Ag Growth International Inc.

Thank you for standing by. This is the conference operator. Welcome to the AGI second 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 will be an opportunity for analysts to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star. I would now like to turn the conference over to Tim Close, President and CEO of AGI. Please go ahead, sir.

Good morning. Thank you for joining Jim Roddick and I to review our second quarter results and outlook for the remainder of the year. Our diversified business model and the robust demand we are seeing across all segments continues to produce strong results, with double-digit sales growth and expanding margins leading to a record second quarter. Despite regional disruptions and persistent supply chain issues, we have now announced three straight record quarters in a row. AGI is uniquely positioned as a supplier of critical food infrastructure globally. Increasing population, rising food and feed consumption, and expanding crop volumes underpin the fundamental demand for AGI products through geopolitical and weather events, as well as economic cycles. We expect our pace of high organic growth to continue, enabling sustainable growth while maintaining a focus on steadily deleveraging our balance sheet. Let's turn to some highlights from the quarter. Brazil remains a key highlight for AGI, with second quarter sales up 80% year-over-year. Strong demand for farm system sales were complemented by steady results in the commercial business. as the entire Brazilian sector, from growers to inland terminals and ports, increased the pace of investments into new capacity and increased throughput to eliminate waste, increase productivity, and keep up with expanding crop volumes. Recently, we completed the transfer of additional products from the U.S. to Brazil for fertilizer products, enabling local production, along with local engineering and sales resources. This is consistent with our global strategy of having complete platform capability in each region. Expanding our product catalog and solutions in Brazil will help support continued gains in market share and sustain our high rate of growth within this opportunity-rich environment. While we have strong year-over-year comparables in Brazil, our Brazilian backlog is up 91%, and our sales pipeline is at record highs in the region. With these dynamics, we expect a trend of strong growth from this region to continue through the remainder of the year. Our farm segment posted 28% year-over-year growth, with strong results in several geographies, including Canada, the U.S., and South America. Canada was able to bounce back from a tough first quarter as the effects of the 2021 drought began to fade and planning for a significant year-over-year increase in grain output takes shape across the region. Towards the end of Q2, signals of a lift in demand in our sales pipeline began to materialize in Canada Farm, and this has continued into Q3. The U.S. farm business delivered a robust second quarter with both strong sales and backlog growth as demand for critical portable handling equipment was augmented by success in deepening our penetration of farm system dealers. Overall, momentum in this key market continued into Q3, and we have good visibility for a strong second half. While the last several years have been unprecedented in terms of volatility and uncertainty across the broader economy, our farm segment has proven that the demand for AGI products is relatively inelastic and critical to grower operations. In addition to extensive distribution channels and growing market share, our farm segment is well positioned to drive further growth in the second half of 2022 into 2023 and going forward. Our commercial platform posted 20% growth in the quarter with significant contributions from the North American commercial team. In Canada, our commercial platform sales were up just over 100% as the grain and fertilizer sector resumed investment programs, owing a pause in activity post a significant build-out in 2020 and 2021. We anticipated an increase in activity given the uptick in quoting and pipeline activity, which began in Q4 of 2021. and accelerated into the first half of 2022. In the US, sales grew 23% as new projects were complemented by a steady flow of recurring maintenance and upgrade work. Our ability to accelerate growth and capture new opportunities has been supported by our North American commercial reorganization efforts, which we've highlighted in prior calls. While it's still early days for our Chicago office, we've made significant progress in bringing together key functions from across the organization in sales execution, product management, customer success, and applications engineering to heighten our customer focus. It's a very positive signal to see these efforts drive early results, and we expect a trend of continued growth in our North American commercial business to be sustained. In EMEA, the commercial platform was flat in the quarter as the loss of work in Russia and Ukraine was offset by other opportunities from the region. Our team quickly pivoted to develop new opportunities and replace these volumes. We are well positioned to play a significant part of the eventual rebuild in the region. Our India business continues to demonstrate consistently strong growth, with sales up 38% in the quarter. India has now become a meaningful contributor to overall AGI results, with accretive margins to our consolidated profile. Looking ahead, India has multiple avenues for additional growth. Our food platform is among the strongest areas of growth across AGI. Sales were up over 100% in the quarter, or approximately 55% after adjusting to the acquisition of Eastern earlier this year. Very strong industry-wide demand, growth within the strategic accounts, and positive customer reception to our design, supply, manage model have all combined to maintain a rapid pace of growth. The total addressable market for the food segment is by far the largest across all of AGI's businesses. We see a long runway for additional growth ahead as we integrate Eastern, expand the team, and work with new counts and steadily penetrate new geographies such as APAC and South America. Turning to our digital segment, record Q2 order intake and our continued focus on expanding our sales channels and dealer network helped support sales growth of 31% in the quarter. We ended Q2 with a higher backlog than we'd like to see in this business, which would have augmented sales growth had we been able to increase production. Access to components critical for production is still a hurdle for AGI Digital, as well as the broader industry. And again, constrained sales in Q2 as key inputs required for production had long lead times. Of note, AGI Digital and Trutera signed a partnership agreement in the quarter which aims to increase carbon market access and participation by Trutera members. Trutera is the sustainability solutions arm of one of the largest farmer-owned cooperatives in the U.S., representing over 300,000 growers. This pilot project will combine AGI Digital's ability to collect significant field activity data via our farm mobile pocket with existing Truterra sustainability tools used by Truterra's griller network. This will improve their data entry, accuracy, and consistency issues, eliminating common hurdles to carbon credit market participation. We look forward to advancing this partnership and playing a lead role in helping develop carbon credit markets. A quick note on inflation as this continues to be a key headline across the global economy. Steel prices have eased but are still elevated. Supply chain constraints are slowly reducing but in an uneven pace across our regions. While the situation is not ideal, it is less disruptive than the extreme volatility witnessed through much of 2021. Throughout that time, AGI developed and honed several standard processes to manage input cost escalation and ensure we are preserving our margins. These tactics, initially applied to steel, have driven the pass-through of cost inflation for other inputs, such as labor, freight, and components. Our ability to deliver strong margin expansion in the corridor highlights the ability of our teams to effectively manage and mitigate a difficult cost environment. With a backlog towards the high end of our typical four- to six-month range and a very strong pipeline with climbing win rates, we have excellent visibility into the second half of 2022. Our confidence in the full-year outlook continues to increase, and as a result, we've raised our full-year adjusted EBITDA guidance from at least $200 million to at least $215 million. This will carry AGI to another record year in 2022, and we expect the momentum to continue into 2023. I'll now hand the call over to Jim to review the quarter in more detail.

