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.

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

Good morning. Good morning, Jacob. My question is on EBITDA margins. And I know during the investigate, you were targeting 17% EBITDA margins in 2023. I'm trying to square this with, you know, what we saw in the quarter with the margin compression we saw on the farm side of things. Maybe just provide a bit more color on, you know, expectations and, you know, how things should progress specifically on the farm side, farm margins through 2023. Hey, Jacob.

Thanks for the question. And, yeah, just commenting on our EBITDA margins. First, we're really excited about the performance that we had in 2022, as you heard Jim outline, with our EBITDA margins up across 2022, 140 basis points. As we look to 2023, we do see continued opportunities for that margins to expand, with the target being to get to near 17%. As you look at where that margin expansion is going to come from, you know, we see opportunities in both the farm and the commercial segment for margin expansion. You know, we continue to have good pricing opportunities across our portable product lines. We see that giving us strength from a margin standpoint in farm. We did comment that there's going to be an expected rebalancing between portable and our permanent business. That could represent a margin shift that we'll see across 2023 that we would look to offset through pricing actions in both the portable and the permanent segment. So we do see opportunities for margin expansion across our farm business. And then we're particularly excited about the margin opportunities in commercial as well. As we look at our backlog of that commercial segment in 2023, we're very encouraged by a positive mix that exists within the commercial segment. I think that's going to underpin some margin expansion across 2023 as well.

Okay. So then specifically for the fourth quarter farm margins, how much of that was mixed versus pricing?

Yes. As we look at the farm margins in Q4, you really had two dynamics going on. We did have and continue to have a very strong portable performance in Q4. That was one of the underlying trends that we saw across 2022. That did start to rebalance between portable and permanent in Q4, bringing a little bit more overall balance to that segment. In addition to that mix, we saw a slight offset in pricing. on a comparable basis of 2022 versus 2021. That was really underpinning significant strength that we had from a pricing standpoint in 2021 as in Q4, our pricing activity was ahead of where our cost structure was. That tended to rebalance as we went through 2022 and was more in a stable position in Q4. Okay.

And then maybe just a question on EMEA. You know, revenue and backlog were hurt by the declines we saw in EMEA there. And I know you were commenting there about, you know, you expect a pickup in 2023. So maybe just to try to frame some of this. So how big of a decline was specifically Ukraine in year on year and kind of fourth quarter 22 versus fourth quarter 21 as far as the Ukraine war and then? You know, the pickup that you're talking about in these larger projects, where specifically is that coming from? And should you get back to somewhere closer to 221 results?

Yeah, fantastic, Jacob. So when we look at the EMEA performance in 2022, and particularly in the fourth quarter, you're right, absolutely an impact that we saw from the Russia and Ukraine activity there. When we try to put that into context, we entered 2022 with greater than 20 million in backlog supporting both of those regions. And that was activity that we did not move forward with across 2022. So that gives you a little bit of a context of the magnitude of the impact, you know, roughly in that greater than 20 million range. Midway through 2022, we quickly rebalanced our focus and increased the focus on the Middle East and Africa. Those are the two specific regions that we saw significant uptick. We saw that, Jacob, in the tail end of 2022, and we've seen that consistent here in 2023. In the early parts here of 2023, we've signed a couple notable projects in the Middle East. They are now in our backlogs. And we've seen our EMEA backlog strengthen here over the first few months of 2023. That kind of underpins our optimism in seeing EMEA rebound across 2023 as activity continues to pick up in the Middle East and even more so in Africa.

That's helpful. Thank you.

Our next question comes from Michael Dumette. Scotiabank. Please go ahead.

Hey, good morning, guys. Fantastic quarter and year. So the first question I wanted to ask on the backlog as it relates to organic growth expectations. Now, we've seen supply chain Zs lead time shorten in the last several months. That would have a larger impact, in my view, to the backlog. and it went to revenue. And despite that backlog, it's still up 10% year on year. So if the duration of the backlog is, call it four to six months, would it be reasonable for us to assume that we could start 2023 with that type of organic growth rate if it's not higher?

