Ag Growth International Inc.

Thank you for standing by. This is the conference operator. Welcome to the AGI third 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, then zero. I would now like to turn the conference over to Paul Householder, President and CEO of AGI. Please go ahead, sir.

Good morning. Thank you, operator, and welcome everyone to AGI's third quarter 2022 results call. I'm joined today by our CFO, Jim Reddick. We will cover a number of topics, including some comments on the recent leadership change at AGI, a note on AGI safety performance and culture, an overview of our quarterly results, and I'll share my outlook for the year and heading into 2023. I'd like to first start by commenting on the incredible success and meaningful contributions that Tim Close had on AGI. It was his vision to create a resilient, diversified business model and set up AGI for a sustained period of growth despite fluctuations in regional or economic conditions. While the agriculture industry is cyclical for many, at AGI we are now well positioned and proven to withstand regional disruption while continuing to grow and expand. This was Tim's vision, and his contributions across many areas of AGI are deeply valued and appreciated. We wish him well and all the best in his future endeavors. Taking over as CEO at such an exciting time for AGI is an honor and huge opportunity to continue to advance our growth objectives. I began my time with AGI in 2019 as the executive vice president of our international businesses. And in 2021, I took on an expanded role as COO, which included coverage of our North America business and related functional activity. During this time, we steadily implemented many initiatives around strategic planning, organization structure, operating excellence, and growth objectives across all our businesses. The key strategic priorities set in motion during my COO tenure will continue and, in some cases, accelerate. As a result, we expect a smooth transition of CEO duties. Throughout its 26-year history, AGI has achieved outstanding growth through acquisitions and experienced tremendous success. We've assembled an incredible team and global capabilities with high-quality products and attractive market positions around the world. I am extremely optimistic about AGI's future as we sharpen our focus on three key areas, operational excellence, balance sheet discipline, and profitable organic growth. This is an exciting and energizing time in AGI's history for our employees, our customers, and our shareholders. Before getting into our Q3 results in detail, I'd like to first highlight a few areas where we've made significant progress in recent years, which have been key contributors to our success, safety, and culture. For AGI, it all starts with safety. It's a primary focus across the organization and the first agenda topic at internal town halls, board updates, and senior leadership team meetings. We have significantly increased our focus on safety over the past 24 to 36 months, adding resources, training, and tools. I'm very proud to report that these efforts are paying off with a dramatic improvement in our safety performance. One example is our lost time injury or LTI metric, which has reduced by 50% over the past two years. Safety is a cornerstone of our culture and an area where we will sustain focus and make ongoing improvements. Another key element of our culture that we have significantly strengthened over the past two years is our effort to unite as one AGI. As we deepen the level of integration across AGI, it's critical to set the foundation of collaboration and cooperation across businesses and regions. The centralization of key functions for an organization-wide view of our priorities, challenges, and opportunities has been necessary and helps to ensure that we bring the absolute best equipment, services, and solutions to our valued customers. Now turning to our third quarter results. Progress continued across all areas of AGI, culminating in an all-time record quarter for our company across both sales and adjusted EBITDA. Robust market demand and our increased focus on operational excellence have come together to drive incredible results and set up continued momentum as we look forward. I'd like to start by highlighting the tremendous progress of our North American commercial business. This is an area that I've personally dedicated significant time to help restructure, refocus, and reposition for growth over the last year and a half. Third quarter sales were up 27% and 30% year to date, with a meaningful jump in EBITDA contribution owing to enhancements in our sales capture, quoting, and project execution capabilities. This is a dramatic turnaround versus a few years ago when this business was underperforming. We have since transformed the organization with centralized and dedicated sales, sales execution, product management, customer service, and revenue management teams, among others. Many of these groups have revamped or pioneered new internal processes to support the business going forward. We will continue to refine this approach within North America commercial business while expanding and leveraging it more broadly across AGI. North America commercial is a great example of what we can achieve with the United 1AGI approach. Among our other key contributors to the quarter was our global farm segment, as well as our Brazil and India businesses. Our U.S. farm business continued to exhibit great results