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.