Thank you, Tim, and good morning, everyone. For today's call, I will cover four topics. First, I'll provide a brief overview of our second quarter results. Second, I'll discuss our balance sheet. Third, I'll provide some commentary on our cash flow. And finally, I'll provide an update on our outlook for 2022. Our second quarter results continued the momentum from prior quarters by setting another record result for both sales and adjusted EBITDA. Consolidated sales of 390 million were up 29% from 302 million year over year, with growth in all segments and all geographies except our EMEA region, which was flat. Adjusted EBITDA of $66.1 million was up 43% from $46.2 million year-over-year. Adjusted EBITDA margins expanded by 160 basis points from 15.3% to 16.9%, the highest margin in any quarter since Q2 2020. Pricing management, cost control, and scaling on an increased revenue base helped capture incremental gross margin. Farm segment sales in adjusted EBITDA grew 28% and 23% respectively in the quarter. Adjusted EBITDA margins declined slightly from 25% to 24%, strengthened Canada, U.S., and South America margins all drove the strong results as fundamental demand for our products, critical to grower operations, remains robust. Consistent with our messaging from Q1, Canada continues to recover from the extreme drought from last year, and we expect to see continued momentum in the farm segment overall during the second half of the year. Commercial segment sales and adjusted EBITDA grew 31% and 102%, respectively, in the quarter. Adjusted EBITDA margins moved from 9% to 15% year-over-year as product mix, volume increases, and SG&A scaling all contributed to the expansion, particularly within the commercial platform. The digital segment posted sales growth of 31% in the quarter. Adjusted EBITDA of negative 1.1 million is a significant sequential improvement as our expanded sales and gross margin profile was partially offset by SG&A investments to set up and prepare this segment for rapid growth and product development. The trend of improving order intake continued in the quarter, up 45% year-over-year, as our efforts to expand sales channels gained traction, but sales were again constrained by industry-wide chip shortages and availability. The outlook and strategic importance of our digital segment remains bright, but the supply chain constraints will be a challenge for the foreseeable future. Turning to key balance sheet metrics from the quarter. From a working capital perspective, our investment in non-cash networking capital increased from $226 million to $274 million quarter over quarter, but declined as a percentage of sales, moving from 19% to 18% on an annualized basis. The dollar increase was driven primarily by our strategic investment in inventory, as well as an increase in accounts receivable, partially offset by an increase in accounts payable. Given our very strong sales growth, there's a natural progression to increase the dollar investment required to support accounts receivable. However, we note that our primary key performance indicator for monitoring accounts receivable levels, DSO, continued to trend downwards in line with our strategic objectives to manage non-cash working capital. In terms of inventory, given the ongoing supply chain environment, we made the decision earlier this year to invest in our steel inventory to ensure we can meet strong customer demand and maintain high levels of on-time delivery. This is a temporary measure designed to manage the current environment and is reflected by a rise in our DSI levels over recent quarters. We do not expect this level of inventory to be required as a part of run rate operations into the future and anticipate that inventory intensity will begin to moderate in the second half of the year as supply chain pressures gradually abate. Our growing adjusted EBITDA continues to support our deleveraging objectives. Our senior debt to EBITDA ratio sits at 2.7 times exiting the quarter. This is down from 2.8 times in Q2 2021 year-over-year and 2.9 times in Q1 2022 sequentially. We have sufficient room against our covenant of 3.75 times, and we do not have any bank covenant concerns. While we are comfortable with our covenants, throughout 2022, we will continue to focus on 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 4.8 times by the end of 2022. We have approximately $167 million in available undrawn credit facilities and $55 million of cash on hand. We closely monitor our liquidity position ensuring we are flexible to react quickly to new opportunities. Funds from operations grew 52% year-over-year to $49 million though some temporary items impacted the conversion of this into cash on our balance sheet, including a strategic increase in non-cash working capital and underwriting and note repayment fees related to financing activities. We view these items as largely transient and unrelated to the fundamental ability of our operations to generate and harvest cash. Cash flow management? and optimizing our credit facilities are a key focus across AGI and will be an area we monitor closely in the second half of 2022 and beyond. And finally, turning to our outlook for the upcoming year. Supported by a strong backlog up 19% year over year and at near record levels, as well as significant quoting activity across many regions, We expect full-year adjusted EBITDA to be at least $215 million in 2022, with growth weighted particularly towards Q3. Thank you very much for your time. And with that, we will turn it back to the operator to take any questions.

