Ag Growth International Inc.

Thank you for standing by. This is the conference operator. Welcome to the AGI first quarter 2022 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, You may signal an operator by pressing star and zero. I would now like to turn the conference over to Tim Close, President and CEO of AGI. Please go ahead, sir.

Good morning, and thank you for joining Jim Roddick and I to review our first quarter results and our outlook for 2022. With 2021 serving to validate the benefits of a diversified business model, that trend has continued into the first quarter of 2022. Sales in adjusted EBITDA were up 14% and 6% year-over-year, both setting first-quarter records despite two significant headwinds in key areas of our business. Last year's drought in Western Canada had a significant impact on our farm business, which is historically an anchor for our Q1 results. 2021 crop production volumes dropped materially in Western Canada, with wheat, Canada's largest crop, down 40% year-over-year, As expected, this type of decrease in crop production had a material impact on our business in the region. In addition, our digital segment was a material drag on adjusted EBITDA in the quarter. Despite record order intake, the supply chain constraints impacted our ability to manufacture product to meet demand. Supply chain issues pushed some revenue recognition into Q2. Our investment to continue to build the digital team to support our ambitious digital growth plan also contributed to the higher drag in the quarter. Our first quarter results, despite these two impacts, highlight the strength of a now well-diversified AGI. With three of our last five quarters setting adjusted EBITDA records, our results continue to validate our recent investment phase leading up to 2021. This stable foundation is important as we move into the next phase of AGI's evolution and focus on deep integration, optimization, and organic growth. Now we'll turn to some highlights from the quarter. Brazil continues to be a tremendous success story for AGI. Sales were up 75% in the quarter against the strong 2021 comparable. Our backlog for South America is up 6%. But we also have a very strong pipeline that features a wide range of small, medium, and large projects that will continue to fuel the growth of Brazil throughout 2022 and going forward. Looking ahead, we expect a sustained trend of strong demand and sales growth in Brazil. The grain, fertilizer, and general food infrastructure gap in Brazil is massive, and this market has many decades of strong growth ahead. Our commercial platform grew 17%, with Canada, the U.S., EMEA, and South America all leading the way. In Canada, our commercial sales and backlog were up 63% and 119%, respectively. The commercial market was slow over the last couple of years following a heavy investment period for the grain and fertilizer industry in Canada. Current dynamics have led to an increased spending cycle, which has been very supportive for our sales and backlog. AGI is well positioned to capture much of this demand, and we expect continued momentum for the Canadian commercial platform. The EMEA region posted 18% overall growth in the quarter, anchored by 48% growth in the commercial platform. Midway through the quarter, activity on projects in Russia and Ukraine largely came to a halt. Ukraine produces significant grain export volumes, which are critical to global food supplies, and our relationships with Ukrainian customers go back well over a decade. Going forward, the industry in the region will recover. We are well positioned to participate and support in a rebuild and expansion phase. In the meantime, we have pivoted our efforts and have already replaced value of the impacted projects in Russia and Ukraine with new work sourced elsewhere within the India region. Strength in India continued with sales up 33% and backlog increasing 31%. We continue to expand our rice processing system export sales from India. We have also finished the installation of a new grain production line in India. With a substantial reduction to wheat production and exports expected from Russia and Ukraine, India will now increase wheat and other grain production, leading to substantial opportunities for AGI in the region now that we have grain storage production in the country. The farm segment sales grew by 6%. So as I mentioned up front, this includes overcoming a major hurdle with a 31% sales decline in Canada as the Western Canadian market faced extremely challenging growth conditions in 2021. The challenges were felt across the industry, and AGI was able to retain market share in this key market despite the temporary dip in sales. The impact of last year's drought will have a carryover effect in the first half of 2022, but as we move into the new crop season, the Canadian farm market will rebound. The growth in the farm segment was largely a result of strong contributions from the U.S. and Brazil. In both markets, we continue to grow market share in permanent grain systems. Additionally, in the U.S., portable handling