Ag Growth International Inc.

Thank you for standing by. This is the conference operator. Welcome to the AGI fourth 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 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 fourth quarter 2022 results call. I'm joined today by our CFO, Jim Ruddick. I'll start the call by providing an overview of our quarterly results and share my outlook for 2023 before passing the call over to Jim, who will review some of our financial results and key metrics in more detail. Our financial results were a record for the fourth quarter and capped another banner year for AGI, with 2022 marking three consecutive years of record results. Sales and adjusted EBITDA were up 22% and 33% in 2022, as the momentum from a broad set of operational initiatives and robust customer demand combined to create a favorable environment for AGI to progress growth and profitability objectives. Importantly, our 2022 results were nearly all attributed to organic growth. With our adjusted EBITDA up 57% since 2020, it is an ideal backdrop for AGI to enter a new era with a clear focus on our three key corporate strategic initiatives, profitable organic growth, operational excellence, and balance sheet discipline. In February, we held our first ever Investor Day where we outlined these three priorities in more depth in addition to providing a comprehensive overview of AGI. The Investor Day materials and a full rebroadcast of the presentation are available on AGI's website. Also published in January of this year was a thorough review of our various sustainability and ESG initiatives. This sustainability progress update is also available on our website and contains extensive information about all areas of our ESG journey, which are broadly organized into four areas. Sustainable manufacturing, people well-being, responsible conduct, and compelling solutions. Before getting into more detail on the fourth quarter, I would like to first take a moment to again call out the tremendous progress AGI has made in employee safety. All the metrics we track, including recordable and lost time incidents, have improved by significant double digits, including our lost time injury rate, which is now down nearly 60% versus 2020. We have a number of initiatives underway to further improve worker safety, including training programs and proactive equipment reviews to mitigate potential safety hazards. In 2023, we are developing a comprehensive company vehicle fleet policy which will enable us to better track and manage our aggregate fleet with the potential to reduce operating costs. In addition, this will also provide accurate and complete data on any near misses, accidents, and claims, enabling us to evaluate options and initiatives to increase the safety of our fleet, and most importantly, the safety of our employees who use corporate vehicles. This is another example of the one AGI culture we are building. Safety is not just limited to frontline manufacturing workers. It's something we think about for all employees, regardless of role, title, or job function. It is indeed an important part of our culture. Now turning to our fourth quarter results. With sales and adjusted EBITDA growing 14% each and stable adjusted EBITDA margins year over year, we are encouraged to see our diversified business model continue to produce record results. Our North America commercial, India, and U.S. and Canada farm businesses lead the way for the fourth quarter. Our North America commercial business continues to be a strong contributor. Fourth quarter sales were up 25%, with a greater than 100% growth from Canada, where the grain terminal and fertilizer markets have shown a meaningful uptick in investment and activity. Our strategic account team continues to work on a number of interesting and exciting opportunities with many of our larger customers, providing further momentum into 2023. North America Commercial is an outstanding example of the value that deeper integration and an operational excellence approach can create. We anticipate that our restructuring efforts will continue to position this business for a strong 2023 and in many ways serve as a template for the one AGI model across other areas of our business globally. As the anchor to our Asia Pacific region, our AGI India operation capped off an exceptional full year with strong fourth quarter results, posting sales growth above 40% for both the quarter and the full year. Adjusted EBITDA margins continue to trend higher, above the corporate average, benefiting from volume and operating leverage and leading to adjusted EBITDA growth of 68% for the full year. With the backlog expanding by 27% at the end of the quarter, this business has strong visibility into 2023 and further tailwinds as product transfers provide new opportunities for the team to continue an accelerated growth trajectory. Our Canada farm group business grew by 78% in the fourth quarter as the rebound from the 2021 drought continues to set up a strong recovery heading into 2023. Looking ahead, we note exceptional strength in the Canadian farm backlog, up an impressive 131% at the end of the quarter, creating excellent visibility into the first half of 2023 and beyond. Encouragingly, we are seeing a relatively even mix of portable handling and permanent system demand within the Canadian farm backlog, a tangible sign of optimism from the Canada farm customer base who are investing today to get ahead of anticipated growth in crop volumes in the months ahead. Our U.S. farm business grew 15% in the fourth quarter and 21% for the full year. Portable handling equipment demand continued to outpace permanent handling and storage systems, though the latter is beginning to show signs of recovery as the quoting and pipeline for these products has picked up in early 2023. We expect the portable handling