Thank you. We will now begin the analyst question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. The first question comes from Jacob Bout, CIBC. Please go ahead.

Good morning. Morning, Jacob. Morning, Jacob. Yeah, a question on maybe just start off on Brazil. You know, another strong quarter. I think you said backlog up, I think, better than 90% there. Maybe just talk a bit about what type of EBITDA you're generating there now. You know, are there capacity utilization constraints here? Are you bumping up against this? Are you thinking about expanding the plant? And would you ever consider building a new plant there?

Yeah, well, look, that pace of growth there has been very positive, very robust now for quite a few quarters. So, yeah, we look at the de-bottlenecking and adding. And I think we might have talked about this a little bit last quarter, but we had when we built that plant we had left some spots for expansion of certain uh production lines and we have recently added to those we've been we've added uh from a laser capacity perspective and a press break perspective uh from a weld cell perspective we've been um filling in those spots that we had left open when we uh when we when we initially built so that'll be ongoing We're right now, as we fairly regularly do at plants, we go through a leaning exercise across each process and look to de-bottleneck and be aware of where each of those critical and priority bottlenecks could be or will be and then get ahead of those. So, but, you know, with this kind of growth that has to happen and it has been happening more so there than anywhere else, I would say. So we're lifting production capacity, but it is a concern. Just a physical footprint from a logistics perspective is something we're addressing right now. And so we'll add from both an equipment perspective and then ultimately, yes, we will look at expanding that facility, just given the huge demand dynamics in Brazil.

And, Jacob, just one follow-up on, I think you asked about margin profile there in Brazil as well. So we're very encouraged and happy to note that Brazil is operating very, very effectively and efficiently. Their margins are where they need to be. We've mentioned this in the past, where they're in line with our corporate averages. We expect them to continue to stay strong as we continue to grow that business down there.

Sorry, an EBITDA generation?

Sorry, I was referring to EBITDA margins. But from an EBITDA perspective, yes, it's now fully online. Last year, we still had a couple of quarters early in the year where it was below our expectations, got online towards the middle of last year, and it's continued to hit its stride and continues to do very well. So very positive contributor to our EBITDA, which is part of why you see our overall EBITDA margins doing quite well as we benefit from the volume and the growth in these key areas we invested in the past several years.