Hey, Michael, thanks for the question. And yeah, we're very encouraged about where our backlog sits right now, up 10%. And I think you rightfully point out That gives us good visibility to four to six months, so we're highly encouraged about the performance from a top-line standpoint, particularly in the first half of the year. I will comment that our pipeline and our quoting activity is extremely strong, so we would anticipate a strong backlog throughout the year that would also complement the second half. But getting back to your question, when you look at the first half of the year and the backlog, extremely strong. It's fantastic to see the performance in our North America farm segment, and in particular, Canada farm. That backlog is up tremendously, as we noted, and it really demonstrates the rebound that we're seeing in that segment. The first half of the year in Canada farm is going to be extremely strong, supported by that backlog. And as it's largely in the farm segment, that backlog turns over a little bit quicker than what you would see in the commercial segment, further increasing our confidence for the first half results. Our commercial backlogs are strong as well, particularly down in Brazil and over in India. The Brazil backlog up over 100%. year on year, we noted that that backlog is a little bit weighted more towards commercial projects than it has been before in Brazil. So while we're very optimistic on the 1H, the first half of the year in Brazil, Brazil's really going to come on again in the second half of the year. And then just rounding out, India, tremendous year in 2022 to have the backlog sitting up around 27%, often extraordinary performance. really sets us up for a nice first half and a full year in India.

That's great. Some big numbers in there, and that's fantastic to see. So maybe just moving on to the margin expansion opportunity. You know what? I think maybe 12 months back, I would have thought that for 2022, we would have seen more margin expansion from OpEx leverage versus gross margin expansion. So I guess the first part, was that in line with your expectation? And going forward, You know, when we think about that 100 basis points of near-term margin expansion opportunity, should we think of that as, again, you know, primarily gross margin or OpEx leverage? Just trying to get a sense for the key drivers going forward.

Yeah, great question. And first of all, yes, in line with expectations performance for 2022, our target entering the year was to get our EBITDA margins up in that 16% range. So we feel fantastic that it came in even slightly above that. We did anticipate going into the year that that was largely going to come from top-line performance and P&L leverage, operating leverage through the P&L, as well as some strength on the gross margin basis. So it really did come in as expected. Relative to operational excellence and our focus on increasing the efficiency of the business, we started a lot of those initiatives in 2022. Those tend to take a little bit more time to work their way into the business and actually see those in the P&L. So that's where, Michael, we expect a little bit of a shift in our margin expansion from 2022 to 2023. So more specifically in 2022, yes, driven by top line, driven by gross margin expansion. In 2023, we see that shifting more towards even a margin expansion through our operational excellence focus and the initiatives that are underpinning that.

That's very helpful. Thank you.

Our next question comes from Andrew Wong of RBC Capital Markets. Please go ahead.

Hey, good morning. Um, so I just want to circle back on like the digital segment. Can you just talk a little bit more about the decision to reorganize and kind of, um, include those, that segment into the farm and commercial and, uh, just in general, like has the uptake on those products been slower than expected? Are there maybe different strategies that you feel need to grow that business? Um, obviously pretty large impairment, so that maybe reflects some of the future outlook on some of those digital products?

Yeah, for sure, Andrew, and thanks for the question. We definitely saw an opportunity on the tail end of 2022 to re-look at our digital business and make sure that we had that well-positioned for both growth and profitability as we enter 2023. we stepped through a pretty thorough evaluation of that business. And from that, it really highlighted that we had a couple of core products that were driving the majority of our growth and profitability in that segment. And further to that, those core products were highly complementary to the other products and activities that we have in our core farm and commercial segments. So the decision was made to restructure that business, focus it on those core products that both have strong market demand as well, highly complementary to our business. And that led us to the actions that we took at the tail end of Q4. The encouraging thing is that as we look at our Q4 performance in digital, as well as the momentum that we have in 2023, we are seeing performance directly in line with what our expectations were as we took that restructuring step. So, in other words, those core products that we focused on demonstrated very strong growth in Q4. Q4, in aggregate, was an excellent quarter for our digital business. Sales were at an all-time high, and we did see good profitability improvements. directly resulting from the actions that we took. So that gives us a lot of excitement about what we're going to be able to accomplish in that digital business as we continue through that restructuring and a march towards profitability.

That's great. And then maybe just on your CapEx plans for the year, I know most of the focus is on delivering, paying down debt right now as the cash flow increases. But I'm kind of curious, like if for whatever reason growth and cash generation maybe were better than expected, would you consider spending a little bit more on some of the growth opportunities that you have in the pipeline?