through the third quarter with sales up 26%. Market factors, including the combination of rising grain volumes and low dealer inventories, provided strong demand for our products. Our strong results were further supported by the benefits of our reorganized sales team implemented earlier this year, which has strengthened the connection and relationships with our value dealer channel partners. With elevated crop prices, which generally pushes growers towards selling versus storing their grain after harvest, the product mix within the business was weighted more towards our higher margin portable grain handling products versus permanent handling and storage systems. The favorable mix led to strong margins and significant EBITDA contribution in the quarter. While sales in the Canada farm segment were only up 6% in the quarter, a similar dynamic to the US in terms of a higher mix of portable grain handling equipment led to strong EBITDA generation, supporting very good overall Q3 results. While the early drought led to a difficult start, To the 2022 Canadian farm business, we are encouraged by the resilience of our results as they steadily recover and come back stronger. Finally, our efforts to grow and expand our presence in the Australia farm market continues to gain traction. EBITDA for this geography grew 24% year over year. With backlogs up 22%, Australia is on pace to post a record year with strong double-digit growth in sales and EBITDA including an attractive margin profile with favorable mix of portable grain handling equipment. Favorable conditions, strengthening channel partners, and greater in-region leadership underpin the strong Q3 results, as well as our optimism for Australia going forward. Brazil continues to be a bright spot for AGI. Sales were up 30% year-over-year. building off of the Q3 2021 result, which itself was up 128% from Q3 2020. Strong demand for our farm products was complemented by an increase in commercial project work and delivery of AGI Brazil's first-ever food platform project in Brazil. Margins in Brazil continued to be broadly in line with corporate averages and improved year over year as steel prices eased off of high levels. This was Brazil's second largest quarter in its history, and with the backlog up 59% year over year, we anticipate continued momentum in this key agriculture market heading into Q4 and 2023. Our India results were another key highlight from the quarter. Sales were up 59% for an all-time record quarter. Operating leverage, favorable mix, and improving gross margins helped drive a 101% increase in adjusted EBITDA for the quarter, with margins well above our corporate average. By year-end, India is expected to be close to doubling in size since AGI acquired the business in 2019. While the last few years have been a tremendous success, we believe there is significant room for additional growth going forward. Near-term growth is supported by a backlog of 43%, and over the long term as we continue to increase India's manufacturing capability and product catalog through the successful technology transfer of several products from North America. Finally, it is important to recognize the outstanding leadership and team we are fortunate to have in India, which reaffirms our confidence in this business going forward. A few additional comments on the other areas of our business to round out the recap of the quarter. EMEA sales were up 32% despite currency pressure as the team continues to progress through large commercial projects. EMEA has managed the impact of the regional conflict quite well. While the backlog is lower than prior year, driven primarily by the removal of Russian and Ukrainian projects, the pipeline remains strong. Further, there are many opportunities in the Middle East and Africa that the team is actively pursuing to build momentum as we head into the end of the year and 2023. Our food platform sales were up 61% with an improved margin profile due to increasing focus on project controls and management. Adjusted EBITDA contribution from food was up significantly in the quarter and is expected to be up significantly for the full year. We are focused on broadening our geographic coverage for this platform and winning new business to keep pace with customer opportunities and our growth objectives. Overall, our strong third quarter results demonstrate that AGI continues to perform as we work through the process of more deeply integrating our businesses and positioning the company to sustain a high pace of organic growth. Our farm and commercial businesses, the anchors to AGI's results, are both performing well with strong customer demand, favorable crop sizes, and ongoing investment into critical food infrastructure, all supporting our outlook for the near term and into the future. In closing, I can't emphasize enough how excited I am about AGI and our outlook for the future. Assuming CEO responsibilities during an all-time record quarter is an ideal backdrop to continue advancing our plans to focus on operational excellence, profitable organic growth, and balance sheet discipline. Building on the momentum of North America commercial turnaround, I see significant potential across AGI to strengthen our businesses, exceed customer expectations, and accelerate growth. We have the people, the products, and positions around the world that serve as a solid base for us to continue to advance and grow. I'll now hand the call over to Jim for further commentary on our quarter.