And then just on the digital side, revenue and EBITDA down significantly. year on year. And I know you called out the chip issue, but is this both a hardware and a software issue? And maybe just talk through your, the data verification space and how demand there is progressing.

In digital, I mean, we saw, we saw a very good growth, a revenue growth in the quarter. I had to add about 30%, 31% revenue growth in digital specifically would have been higher. I think I noted the backlog in digital. We actually, well, you know, this is a division or a business where our goal, my goal is to have zero backlog because we want to be configuring and shipping that equipment out the door as essentially immediately. And we ended the quarter with a higher backlog than we would have liked. And so order intake was higher than that 31% would represent, but constrained by production and supply chain. So, you know, but still, despite that disruption, we came in with very solid growth in Q2, which is often an off quarter from a digital perspective. Farmers are out busy and not that focused on the bin tech or the IoT side, so pleased with the quarter in digital. The EBITDA side on digital was a drag, a slight drag in the quarter, but really because we've expanded our product development teams, and that are working on future releases of products across AGI Digital. So, you know, some investment continues here. It's certainly a part of the business that we're very excited about, continue to invest in. But as those sales continue to grow, that more than offsets within the division itself. And then we get a knock on effect across our whole business that benefits from having availability and inclusion of the digital products in our systems.

Sorry, and how is the carbon and traceability markets progressing?

Yeah, we noted, we signed an agreement with True Terra, which is a leader in the carbon market space. So True Terra, we have a project going with them where our PUC, our Farm Mobile PUC is being included with some of the generation of their carbon credits. So we're automating the collection of that field data and then feeding that into True Terra's system to automate that collection and really validate and improve the value of their carbon credits. We're actually involved in quite a few of the carbon credit programs across North America, most of them. We have our POC involved in playing exactly that role, the fundamental infrastructure of data collection, that digital infrastructure collection of that data that feeds into these programs to validate the credits.

Is this primarily a Canadian product?

No, it's mostly U.S.

Okay. All right. Thank you very much.

The next question comes from Michael Dumais with Scotiabank. Go ahead.

Hey, good morning, guys. Good morning.

First question, on the working capital, Jim, I think you previously indicated that you expect to retrieve, you know, I think most of the $80 million that was invested in Q1. So the working capital, I think it's about $125 million a year to date. obviously the increase in EARs, it doesn't surprise obviously with the sales ramping here, but I just wanted to maybe get a sense, given the sales trend, how much of the 125 increase do you think you can get back within the second half?

Yeah, so the short answer, Michael, is that we expect to reverse all of that by the end of the year from a working capital perspective and get back down to our historical levels. As we've talked about in the past, We do have a very strong program. We're in capital management. The metrics we use are the underlying metrics, DSO, DSI, and DPO. We're making great improvements in receivables and payables in terms of improving the DSO and DPO metrics. DSI, we purposely let run up a bit at the start of this year, particularly with the events unfolding around the world. and some of the concerns we had on supply chain management. So we consciously extended out our orders for steel and other raw materials to ensure that we were able to fulfill the growing demands as you see us going through our business here right now. However, we've now got a lot more comfort on our supply chain. The areas have stabilized quite a bit and we're now reverting back to traditional practices and managing inventory levels and so uh we expect that to fully reverse and free up that cash by the end of the year so the full amount of the increase this year we expect to be able to chip away and get most of that back by the end of the year okay that's great thank you um and then uh maybe just a larger or higher level picture you know you're on pace for record revenue and ebitda this year you know tim jim

I think a lot of us are still trying to figure out how much of this is coming from a favorable cycle versus, you know, what is structural is obviously you've made significant investments in the last several years and those are starting to pay off in any way you can speak to your confidence level that you can build further on the 2022 EBITDA into 2023. Yeah.