Yes, thanks, Dan. Great question. So as we look at our cash flow generation, take a moment to just reiterate our priority is growth. to continue to pay down the debt. We saw exceptional performance in Q3 and Q4 as reflected in the improvement in our leverage ratio. That continues to be a priority for us in 2023, and we're very confident on our ability to generate free cash flow and pay down our debt and achieve the leverage ratio targets that we have laid out. We do see a lot of strength in our free cash flow in 2023. We believe that is going to give us an opportunity to continue to look at the exciting growth that we have across our global platform and then strategically invest in growth opportunities where we're seeing, you know, strong market availability and where there is opportunities to improve our manufacturing capacity. So we will make strategic and targeted investments in our manufacturing capacity. Those will be more on the incremental basis just to ensure that we can meet the strong demand that we're seeing across our businesses. You know, as we improve our debt position and our leverage ratio and continue with the excellent free cash flow generation, that puts us in a great opportunity looking into 2024 to make even more investments in our core capacity to support ongoing organic growth.

Okay, great.

Thanks. Thank you, Andrew.

Our next question comes from Gary Ho of Desjardins. Please go ahead.

Thanks, and good morning. Just going back to the backlog, I know it's strong 10% year-over-year. Just on the commercial side, maybe you can elaborate the Canadian commercial that's down 11% year-over-year and the U.S. commercial that's down 15%. Just wondering if you can provide a bit more color on that.

Yeah, for sure, Gary. Thanks for the question. Yeah, maybe a couple of comments. First, as we noted, very encouraged where our backlog sits right now, up 10% and at record levels, giving us a lot of momentum into 2023. You know, I'll take each of those individually, the Canada and U.S. commercial. On the Canada side, the backlog is down. It's more from just the cyclic nature of our backlog. Because it's largely due to timing of significant projects, your backlog can vary significantly. pretty significantly based on when an order was released out of the backlog versus the timing of when a new order comes in. So we don't necessarily see anything of substance behind the year-on-year comparison for Canada. There is several positive opportunities that we're holding on, and we expect that backlog to strengthen year-on-year. U.S., a little bit different. That backlog in the U.S. is impacted by a little bit of the softening in our food segment that we commented on as a few of our large customers in that segment paused on their capital spend on the second half of 2022. We do see that now improving in 2023, and that is going to lead to our U.S. commercial backlog improving throughout the year. It is valuable to note as we look at that U.S. commercial backlog, we're highly encouraged with the mix that we have in that backlog, particularly in our grain segment. Our highest margin products are underpinning a notable part of our strength in that backlog. So we actually like where our U.S. backlog sits from the commercial basis into 2023. Okay, great.

That's helpful. And then My second question, just on the additional $6.1 million of equipment rework, maybe just give us some background on this, why the additional cost this quarter seems like a fairly big jump on an absolute basis, and then is this all related to one project?

Hi, Gary. It's Jim here. Yeah, thanks for that question. The $6 million relates to a – One customer where we are reworking the structures around their handling and storage equipment. It's been ongoing now for the better part of almost two years now, and we're probably six months away from it. And as we wind it down with some of the cost increases, we've made an adjustment to reflect those final cost increases that will run through this year to close out the project.

Okay, that's great. And then just last question, Jim, while I have you. Just on the leverage, like you mentioned, pretty healthy step down in terms of the absolute dollar of net debt and also the leverage ratio. When you think about 23 and putting the $260 million guidance in context, I know you commented $100 million of debt repayment last two quarters. How much higher could 23 be? And then as a related question, the 2.5 times leverage target you mentioned for 24, That assumes no conversion of the money converts, right, I assume?

That assumes no conversion of the converts. That's correct. And in terms of the opportunity from a cash flow perspective to apply to debt, so if you recall last year, we built up our working capital positions, primarily our inventory positions in the first half of the year, and then we were able to right-size that in the back half of the year. So if you look at the full year, the amount of cash applied to the debt was flattish, meaning nothing. And so when you look at 2023, the opportunity really that we see is to manage the inventory levels now that supply chain challenges have subsided, lead times are consistent. We don't see the need for that massive build in the early half of this year. And so what we expect in 2023 is a situation where we'll make a significant contribution to paying down debt overall for the year. Our seasonality of our business is such that you have some quarterly needs for cash in the early part of the year. Inventory levels will rise a little bit in the early part of the year, particularly as the heavy Q2 and Q3 farm segment sales happen. You need to be in position to meet those sales needs. But the impact this year versus 2022 will be much different we won't have the massive bill that worked out in the first half. And so you'll see an overall net repayment in 23. Okay.