Thank you, Paul, and hello, everyone. For today's call, I'll cover three topics. First, I'll provide an overview of our third quarter results. Second, I'll discuss our balance sheet. And finally, I'll provide an update on our outlook. Our Q3 results were not only a record for the third quarter sales in adjusted EBITDA, but an all-time record for AGI. Consolidated sales of $402 million was up 28% year-over-year, and adjusted EBITDA of $76 million was up 65% year-over-year, as broad-based strength across all segments and geographies contributed to the result, including notable strength in our commercial platform, farm segment, as well as ongoing momentum in the US, Brazil, and India. Adjusted EBITDA margins of 19% were up 420 basis points and largely reflect the benefit of favorable product mix, as well as the benefits of increased operating efficiency as higher volumes moved through our facilities. Farm segment sales and adjusted EBITDA grew 20% and 52% respectively in the quarter. Adjusted EBITDA margins increased from 21% to 26%. Strength in the US and Brazil, as well as a steady recovery in Canada from the 2021 drought, all contributed to the result. Strong customer demand for our portable grain handling products, critical to grower operations, remains robust. Consistent with our messaging from the first half of the year, Canada continues to recover from the extreme drought from last year. and we expect to see continued momentum in the farm segment overall as we move into Q4, with the Canadian farm backlog up 16%. Commercial segment sales and adjusted EBITDA grew 40% and 97%, respectively, in the quarter. Adjusted EBITDA margins moved from 13% to 18% year-over-year this as product mix, volume increases, and SG&A scaling all contributed to the expansion, particularly within the commercial platform. Finally, our digital business posted 9% growth on a record quarter for order intake. Supply chain issues, particularly for chips, hampered production. However, the adjusted EBITDA loss in the quarter was primarily due to the increase of subscription sales relative to retail sales year over year as we introduced a new subscription plan late in 2021. Turning to key balance sheet metrics from the quarter. From a working capital perspective, our non-cash networking capital investment decreased from $274 million to $264 million quarter over quarter and declined as a percentage of sales moving from 18% to 16% on an annualized basis. The overall reduction in net working capital was supported by a modest reduction in inventory as the strategic positions taken earlier in the year begin to release. In addition, our day sales and inventory, an organization-wide priority to monitor and reduce, also continues to tick downwards quarter over quarter. This is an encouraging sign that as we renew our inward focus and deepen the level of integration and coordination across AGI, we are able to sustain progress on this key metric. Our growing adjusted EBITDA continues to support our deleveraging objectives. Our senior debt to EBITDA ratio sits at 2.2 times exiting the quarter. This is down from 2.9 times in Q3 2021 year-over-year. and 2.7 times in Q2 2022 sequentially. On an all-in net debt to adjusted EBITDA basis, our leverage ratio now sits at approximately four times, which was our target ratio for the end of 2022. We are very pleased to have achieved this goal ahead of schedule through a combination of growing EBITDA and debt repayment. While we are happy with this progress, we will stay disciplined and seek to further reduce this ratio through the end of the year and into 2023. We still have ample room to react to new opportunities with funds from operations growing 75% year-over-year to $56 million, $42 million of cash on hand, and $220 million in credit facilities available. However, it remains a priority to stay disciplined in managing our balance sheet and continuing to make progress in gradually reducing our leverage ratios further. And finally, turning to our outlook for Q4. The demand for AGI equipment systems and solutions continues to grow across our segments and geographies. Consolidated backlog was up 4% year-over-year, just above the record level from the prior year, which itself was up 99% from Q3 2020 levels. The moderation of backlog growth was expected, as the backlog resets at higher levels relative to historic levels, given our increased mix of project-based work. In addition, the backlog in Q3 2020 was impacted by timing of our permanent green handling equipment and storage projects in our farm segment, as well as the removal of Russia and Ukraine projects. Our pipelines remain robust and we are continuing to see strong interest from customers across all segments and regions as they continue to invest in critical infrastructure equipment and solutions. Our backlog gives us clear visibility into Q4 2022 with over 100% of our internally forecasted Q4 sales covered by the backlog, as well as line of sight into 2023. We expect a full year 2022 adjusted EBITDA of at least $228 million, up from at least $215 million, which represents another very strong year driven primarily by organic growth. Our updated guidance implies flattish adjusted EBITDA for Q4 2022. However, we remind readers that Q4 2021 was a record fourth quarter for adjusted EBITDA, which was up 61% over Q4 2020. Our updated guidance signals continued strength and momentum in our business heading into the end of the year and 2023 ahead. as we sustain our record results and continue to execute against our growth objectives. Thank you very much for your time. And with that, we will turn it back to the operator to take any questions.