and permanent system split to rebalance through 2023, supported by our strengthening U.S. dealer channel positions. The strong backlog and accelerating pipeline sets up the U.S. farm business for further growth and consistent contributions to AGI's overall results. A number of our other businesses continue to make meaningful progress on strategic priorities with a clear setup for further growth in 2023. Our operations in Brazil continue to contribute strongly to AGI. Sales were up 3% in the fourth quarter as timing of some larger projects was shifted into early 2023. Sales in adjusted EBITDA were up 36% and 28% for the full year. The margin profile of this business has stabilized around our corporate average as the team has honed their processes to secure inventory positions in alignment with committed orders, effectively locking in material costs, and securing project margins. Brazil is working through a wide range of active projects, including some very large commercial projects in excess of 25 million with target startup dates in the second half of 2023. Our ability to win, execute, and successfully deliver these types of complex projects represents the sophistication of our capabilities in Brazil and the strength of the local team. Looking forward to 2023, the backlog in Brazil is up 110%. providing strong visibility and momentum into what we anticipate to be another fantastic year in Brazil. Sales for our EMEA region were down 24% in the fourth quarter due to project timing and FX, as well as a record fourth quarter 2021 comparable. This type of quarterly fluctuation is common for the region, given its higher weighting to the commercial side of our businesses, which is more prone to project timing impacts. Fails were approximately flat for the year, an outstanding result and a testament of the EMEA team's ability to overcome significant unexpected challenges with the conflict in Eastern Europe. Heading into 2023, the backlog is down 45% or approximately 25% when normalized for canceled or delayed orders from Russia and Ukraine. The decline in backlog is largely on the food side of the business, which was impacted by a temporary pause on capital spending from the largest customers in this business. We now see customer sentiment around spending and investing improving into the second half of 2023. A strong backlog, pipeline, and quoting activity in three key areas underpin optimism for EMEA, including first, Africa and Middle East in commercial grain projects, second, fertilizer equipment across EMEA, which was a recent product transfer from North America, and third, a strong focus building on the rice milling opportunities within the Africa region. We expect the EMEA region activity to pick up early in 2023 as several very large projects are in the final phases of quoting. Turning to our food business, we are enthusiastic about its growth prospects with an incredibly large, attractive, and growing total addressable market. Our food business quickly came together over the course of five separate acquisitions. Directly aligned with our one AGI objectives and consistent with the recently successful transformation across North America commercial, our food business is progressing through a deep integration that will result in a key strategic advantage for us going forward, creating integrated engineering and product offerings, extending our global reach, and broadening our capabilities. This process began in 2022 and will continue through 2023. Our food business grew 47% in the fourth quarter and 66% for the full year, primarily driven by organic growth with a significant step up in profitability as more disciplined project management approaches are steadily implemented. Heading into 2023, our backlog for food has softened, as previously mentioned. We have taken aggressive measures to address, including several new dedicated sales resources to grow our backlog and diversify our customer base. We are seeing early signs of recovery and are highly optimistic on the prospects for this business in the mid to long term. And wrapping up on our review of fourth quarter results, I'll make a few quick comments on our digital business. We have successfully completed several major phases of our reorganization plan in recent months and continue to evaluate how to further optimize. On a weekly basis, we are closely tracking KPIs around the reorganization plan, sales, order intake, and quoting. We are encouraged to see the business off to a great start in 2023 and hitting or exceeding performance milestones. While refocusing this business on core products with the highest growth potential, we will more deeply integrate the digital product catalog within our U.S. and Canada farm and North America commercial businesses. I'd like to close out my portion of the call by reiterating what an exciting time this is for AGI. The team has now achieved several years of consecutive record results with the significant growth in recent years almost entirely attributable to organic growth efforts. Our critical KPIs, sales and adjusted EBITDA growth, expanding adjusted EBITDA margins, and a lower total leverage ratio are all trending in a positive direction. The initial success from an increased focus on operational excellence, 1AGI culture, and deeper overall integration is driving the strong pace of organic growth and margin expansion. As we progress through this journey, we are well positioned for additional growth and success. I would like to thank our employees, customers, suppliers, and shareholders for a great 2022. As we look forward to an even better 2023, I'm highly encouraged by our strong end-of-year backlog which is up 10% and sitting at record levels. This will help us get the year off to a strong start as we continue our streak of record yearly results again in 2023. I'll now hand the call over to Jim.