That's helpful for me. Thank you.

Thanks, Gary.

Our next question comes from Matthew Weeks of IA Capital Markets. Please go ahead.

Good morning. Thanks. Just building kind of on questions and discussion around, you know, expanding products to companies. you know, adjacent geographies and things like that, kind of, you know, doing more business in the Middle East and Africa and kind of filling in a little bit of maybe some of the blank space in the, you know, in your activity geographically. I'm wondering, as you go through that process, you know, have you identified any, you know, more opportunities, any areas where you're seeing particular strength or are performing above your expectations, you know, anywhere you'd like to, you know, participate more going forward? Thanks.

Yeah, thanks, Matthew, for the question. And I'll address it from both a product standpoint as well as a regional standpoint. So, yeah, as we look at our product lines and the opportunities that exist globally, there are a couple of our product lines that we're particularly excited about and we would look to leverage even more going forward. One of them in particular that I'll note is our outstanding rice milling product lines that we currently manufacture and sell across India. Extremely strong market opportunities for these products across Africa as well as Southeast Asia as you get into the Philippines and Indonesia. So that particular product line is one to emphasize as a significant amount of opportunity for us to continue to grow and expand it, not just within India, but more broadly across some of the other attractive regions and markets. We're also transferring a number of our core products down to India, our storage bin line, as well as our portable handling equipment line. That is going to support sales not just across India but give us an opportunity to further support and expand our business into Australia. So those are two other examples of products that we're excited about relative to transfers and continuing with our organic growth. as well as touching on a few regions that we're particularly excited about, again, those being Africa, growing Australia, and then a couple of regions specifically in Southeast Asia, Indonesia, Philippines, and even into Bangladesh.

Okay, thank you. That's everything for me. I'll pass it back. Thanks.

Fantastic. Thanks, Matthew.

Our next question comes from Tim Monicello of ATB. Please go ahead.

Hey, good morning, everyone. Hey, Tim. First question, I just want to touch on the food segment. You said that demand is softening a little bit or the backlog was softening into the first half of 2023. I'm curious to understand the dynamics at work there. Are you seeing softness of demand across the industry? Is it an AFN sort of specific issue?

Yeah, Tim, thanks for that question. As we mentioned in our initial commentary, very excited about our food business going forward. It finished with an exceptional performance across 2022. But as you noted, Tim, we did see some softness in that business as represented in our backlog performance. If we look at our foods business, we're very fortunate to have a few very large, significant customers that we've grown with over the past few years. In the second half of 2022, those customers took a purposeful pause in their capital spending, which then translated to that backlog softening. We do see this as a temporary pause. We're in direct conversation with these large customers. Their activity is opening up in 2023. The capital constraints that they put on in the second half of 2022 are now coming off in 2023. So that underscores our optimism on the food segment rebounding, particularly in the second half of this year. What's equally encouraging is we are now in our foods business stepping through a deep integration, very consistent with what we did on the North America commercial side in 2022. This is absolutely going to help our performance in food in 2023 and beyond. Part of that is increasing our sales activity, broadening out our sales team and extending and expanding our geographic reach as well as customer diversity. This is also going to be very favorable to growing our top line and strengthening our backlog.

Okay, got it. A follow-up on the food segment and just the disclosures being lumped in with commercial. I'm a bit surprised just given that it was fairly material on its own and the revenue drivers are a bit different. Can you help me understand the decision to discontinue the line segment disclosures around food?

Yeah, we'll continue, Tim, to highlight the performance of our food business going forward, as it is a very important part of the company, as you've noted. we are folding that into the commercial. It's always really been a part of commercial, but it's a matter of just simplifying our business, making sure that we're emphasizing the core segments that ultimately drive our performance, which is the commercial segment and the farm segment.