equipment was a key growth driver as the combination of an expanding dealer network and overall low dealer inventories supported robust demand for AGI products. Our food platform continues to be an area of very high growth, with sales up 62% in the quarter. Given the purchase of Eastern Fabricators in January, there is an element of acquired revenue embedded in the quarter, but the results also include strong organic contributions, which are representative of the significant demand we are seeing in this market. Throughout 2022, we see the pace of growth continuing as supported by significant backlog growth, which was up 153%. With a strong backlog in hand, the near-term priorities for our food platform will be on the eastern integration with a focus to build on early wins for revenue synergy capture in addition to recruiting as we continue to build the team to keep pace with significant demand. AGI digital sales were up 8% in the quarter. However, as I mentioned in my opening remarks, this does not fully reflect the strength in this segment as chronic industry-wide chip shortages constrained our production. Q1 was a record quarter for order intake, following our focus to expand the dealer channel through 2021. However, from a timing perspective, the chip shortages delayed some key revenue recognition into Q2. The combination of strong order intake, expanded sales channel, and additional resources to help drive growth sets up a positive outlook for AGI Digital. Supply chain challenges continue to impact the global economy. As discussed for most of 2021, supply chain dynamic for steel is an area we closely monitor, and we have made dynamic adjustments to manage our supply effectively. Through the first quarter, we saw lead times for steel improve marginally in most regions. Overall, steel pricing remained at elevated levels, causing a corresponding increase in working capital investment. Outside of steel, we are seeing more pronounced inflation for freight, components, and labor. However, our supply chain dynamics are manageable. We do not foresee a material impact to our margin profile. Overall, our record first quarter results and current outlook confirm the ability for our diversified business to mitigate the impact of regional issues while maintaining robust growth. We have increased confidence in our outlook for 2022, which we expect to be another record year for AGI. One final note before I turn the call over to Jim. I'd like to reiterate AGI support for the people of Ukraine. To show our support and help address the humanitarian crisis, we launched our Step Up for Ukraine collaboration in early April with the goal of delivering urgently needed medical supplies to the country. Thus far, we have raised over $750,000. We are delivering high-priority supplies into Ukraine. We are in the process of arranging additional deliveries and remain committed to providing ongoing help to those impacted. A special thanks to our AGI team for stepping up to quarterback this great initiative. I will now turn the call over to Jim for further discussion of our first quarter results.

Thanks, Tim, and hello, everyone. For today's earnings call, I'll cover three topics. First, I'll provide a brief overview of our first quarter results. Second, I'll discuss our balance sheet. And finally, I'll provide an update on our outlook for 2022. Our first quarter results continued the momentum from a record 2021, with record first quarter results for both sales and adjusted EBITDA, an impressive result, especially when considering the headwinds we needed to overcome to generate this result. Consolidated sales of $292 million were up 14% from $255 million year-over-year, with growth in all segments and all geographies except for Canada. Adjusted EBITDA of 41.3 million was up 6% from 39.1 million year-over-year. Adjusted EBITDA margins of 14.2% were down approximately 110 basis points from 15.3% year-over-year, but it is important to note that there was a significant change in our input cost structure in comparing the year-over-year results. The input costs used to support Q1 2021 sales were purchased largely in late 2020, ahead of the steep increases in steel prices. While we are generally able to pass along input cost increases, our ability to largely preserve margins despite the extremely challenging environment is a significant accomplishment. Farm segment sales and adjusted EBITDA grew 6% and declined 2% respectively in the quarter. Segment adjusted EBITDA margins declined from 25% to 23%, as the rise in steel prices did have some impact. We are extremely proud of these results, given we were able to overcome a very challenging quarter for the Canadian farm segment, which is typically strongest in Q1. Despite the headwind, our U.S. and Brazilian divisions were more than able to make up the difference and led to a phenomenal quarter for the farm segment overall. As farmers in Canada recover from the extreme drought from last year, we anticipate results to recover throughout 2022. Commercial segment sales and adjusted EBITDA grew 24% and 40% respectively