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 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. 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 US 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 US, 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 take 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 US 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 the trend to continue 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 accounts 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 help 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 and we've 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 and one of the largest farmer owned co-op in the US 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 Trutera sustainability tools used by Trutera's grower 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 is 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 disrupted 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 in 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 in 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 .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%. Strength in Canada, US, and South America 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 gains 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 and were 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 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. Another strong quarter, I think you said backlog up, I think better than 90% there. Just talk a bit about what type of EBITDA you're generating there now. 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, 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've talked about this a little bit last quarter, but when we built that plant, we had left some spots for expansion of certain production lines. And we have recently added to those. We've added from a laser capacity perspective and a press break perspective, from a weld cell perspective, we've been filling in those spots that we had left open 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 with this kind of growth that has to happen and it has been happening more so there than anywhere else, I would say. But so we're lifting production capacity, but it is a concern, just a physical footprint is 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. There, we've mentioned this in the past, where they're in line with our corporate averages. We expect them to continue to stay strong and as we continue to grow that business down there.

Sorry, in 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 contributed 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 in the past several years.

And then just on the digital side, revenue and EBITDA down year on year. And I know you called up 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 a very good growth, the 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, this is a division or a business where our goal, my goal is to have zero backlog because we wanna be configuring and shipping that equipment out the door 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. But still, despite those, that disruption, we came in with very solid growth and acute too, 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 I'm 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 this products across AGI digital. So, some investment continues here. It's certainly a part of the business that we're very excited about continue to invest in, but that as those sales continue to grow, that more than offsets within the division itself. And then we've got 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 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 park, our farm mobile park is being included in 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 system to automate that collection and really validate and improve the value of their carbon credit. So we're actually involved in quite a few of the carbon credit programs across North America. Most of them we have our park involved in in playing exactly that role, the fundamental infrastructure of data collection, that digital infrastructure collection, that data that feeds into these programs to validate the credits.

Is this primarily a Canadian product or?

No, it's mostly US.

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 I think most of the 80 million that was invested in Q1. So the working capital, I think it's about $125 million year to date. Obviously the increase in the 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 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 on working capital management. The metrics we use are 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 flowing 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 managing inventory levels. And so 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. And then maybe just a larger or higher level picture, you're on pace for record revenue and EBITDA this year. 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 what is structural, as obviously you've made significant investments in the last several years and those are starting to pay off. But any way you can speak to your confidence level that you could build further on the 2022 EBITDA into 2023?

Yeah, but then we're very confident on continued growth. You know, 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 profiled errors for continued growth across the board and not related to a cycle per se, but they related to fundamental investment in the infrastructure in that country. Likewise in India, contribution of that business, NetNew and growing and will continue to grow. We've expanded our product lines in India. So net benefit from being a leading market, 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 US farm business we invested in over the last four or five years is a NetNew contributor to our business from a farm systems perspective. 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 NetNew that we are 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 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 transaction costs 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 approved related to some historical acquisitions. We have an ongoing, where we're the plaintiff, a lawsuit in the US for digital patents that is about a third of those costs. And then the other third is related to some costs related to us integrating some of our facilities in the US. 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 AGI from meeting some of that strong demand, like for example, like how the tech segment had some difficulties with the sourcing chips, like on the other, on the rest of the business, could there be like labor issues or anything else like that?

Yeah, good morning. Sure answers no, nothing that isn't very much manageable. Labor is generally tight, but is actually improving and so is supply chain. You know, we're coming from rather 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 green fields and other geographies, if maybe there aren't any businesses that you can kind of buy into, like what you did in those areas? Yeah,

for the most part, we've, we're 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 the 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 region we're in, we'll continue to expand, organically expand our product lines, our sales channels, and ultimately see that manifest itself in the kind of world that we're seeing right now. So, you know, the short end, that'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 green field, you know, expand geographic expansion right now. I think the only, 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, not, you know, 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. Just, I mean, it's 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, you can provide a bit more comment on that, that would be great.

Yeah, hi, Gary. Thanks for the question. From the margin perspective, you know, we've talked about, we've said this a number of times now, about our expectations to increase our margin back to historical levels by about 100 to 200 base 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 in investments in our capacity, in 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, improvement 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 cost of steel that occurred, that we had some projects shipping at lower margins than we would have, but we right-sized that with our pricing enhancement and how we deal with some of the input costs and how we manage them now.