And Tim, just a little small build on that. If you remember that the MD&A in the past, some of the feedback we got was it was a little confusing with all those tables. especially when we – because remember, for food, all we really did was highlight sales by the various regions for just the food segment as part of the commercial segment. And so what we're trying to do is really simplify the messaging and then provide the commentary and important supplementary information to help explain what's going on in the overall commercial segment. Our food – the reality is our food subsegment, if you will, of commercial is really – just like all the other sub-segments in commercial. So for us to just single that out in that table, I think just created a lot of confusion to folks.

Okay, understood. Next question I have is just on the leverage targets for the year. Given where you set the benchmark for EBITDA for 2023 on a minimum basis, I'm curious if you're more or less confident in your leverage targets and also specifically how you're thinking about any settlement related to the BIN litigation that's going on and how that plays into your leverage targets.

Yep. So a couple things. I think we're very confident in continuing to march down our leverage targets. We expect to be in the three times level by the end of this year and hitting our target of two and a half by early to mid of 2024. And that is even factoring in our hopeful resolution, expected resolution of the bin incident. So despite the potential outflow of some cash related to that, we still are very confident in getting our leverage ratios down to those targeted levels very quickly.

Okay. And on the EBITDA guidance, I'm wondering if you can just frame how you're thinking about that and what the potential levers are around that. upside to that EBITDA guidance?

Yeah, thanks, Tim. You know, as we see 2023 unfolding, we're providing the early guidance of EBITDA at least 260 million. We feel very confident in that level of performance. And to your question, we see that being driven by two major factors going forward. First is, is top line and growth that is going to come from our focus on organic growth supported by our outstanding positions globally, as well as the activity that we have ongoing around product transfers to extend our market reach and broaden out our positions in these key geographies. So we're very optimistic about our top line performance in 2023 that is going to contribute to that EBITDA margin increase. Then our focus on operational excellence and improving our cost structure, growing our margins accordingly, further supporting the EBITDA strength in 2023, both getting us above that 260 million guidance, as well as marching towards our 17% EBITDA margin expectations.

Okay, that's helpful. And then last one for me, just on the South America segment. We saw revenue come down a little bit year over year. But we saw backlog build significantly. I think it was a 230% or so increase in Brazilian commercial backlog. And then you mentioned that the food backlog, or sorry, the farm backlog was not performing quite as well as the commercial segment backlog. So I'm just curious if you can describe the dynamics at play in Brazil in terms of demand across farms. and commercial and what may be contributing to the year-over-year decline in revenue. Thanks.

Yeah, thanks, Tim. And to clarify, we're very optimistic about our Brazil performance in 2023. We absolutely see and expect both revenue and profitability growth year on year in 2023. 2022 performance was exceptional, and that's coming off of two incredible years of growth. We've now had three very significant years of growth in Brazil, and we expect that momentum to continue in 2023 as supported by our backlog being up over 100% to a very strong comparable as we enter 2022. So lots of momentum in our Brazil business. We made a structured focus at the tail end of 2021 to broaden our activity in the commercial space. So the fact that our backlog is weighted more towards commercial and farm than it had been previously is exactly in line with our plans and our expectations. There is a significant amount of infrastructure build in the commercial area that is going on currently in Brazil and that we expect to continue over the next two to three plus years. We wanted to make sure that we were well positioned to capitalize on those growth opportunities and make sure that we won, you know, really more than our share of those commercial projects. We were able to do that in 2022. That's why the commercial part of our backlog is particularly strong. In addition to that, we see that continuing in 2023 being a very strong commercial activity. We remain very bullish on our farm business. It's extremely strong. Brazil is just now going through a harvest. It's going to be a great harvest once again in Brazil with crop volumes up. That's a strong tailwind for demand that we'll see across 2023 supporting our farm business. So our farm business is going to be in great shape and just terrific opportunities on the commercial side.

I think you mentioned in your prepared remarks just one project where revenue recognition is deferred into Q1. I don't know if you can speak to the lumpiness of that project or how much of the backlog that might consume in Q1.

Yeah, I mean, without getting into any specifics of an individual project, Tim, that's very common in our commercial segment. You know, when you look at these large commercial projects, they come with quite a lot of site activity, site prep activity that falls within the customer's responsibility to complete. You know, you can think of the civil and other infrastructure that has to go in. Sometimes that activity just falls behind schedule, and then we hold off on shipping our equipment until that activity is completed. That's very consistent with what we saw in Q4. It's really just the timing aspect of it. And, again, you know, very similar of what we see in the commercial side in our other regions as well, North America or EMEA as an example.