We're very confident on continued growth. You know, I, we'll, Really, this is not a connection to any type of cycle. To your point, we're seeing the contribution now, the steady and consistent and ongoing contribution of the places we've invested in over the last five years. So that's Brazil. It really went from a startup, a build, to now a solid contribution and profile there is for continued growth across the board and into... They are not related to a cycle per se, but they're related to fundamental investment in the infrastructure in that country. Likewise, in India, contribution of that business, net new and growing, and will continue to grow. We've expanded our product lines in India, so net benefit from being a leading market company leading the market there in rice processing and then expanding our product lines in the grain, so continued growth into additional end markets in that country and broader region. Same story in APAC. Very, very much the same story in North America. Our technology business now contributing and will continue to ramp up and grow and contribute more. Our U.S. farm business we invested in over the last four or five years is a net new contributor to our business from a farm systems standpoint. Now seeing an increased growth rate from our commercial platform in North America where we've spent many years now bringing together the right products and then the right structure and capabilities from an engineering design and then a sales execution perspective. So this isn't cycle related. This is fundamental contribution from places we've invested. So net, net new. That, you know, we are... We very much and consciously focus on the description of our business around food infrastructure. Infrastructure investment carries on through geopolitical events. We're seeing that now and through economic cycle and fundamentally driven by food and feed consumption. So it's, you know, that's the demand drivers here. That's the fundamentals that we're seeing. And we see a robust profile of that continuing to grow going forward.

That's amazing, Tim. So high confidence levels. And maybe if I can sneak one in, can you comment on the other transaction and transitional costs in the quarter? And I'm just guessing or trying to think here if M&A is or does take a pause, if that expense should kind of zero out in the second half.

Yeah, the other transactional cost that you see running through there, it's broken out approximately a third related to some earn-out payments For historical acquisitions, earn out costs that we approve related to some historical acquisitions. We have an ongoing, or we're the plaintiff, a lawsuit in the U.S. for digital patents that is about a third of those costs. And then the other third is related to some a cost related to us integrating some of our facilities in the U.S., a couple of facilities that we've been able to relocate and move some of the production to other facilities, which is helping drive notably some of the improvements you see in our gross margins in the commercial space.

Thanks, guys.

The next question comes from Andrew Wong with RBC Capital Markets. Go ahead.

Hey, good morning. So I'm just kind of curious, like, regarding supply and on the production side, demand is obviously seems like it's really strong right now. Are there any supply side restrictions that might come up that could prevent, you know, AGI from meeting some of that strong demand? Like, for example, like how the tech segment... had some difficulties with sourcing chips like on the other, on the rest of the business, could there be like labor issues or anything else like that?

Uh, yeah, good morning. Um, uh, no, not, not nothing that, uh, isn't very much manageable. Uh, labor, you know, is, is, is generally tight, but is actually improving. Um, and so is supply chain. You know, it's, uh, we're, we're coming from rather, uh, severe supply chain environment. So anything less than that seems much easier these days. So from the supply side, we're in very good shape.

Okay, perfect. And then just thinking broader, like more strategically, now that Brazil and India looks to be up and running and trending really well, Are there other geographies that you might now start looking to expand into, kind of building on top of what you've done in those regions, which seems to have worked out really well? And would you consider maybe doing even greenfields in other geographies if maybe there aren't any businesses that you can kind of buy into, like what you did in those areas?

For the most part, we now have complete operations in all of our key regions. In fact, all of the key either grain production or consumption markets worldwide, except for China. And we won't be looking at China anytime soon. And so right now, really, we've talked about AGI in terms of phases. Up to 2020 was really about that geographic expansion and establishing the footprint in each of the regions we wanted to be in. So that was complete. The next stage is really around expansion of those businesses in those regions, which is what we're mid-stride on right now and seeing fantastic momentum and traction on doing so. So we will continue to build in each of the regions we're in. We'll continue to expand, organically expand our product lines, our sales channels, and ultimately see that manifests itself in the kind of growth that we're seeing right now. So, you know, it's a long way of answering your question, but we're very excited about this phase where we're building out or organically building on the investment that we completed in the prior phase. So, you know, we do not see any greenfield, you know, geographic expansion right now. I think the one note I would say would be that Northern Africa in particular is a geography where we are growing and we are focusing on that is relatively new, that's been growing over the last 24 months. We'll continue to grow, but that's really organic expansion of our capabilities in the region. We're adding sales offices throughout that region and seeing very good traction and pipeline build for opportunity. So, but, you know, and then that sort of same concept carries on into Southeast Asia, APAC, around as we expand our reach from India. Okay, perfect. Thank you.

The next question comes from Gary Ho with Desjardins. Please go ahead.

Thanks, and good morning. My first question on the overall margins, pretty strong, 16.9%. Maybe you can walk me through kind of the drivers behind it, you know, the sticky price increases, you know, the steel costs rolling over, and maybe recouping some of the lost margins from last year. We've seen quite a bit more coming on that. That'd be great.

