil being one, where our sales activity has increased quite significantly. It's really throughout the business in the first half of 2018 due to the volatility in steel. We have been strategically procuring steel and using our balance sheet to protect against margin erosion. Those will be the two most significant factors in the increase in inventory. AR is also up significantly compared to the prior year. That's due to sales volume. There has been no change in our profile of [indiscernible] payments, so that will be converted into cash in H2 as well as the inventory increase.

Okay. So in the second half, we would expect a working capital benefit to cash flow?

Right.

Okay. And then just maybe the last one. More broadly speaking, looking at the 567 strategy, which of these areas would you feel underrepresented and most likely to see investment over the next couple of years? It does seem like you're targeting more on the Food side right now? Is that fair to say and does that change?

Yes. So 70% is in grain of sales right now, so the other platforms will grow at a faster rate. We have invested quite a bit in fertilizer in North America over the last couple of years. And so we'll be turning our attention or weighting our attention a bit more to the other three, so to seed, feed and food.

Your next question is from Matthew Pallotta from AltaCorp.

Sorry, I just joined the call a little late, so apologies if this question was asked. I had a bit of technical difficulties. But noticing the payout ratio is down to just 36%. And obviously, quarter is very strong, especially strong results going forward. Is there any possibility of raising the dividend to maintain that payout ratio in sort of the 40% to 50% range?

No. Our priorities are - capital allocation priorities are continuing to be on growth of business organic and through acquisitions, so that will likely consume or take up the majority of our capital going forward. So there is no immediate plan to change the dividend.

[Operator Instructions]. Next question is from Steven Hansen from Raymond James.

On the M&A side, you mentioned the expansion in France with the latest acquisition. I'm just curious about the geographic spread that you're looking for in the future M&A. Do we expect to see further expansion of that footprint or should we expect you to stay closer to home as you look at seed, feed and food [indiscernible]?

No. We will continue to look at international opportunities. So we have a pretty substantial base in North America, a pretty solid base in South America now with our new plant, good capacity, capabilities there. But we'll continue to look internationally to expand our footprint. We need to be local in all markets, local from a sales and service perspective, but also from manufacturing perspective.

And do you find and this is just [indiscernible] do you find that the geographical spread, the challenges are associated with that don't sometimes run into the benefits to the diversification. I'm just asking at earlier stages [indiscernible] that strategy.

No. The benefits bar away any challenges.

At this time, there are no further questions. You may proceed.

Okay. Well, thank you for your time this morning, and we look forward to talking to you further. We'll end the call there.

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