Okay. I appreciate it. I'll turn it back. Thanks.

Yep. Thanks, Tim.

Our next question comes from Michael Tipum of TD Securities. Please go ahead.

Thank you. Good morning. First question relates to the product transfer strategy you highlighted at your recent investor day and have talked a little bit about today. I guess two questions. First, can you provide a little bit more detail on on what you target achieving on that front as it relates to the product transfer strategy in 2023, and to what extent have you assumed any contribution from product transfers in the 2023 EBITDA guidance you introduced?

Yeah, thanks, Michael, and appreciate you bringing up product transfers as that is going to be a key part of our organic growth and why we're bullish on organic growth in 2023 and beyond. To provide a little bit of specifics on what we look to achieve in 2023, we have five active product transfers that we see being completed in various stages across 2023 that are going to tangibly contribute to our top-line performance. I'll just comment on each of those quickly. We've transferred up a permanent farm material handling product line from Brazil to our U.S. and Canada farm business. That transfer is complete. We're out marketing and selling that product line. We've secured some orders, and that's already in the backlog for U.S. and Canada. We're very encouraged about that product transfer and the tailwind that that is going to provide for both our Canada and U.S. farm business. Two notable product transfers down to India, the bins that I commented on earlier, we're in the process now of completing that product transfer. We expect to be selling bins into India in the second half of the year. That's certainly going to support our results for our Indian businesses. in 2023. The portable product line that we're transferring will trail the bins slightly. We do expect that to be completed in the second half of the year, also contributing to results during 2023. And then two others real quickly. We're very excited about the feed platform that we launched in 2022. We're actively transferring a key product down to Brazil, very strong feed market and great opportunities for us in Brazil. That product line will also be transferred in 2023, and we would expect results in the second half of 2023. And then finally, fertilizer product lines that we transferred over to EMEA. That's a key part of our strategy around Africa. We're already actively selling and signing business in that product line for that geography. So those are five that we would highlight from a product transfer. A lot of activity, and we're really making great progress there.

Okay, that's definitely very helpful detail. Thank you. Second question is just on dealer inventories in the Canada and U.S. farm business. I'm wondering if you can comment on how those look right now.

Yeah, thanks, Michael. Great question. As we look at dealer inventories, I'll start by commenting on 2022, where we did see dealer inventory soften in 2022. That was for various reasons. You know, as we looked at the different farm activity that was ongoing, we had very strong activity from a portable standpoint and a little bit of softer activity on the permanent standpoint. As we enter 2023, we do see dealers now moving their inventories back to normal levels. That is part of the accelerated performance that we saw in our Canada business in Q4. That business was up substantially in Q4. Part of that was the inventory levels in our dealers strengthening and getting back to the normal levels and then supporting the activity that we expect in Q1 next. Underpinning, obviously, that the build of dealer inventories is strong demand from the farmers and the farm segment. So rounding out, we would see dealer inventories back to normal levels here early in 2023, supported by strong demand in the business across the region.

Okay, perfect. Thank you. And then just lastly, a question regarding steel input costs. This was obviously a hot topic in the past. We've seen certain North American steel prices move sharply higher through the first few months of this year. If you look at hot roll coal prices, they're up about 75% from Q4's lows. Should we expect that move in steel prices to have any impact on AGI's margins over the near term, particularly as we think about the first half of the year?

Yeah, great question. And obviously, we keep a very close eye on steel and steel prices. The short answer, we would not anticipate that having an impact, a material impact on our business or our margins. You know, when we had that significant variability in steel costs going back 12, 18 months ago, we quickly implemented new process tools and procedures that would help us mitigate that type of variability. The cost increases that we're seeing now, it is trending up, as you noted. It's much more gradual. It's far easier for us to adjust our business accordingly, and we don't anticipate this to be a challenge for us in 2023.

Okay, perfect. That's all for me. Thank you.

Thanks, Michael. Okay. I think that's it on the questions, and it wraps us up for the call here this morning. I want to just finish by thanking everybody for joining us on the call. I would like to congratulate the AGI team on certainly an outstanding Q4 and an exceptional 2022. We're very excited about our outlook and the opportunity for 2023 to be even a stronger year for AGI than our terrific performance in 2022. Thanks, everyone.

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