Yeah, hi, Gary. Thanks for the question. From a margin perspective, you know, we've talked about We've said this a number of times now about our expectations to increase our margins back to historical levels by about 100 to 200 basis points over the next year and a half, two years. And really a big part of that is driven by a number of enhancements we've done internally from a pricing perspective. So our approach at pricing has evolved where we're a little more sophisticated in being able to respond to changes in input costs. and make sure that those costs don't hurt us as we fulfill those contracts. We also are doing a number of things and investments in our capacity and our facilities. I mentioned about some of the integration things that we did earlier, which is driving, we're able to scale on our SG&A line quite healthily, and in some cases, improving from a gross management perspective. Now, we did benefit a little bit from last year If you remember Q2 and Q3, we did have a situation where our margins were negatively impacted because of the extremely dramatic increase in costs of steel that occurred, that we had some project shipping at lower margins than we would have, but we right-sized that with our pricing management and how we deal with some of the input costs and how we manage them now.

Yeah, and maybe as a follow-up then, like you've reached your – I guess your historical levels, you know, 16%, 17%. So how should we look out for the balance of this year? Should we, you know, flatline that? Or can we see a bit of more improvement in the latter half of this year?

Yeah, no, you'll continue to see improvement year on year. But just remember, just cautionary, there is some seasonality. Mix plays an important role. And so Q2 and Q3, you have the farm segments being very strong. And in particular, our portable segment of the farm segments has much stronger margins historically and generally, and so they will skew the quarter margins to be slightly higher. However, having said that, you know, if you think about an annual basis, we will continue to improve year on year, and quarter on quarter for this year, you should see improving margins as well, even the margins I'm talking about.

Yeah, okay, makes sense. And then my last question. You can talk about, you know, the progress on the dealer onboarding and penetration in the U.S. farm permanent side, like this is a major organic driver.

Yeah, great question. We know it carries on and seeing very positive momentum there, you know, over the last, well, all of H1, and we expect to have continued progress for the remainder of the year and into next year. So it's a key part of our strategy and we're seeing very good results.

And do you have internal targets, like how many you want to onboard this year, anything you can share with us? We do.

We do have internal targets, absolutely. We've got our priority accounts, and we're actively building those relationships across the board. So, you know, it's a key component of building share, obviously. Those channel partners are extremely important, and And, you know, we're really happy with our available there and results to date. So, yep. Okay, great. That's it for me.

Thanks. The next question comes from Steve Hansen with Raymond James.

Please go ahead. Yeah, good morning, guys. Tim, could you perhaps elaborate a bit more on the recovery in Canada? I understand that the crop is looking a lot better, but just trying to get a sense for how confident farmers have been and to what degree they are stepping up relative to last year. You had a few remarks in your prepared comments, but just let me hear a bit more about how that recovery is trending.

A little hard to hear, Steve, but good morning. I think you're asking about Canada and just a little bit more detail there. I mean, that drought last year was quite severe, so then you combine a drought with really high crop prices. Canola, for instance, and all crops, but canola and Canadian crop prices, I mean, have been very strong. So, obviously, bins get emptied out. And, you know, it's somewhat constrained by logistical capability to get all of that to the port. But the loadout of those bins carried out throughout But yeah, now much better crop dynamics going on in Western Canada. You know, the farmers are very positive in general around that crop volume. And so there is now an uptick in interest and demand from across the board, from portable and then into storage and systems and permanent handling. that'll continue to increase as we go through H2. We would, I think it sets up for a very strong 23 and 24. So the subdued demand, you know, in 22, which by the way, we've had a very solid year despite in U.S. farm. So then in complimented, augmented by market share gains, in some of our key products. And, and so, you know, all things considered in pretty good shape for, for this year. And then, but, but I'm really excited about 23, 24 in, in U.S. Farm. I think it'll, or Canadian Farm, it'll, it'll set up, you know, as some of the, the makeup for the last 12, 18 months will, will happen. And, you know, inventories are going to be stocked towards the end of the year and into, into next year.

That's helpful. Uh, apologies for the connection. Just one last one, if I may, is on, on the leverage target. I think you referenced 4.0, uh, by year end. Are you still comfortable with, uh, maybe just describe where you would like to be as sort of a normalized level of leverage, uh, as we look into next year?