Thanks, Paul, and hello, everyone. Today, I'll cover four topics, including a review of our revised segmented disclosure, an overview of our fourth quarter results, An update on our balance sheet and finally a recap of our outlook. In RMD&A, many of you may have noticed a new and more simplified approach to our segmented disclosure. Going forward, we will keep our farm and commercial segments and discontinue the digital segment. The digital segment will largely be captured within the farm segment. In line with our approach to simplifying our reporting, The previously disclosed food platform, which was a subset of the commercial segment, will be fully amalgamated into the commercial segment for financial reporting purposes. This is a natural fit given the similarities between food and commercial in terms of highly engineered project-based work. At a high level, this simplified approach will help to streamline our reporting and refocus our results on the largest and most impactful segments we operate. We will continue to provide appropriate and relevant commentary for our digital and food areas as we explain and review the results and trends of the farm and commercial segments. Moving on to our results. Consolidated fourth quarter sales and adjusted EBITDA of $374 million and $51 million were both up 14% year over year. For the full year, Sales and adjusted EBITDA of $1.5 billion and $235 million were up 22% and 33%. In line with our operational excellence initiatives and increased volume, full-year adjusted EBITDA margins of 16.1% grew 140 basis points over the 14.7% from 2021. As we outlined during our investor day, Our objective is to increase our adjusted EBITDA margins to approximately 17%, and we have a number of measures underway to help achieve this goal. Our farm segment sales and adjusted EBITDA grew 24% and 4% in the fourth quarter, as well as 20% and 16% for the full year. The U.S., Canada, Australia, and Brazil all contributed to the growth, with particular strength in portable handling equipment in the US market and a recovery in Canada from the 2021 drought leading the way. The farm segment backlog is up 25% exiting the fourth quarter with a very strong contribution from Canada as the effects of the drought subside and demand for permanent handling and storage solutions increases. Our commercial segment sales and adjusted EBITDA grew 6% and 26% in the fourth quarter, as well as 23% and 60% for the full year. North America commercial anchored results with food, India, and Brazil all contributing to the strong results. Increased volume and disciplined cost management helped drive adjusted EBITDA margins higher for this segment in the quarter and for the full year. On a full year basis, our farm versus commercial sales split remains close to 50-50, which provides balance and stability to our overall mix and results. Turning to our balance sheet and related metrics. From a working capital perspective, our non-cash net working capital investment increased from $147 million to $169 million year over year, but held steady as a percentage of sales at 11% on an annualized basis. We have structured initiatives across the organization to gradually reduce our days payable, receivable, and inventory with division level targets and metrics. This type of focus will help us manage short-term capital needs while growing the business and being mindful of our balance sheet position. From a leverage perspective, Our progress against our balance sheet discipline objective continues to make tremendous progress. Our net debt to last 12 months adjusted EBITDA ratio was 3.7 times at the end of the fourth quarter, down from 4.1 times quarter over quarter and 4.7 times year over year. Importantly, the decrease in this ratio was from a combination of both growing adjusted EBITDA as well as debt repayment. we have made net repayments to our senior debt in each of the last two quarters. In Q3, we repaid $48 million of senior debt and followed that up in Q4 with another $60 million. While usage of senior facilities will ebb and flow from quarter to quarter, especially given our seasonality and strong growth profile, we remain committed to steadily deleveraging our balance sheet and view our progress on this front over the last two quarters to be in line with this commitment. Our steady state leverage target of 2.5 times is within reach, and we're targeting some time in 2024 for us to achieve this important milestone. And finally, turning to our outlook for 2023. The demand for AGI equipment, systems, and solutions continues to grow. Consolidated backlog was up 10% year over year. Importantly, the current backlog level is without contributions from Russia and Ukraine, which would be included in the year over year comparable. Also of note is that our current backlog is 60% higher than 2020, indicating the step change in the mix of our business with more project-based work and the strong overall demand we're seeing across all regions. Our backlog gives us clear visibility into most of the first half of 2023 and is complemented by active pipelines and significant quoting activity. We expect full year 2023 adjusted EBITDA of at least $260 million, which represents another very strong year driven exclusively by organic growth. Our updated guidance signals continued strength and momentum heading into 2023 as we sustain our record results and continue to execute against our growth objectives. We remind everyone that while we are very excited about the growth opportunities for AGI and the potential need for capacity-related investments to keep pace with customer demand, we are highly committed to our stated objective of maintaining balance sheet discipline and are still squarely focused on managing our key balance sheet ratios, despite all the progress we have made in this area over the last year. Thank you very much for your time. And with that, we will turn it back to the operator to take questions.