in the quarter. Adjusted EBITDA margins expanded from 12% to 14% as overall higher volumes benefited both gross margins and our ability to scale our SG&A base for the segment. The digital segment posted sales growth of 8% in the quarter. Adjusted EBITDA of negative 4.8 million is up from negative 1.4 million as we invest in building the team in preparation for rapid growth and further product development. As Tim mentioned in his remarks, we have begun seeing this growth materialize with record order intake in Q1. But revenue recognition and timing was delayed due to chip availability required for production. On balance, we expect strong growth in the digital segment in 2022 and aim to be EBITDA neutral by the end of the year. Turning to our balance sheet. First, I'd like to highlight two key announcements made subsequent to the quarter. We announced a credit agreement amendment for our senior facilities that will provide us with more flexibility to meet the needs of our growing business, particularly in international geographies. Importantly, The interest rates on these facilities will remain essentially unchanged. We'd like to thank our longstanding members of the lending syndicate for their continued support and extend a warm welcome to four new members to the group who will help add depth of service and coverage to AGI. In April, we closed a convertible unsecured subordinated to venture offering with net proceeds of $99.7 million, including a partial exercise of the overall allotment option. The proceeds will be used to redeem the prior issuance of convertible unsecured subordinated debentures due December 2022, with an aggregate principal of approximately $86 million. The difference will be allocated towards paydown of senior debt and general corporate purposes. The coupon of the newly issued debentures is 5.20% per annum, 70 basis points higher than the debentures being redeemed. Turning to key balance sheet metrics from the quarter, from a working capital perspective, our investment in non-cash net working capital investment increased from $143 million to $232 million year-over-year and also grew as a percentage of sales moving from 14% to 20% on an annualized basis. This increase was driven primarily by our strategic investment in inventory. Given the ongoing supply chain, delivery timing, and availability of steel, we made the decision to invest in our steel inventory to ensure we can meet strong customer demand and maintain high levels of on-time delivery. In addition, the overall increase in the cost of steel further magnified the extent of the increase in inventory. We do not expect this level of inventory to be required as part of our run rate operations into the future, but believe that strategic benefits of a temporary investment in inventory are justified given the unique supply chain circumstances we are managing. In the short term, we expect our initiatives to optimize our accounts payable and accounts receivable positions to help offset some of the investment in inventory. We continue to closely manage our senior debt to EBITDA ratio, which sits at 2.9 times exiting the quarter. This is up from 2.4 times from Q1 2021 year over year, and 2.5 times from Q4 2021 sequentially. We have sufficient room against our covenant of 3.75 times, and we do not have any bank covenant concerns. The increase is primarily attributable to the strategic investment we've made in inventory to support our robust backlog in the coming quarters. That said, we remain vigilant in closely monitoring our senior credit facility usage and overall cash flow management. while also balancing credit facility usage to help enable growth, particularly in our international regions. While we are comfortable with our senior debt ratio, throughout 2022, we will continue to focus on free cash flow conversion and managing the overall balance sheet with a clear objective to continue deleveraging. On an all-in net debt to adjusted EBITDA basis, we expect the ratio to trend towards the four times level. from its current level of approximately 5.3 times by the end of 2022. As previously stated, this will be achieved through a combination of disciplined capital management and the benefits of strong results and growing EBITDA. We have approximately 186 million in available undrawn credit facilities, taking into consideration the credit agreement amendment as well as the repayment of senior debt in excess of what was required for the redemption of our 2022 debentures. and $60 million of cash on hand. We closely monitor our liquidity position, ensuring we are flexible to react quickly to new opportunities. And finally, turning to our outlook for the upcoming year, supported by a strong backlog, up 19% year over year and at record levels, as well as significant pipeline and quoting activity across many regions, We expect full-year adjusted EBITDA to be at least $200 million in 2022, with growth weighted particularly towards Q2 and Q3 of the year. Thank you very much for your time. And with that, we'll turn it back to the operator to take questions.