Yeah, well, we'll start to bring, uh, overall leverage. We'll, we'll take down to sort of three and a half. Um, obviously that puts a senior at a very, uh, a very good level. I mean, in, even better than it is now, but put senior very good and overall at a very reasonable and appropriate place as we move into that three and a half going into next year.

Okay. Appreciate the time, guys. Thanks.

The next question from Matt with IA Capital Markets. Please go ahead.

Good morning. Thanks for taking my question. Just talking about supply chains again and just coming back to that, you know, you say things are kind of improving a little bit from that perspective. And it seems like, you know, you're doing a pretty good job of sort of mitigating things there. But maybe, you know, supply chains are still relatively complex. I'm thinking besides sort of, you know, a lot of the sort of strategic inventory stocking that you're doing. Are there any other sort of specific measures you're taking at this point to mitigate supply chain risk across different areas of the business?

Well, good morning. I think the question or the comment was around supply chain hedges. I mean, that essentially is what, when we talk about strategic purchases, that is what we're doing. We're matching supply to to lock in our margins as we build our backlog. So we're essentially dollar good in our backlog. And that has required or we made a decision to invest in that inventory to lock that in. Just given the dynamics, lead times have been on supply in general are longer, have been longer, but probably more importantly, they're more unpredictable. And so we need to take that uncertainty out of the supply chain, and we do that by a physical hedge in our inventory. And so, yes, it sees an uptick in working capital, but it also sees an uptick in both our certainty to supply and our certainty to meet customer expectations. And, you know, those strategic – you call them strategic because it – It adds to our profile and our ability to delight our customers in an environment like this. It absolutely adds to that. And then all those things come together to mean we build share in each of our markets. So it's an important part of how we're operating right now in this environment to give us certainty around supply and margins and growth. Okay, thanks.

I appreciate that. And just one last question for me, and you talk about sort of gaining and augmenting market share in certain product categories, you know, in the U.S. If you think about market size in the U.S., I'm just wondering if you have any thoughts on sort of the growth there, sort of given, you know, positive trends that I think we're seeing in biofuels and, you know, regulations there, and you think about the new climate bill and things like that. Just any thoughts on sort of market demand trends given increasing biofuels use? Thank you.

Yeah, the biofuel is a positive element of North American demand, both in Canada and the U.S. Our farm, just to note, I mean, you raise a good point that we often don't focus on, but our market share in farm systems, U.S. farm systems, actually Canadian farm systems, is much lower than our market share across other product lines. And for us, that's a very... big positive because we have the platform to continue to grow share. So it's a large market. It's a growing market with components that you've identified. The biofuel will be a meaningful contribution to market size over the next five years in particular. And our share is growing and will, we believe, accelerate our growth, our market share growth within that overall large market. U.S. farm systems, Canadian farm systems together is a substantial growth opportunity for AGI. Okay, thanks. Appreciate the commentary.

I'll turn it back.

The next question comes from Tim Monticello with ATB Capital Markets. Please go ahead.

Hey, good morning, everyone. Good morning, Tim. Just looking at the guidance for $215 million, or at least $215 million, that would suggest roughly a flat second half from the first half. Q3 is your biggest quarter. And over the last couple of years, Q4 and Q1 have been sort of comparable, but you've got a 19% build in backlog going into the second half year over year. So fair to say that...

We got a bit of a bad line, I think, in this end. Sorry, Tim, can you just repeat the tail end of that?

Sorry, yeah. I was just saying that based on that and the fact that that closed up 19% of the second half, it would seem to me that the guidance is on the conservative end. Is that a fair statement?

Well, I think in general, guidance is always going to be a little conservative. You know, we, but look, there's, yeah, as you extrapolate out and do the math, we're, and you look at those components that we've identified, growth, then backlog in win rates, in contributions, you know, that's what gives us the confidence. And it's why we said at least 215. But that still implies a strong close to the year. And so we're confident on that number. And is there upside? Yes. Is there risk? Yes, of course. So we think it's a good balanced place to be overall. I know it's the aggressive and robust growth across the business, but... Okay.

That's helpful. Thanks for that. Second thing is just on Brazil. You know, you guys have seen very substantial growth there. It's becoming increasingly material to the business. I guess two parts to this question. One, at what point do you break out Brazil on a standalone basis? And two, over the next three to five years, how big can Brazil be just in the context that the Brazilian agricultural market is one of the largest in the world? Could it be something that's comparable in size to Canada or the U.S. market in terms of materiality to your company?