Yeah, maybe as a follow-up then, 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 a lot of assets 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 segment being very strong, and in particular, our portable segment of the farm segment 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 US farm permanent side. You feel like this is a major organic driver.

Yeah, 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 wanna 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, you know, we're really happy with our, they all look there, and the results today, so, yep. Okay, great, that's it for me, thanks.

The next question comes from Pedeve Hansen with Raymond James, go ahead.

Yeah, good morning, guys. Tim, can 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, you know, to what degree they are stepping up, relative to last year. You had a few remarks, you were prepared with 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, you know, 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 work, but the loadout of those bins carried out throughout H1. But, yeah, now much better crop dynamics going on in Western Canada. You know, farmers are very positive in general around that crop volume, and so there is now an uptick in interest and demand 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 US Farm. So then, and complimented, augmented by market share gains in some of our key products. And so, you know, all things considered in pretty good shape for this year. And then, but I'm really excited about 23, 24 in US Farm. I think it'll, or Canadian Farm, it'll set up, you know, as some of the makeup for the last 12, 18 months what will happen and, you know, inventories are gonna be stocked towards the end of the year and into next year.

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

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

Okay, appreciate it, I'm good, thanks.

The next question from that, with IA Postal Market,

please

go ahead.

Good morning, thanks for taking my question. Just talking about supply chains again and just coming back to that, you know, so you say things are kind of improving a little bit from that perspective and it seems like, you know, you're doing a pretty, you know, 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?

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 lock in our margins with as we build our backlog. So we're essentially called 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's using 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 adds to our profile and our customer, you know, our ability to delight our customers in an environment like this is, 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 our, of how we're operating right now in this environment to keep a certainty around supply and margins and growth.

Okay,

thanks.

I appreciate that. And just one last question for me. When you talk about sort of gaining and augmenting market share in certain product categories, you know, in the US, if you think about market size in the US, 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 US. You know, our farm, just to note, I mean, it's a good, you raise a good point that we often don't focus on, but our market share in farm systems, US 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 shares growing and will, you know, we believe accelerate our growth, our market share growth within that overall large market. So US 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. Morning, Tim. Just looking at the guidance for $215 million or at least $215 million EBITDA, that would suggest, you know, roughly a flat second half from the first half. Q3 is your biggest supporter. And over the last couple of years, you know, Q4 and Q1 have been sort of comparable, but you've got a 19% building backlog going into the second half here, year over year. So fair to say that, can 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 backlogs up 19% to the second half, 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 gonna 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 look, that still implies a strong close to the year. And so, you know, we're confident on that number and is there upside? Yes, is there risk? Yes, of course, so it's, you know, 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. Two parts to this question. One, at what point do you break up Brazil on a standalone basis? And two, like over the next three to five years, how big can Brazil be, you know, 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, the US market, in terms of materiality to your company?

Yeah, I mean, sure, Brazil can be that large. It's got years of growth ahead of it, right? They're just starting a fundamental build of the infrastructure for, as you know, 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 be there well beyond where we are now. I mean, I just note, you know, it is a, still I deem it 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, you know, it's relatively low when you, we know for, I mean, 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. Has the supply chains around the chips for the digital business started to loosen a little bit over the last, you know, 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. 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. So, 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. I'll congrats on a really strong quarter and thanks for taking my questions. Just kind of a couple here, mostly you can go on work, touched on already. We've seen a lot of headlines 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, you know, could aid in increasing crop yields while, you know, 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 proper amounts 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 gonna 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 formal mobile pot 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, you know, 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 from, 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, 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, you can see the color there. Maybe just one more follow up to Gary and Jim's commentary on the EBITDA margin profile. You know, you spoke to sort of targeting a 100 to 200 basis point increase over, I think the 15% you guys did back in 2020. And just sort of wondering what, maybe what inning you guys feel like right now working towards that target. Obviously, you know, good to see 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, you know, the sort of levers that are there with the volatility in the supply chain and raw material input costs. So, you know, looking out on an annual basis, like how far along in that process do you feel like you are today if things sort of, you know, plateau a bit and stabilize at these levels?

Yeah, so we've done a number of things already, certainly from a plan perspective, gained 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 like 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 color, I'll turn it back.

Thanks,

Michael.

This concludes the question 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 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.