Yeah, I mean, sure, Brazil can be that large, and it's got years of growth ahead of it, right? They're just starting a fundamental build of the infrastructure for, as you note, a huge growing and crop region. So there's relatively very little there now and much that needs to be built. So we expect continued growth to continue. well beyond where we are now. I mean, I just note, you know, it is a still a deemed emerging market that can have volatility. So we expect an upward trend that can have some ups and downs.

Okay. Can you estimate or just give some bookends to, I guess, the revenue capacity of that business? without having to inject a meaningful amount of capital into it?

Well, look, we talked about off the top here, we're augmenting capacity to be able to continue to see and facilitate growth. And then we will get, you know, if you wanted to talk about 50 or 100% increase over time in that business, It will take more investment from a CapEx perspective, but it's relatively low. In general, across our business, our CapEx is generally quite low, and in relation to the growth there and the size of the market, we can continue to grow that to scale up to meet that demand.

Okay. And then just last question for me, have the supply chains around the chips for the digital business started to loosen a little bit over the last month or two, just given sort of broad market pullback in demand for chips globally?

Yeah, you know, I should clarify too, it's not just chips, but we have redesigned a lot of the components to be able to use more available chips and components. I'll give you a good example. We had one bottleneck on our dryers was actually the screen that's used to control the device or control the dryer. We've modified that to be able to use an iPad or any tablet, for instance. And that unlocked some production capability and supply capability. So we've redesigned motherboards to use different chips that are readily available. That's, you know, I think it's a relatively common approach to get around supply chain crunch. So that work completed, carried out throughout H1 and now making it easier for us to supply into H2.

Okay, got it. That's all from me. I'll turn it back.

The next question comes from Michael Robertson with National Bank Financial. Please go ahead.

Hey, good morning, all. Congrats on a really strong quarter, and thanks for taking my questions. Just had a couple here, mostly that you can go on and speak on, were touched on already. Been seeing a lot of headlines recently. with concerns from farmers surrounding emission reduction targets related to fertilizer. And I was wondering if maybe you could speak to how some of your digital offerings could aid in increasing crop yields while reducing fertilizer use. whether that's, you know, SureTrack or maybe even some of the partnerships that you've done. I think it was with MyLand Systems in terms of, you know, monitoring soil and making sure it's got a proper amount of nutrients.

Yeah, well, fundamentally, those, you know, those regulations, you'll see an increasing amount of regulation or scrutiny around things like fertilizer usage, right? So fundamentally, that's going to... start with measurement. So you have to be able to accurately, reliably, transparently measure application. And that's where we'll see the initial traction. So that our form mobile pod will play a role in that, being able to accurately record and distribute the information around application. And then with measurement, they can then set or put in place targets and guidelines around reduction. And, of course, if you don't measure, you can't reduce. You don't know what reduction means. So that's where we see this starting to have an impact from our perspective. And that will carry on now, I think, or accelerate in terms of regulation, but voluntary measurement fundamentally. And so, though, you know, we're working with a lot of industry participants to be able to provide that measurement and that data.

Got it. Got it. See the color there. Maybe just one more follow-up to Gary and Jim's commentary on the EBITDA margin profile. um you know you spoke to sort of targeting a 100 to 200 basis point increase over i think the 15 percent that you guys did back in in 2020 and um just sort of wondering what maybe what inning you guys feel like right now working towards that target obviously you know good to see uh stronger margins than you've had in some time in the quarter and based on your commentary for Q3, I suspect that continues near term, but just kind of hard to disaggregate the sort of levers that are there with the volatility in the supply chain and raw material input costs. So looking out on an annual basis, how far along in that process do you feel like you are today if things sort of plateau a bit and stabilize at these levels?

Yeah, so we've done a number of things already Certainly from a plant perspective, getting some efficiencies, our growth is helping us out. We still think we've got a fair bit to do, though, in the SG&A area. So if I had to give you the baseball analogy that you mentioned, I would say we were probably in the fourth inning.

All right. All right. Fourth inning. I like it. I appreciate the caller. I'll turn it back. Thanks, Michael.

This concludes the question and answer session. I would like to turn the conference back over to Tim Close for any closing remarks.

Okay. Well, thanks for joining us this morning. I think great questions that provided an opportunity for us to add some good color and detail around the quarter and the business. So we'll end the call there, and thanks again for joining.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.