Ag Growth International Inc.

Thank you for standing by. This is the conference operator. Welcome to the AGI first quarter 2023 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. As a courtesy to management and other participants on the call, please limit yourself to two questions and rejoin the queue if you have further questions. 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 first quarter 2023 results call. I'm joined by our CFO, Jim Reddix. On today's call, I'll provide an overview of our quarterly results and share my outlook for 2023 before passing the call over to Jim who will review our financial results and key metrics in more detail. We will then open the call for questions. Our strong first quarter was not only a fantastic start to the year, but also continued our streak of outstanding results, making it six consecutive quarters of record results. With broad-based strength from our farm and commercial segments, and across all geographies, we continue to see clear and consistent demand for AGI equipment, products, and solutions. Along with our increased focus on operational excellence initiatives, we have been able to maintain a robust pace of organic growth which gives us good visibility to the rest of the year. Before getting into more detail on our first quarter results, I'd like to briefly make a few comments on employee safety. Our key safety metrics continue to trend in a positive direction and having made significant progress in reducing safety incidents, we've turned our attention to recording and studying near-miss data. This helps us become more proactive in identifying risks before they become incidents. In addition, I'm pleased to announce that we recently launched our third annual Safety Week across AGI. This year, the theme is specifically targeted on hand safety. Safety Week is an excellent opportunity for our teams from around the world to collaborate on a critical aspect of our one AGI culture, safety. Now turning to our first quarter results. With sales and adjusted EBITDA of $347 million and $48 million, growing 19% and 16% year over year, we are encouraged to see sustained momentum across AGI. We continue to demonstrate success against our three corporate strategic priorities, profitable organic growth, operational excellence, and balance sheet discipline. The key KPIs we use to monitor progress of our strategic priorities are all generally trending in the right direction. For profitable growth, our growing sales and adjusted EBITDA are a positive indicator. For balance sheet discipline, a downtick in our net debt leverage ratio is an important metric we closely monitor, and Jim will discuss this in a bit more depth later on this call. For operational excellence, our adjusted EBITDA margin came off slightly, about 30 basis points year over year, which is mostly due to a temporary increase in corporate costs that include several one-time professional fees and expenses. We expect this to normalize in the second quarter and going forward, supported by a recent initiative focused on streamlining SG&A costs across the organization. Several additional operational excellence initiatives gain traction across Q1 and will contribute favorably throughout the year. There is no change to our previously stated full-year target of 100 basis points improvement in adjusted EBITDA margin, or approximately 17%. Now turning to our results. Our Canada farm and India businesses led the way for the first quarter. Canada farm had a phenomenal first quarter and was a major contributor to the overall adjusted EBITDA growth. First quarter sales were up 88%. Adjusted EBITDA was up 124%. And the order book increased 66%. We are seeing a sustained rebound off the 2021 drought, which weighed on our results through part of 2022. Permanent handling equipment has been a major source of customer demand as growers prepare for future increases in crop volume. It's also worth noting that within our Canada Farm Order Book, portable equipment orders have grown significantly and are at a record level for this time of year. This supports a favorable margin profile for Canada Farm through Q2 and Q3. Overall, the Strong Order Book sets the stage for a banner 2023 year for Canada Farm and with upside potential as we get further into the crop season. Along with Canada Farm, our business in India continues to be an important growth engine for AGI and was another key contributor to our first quarter results. With broad base demand for rice milling products, sales grew 19%. This led to a significant 46% increase in adjusted EBITDA as gross margins expanded to productivity efforts and pricing leverage. Exiting the quarter, the order book for India was up 6%, a solid base for continued momentum into 2023. We expect the order book to expand further in coming quarters as rice milling order intake remains robust and activity increases on recent product transfers. Favorable margins and continued market share growth are also expected as we further penetrate the premium segment of the rice milling market. With regards to product transfer activity, we are pleased to announce that our operations in Bangalore are now capable of manufacturing our portable grain augers and conveyors. During the first quarter, production of these units was initiated and we expect this new manufacturing capability in India to drive adoption of these products throughout the region. Target markets include both India and Australia. Australia has been steadily expanding with plans to further accelerate by leveraging this new production capability in India, as well as other planned initiatives. Given the tremendous growth, high-caliber local management team, and deep roster of product transfer opportunities, our India operations are an area we are closely evaluating for potential capacity expansion investment. Continuing with our review of other regions and businesses, once again, our U.S. farm business was a very meaningful contributor to AGI results. First quarter sales grew 12%, driven by portable equipment demand. Pricing was relatively steady, with growth coming largely from increasing volumes. The U.S. farm team continues to make progress on several key strategic initiatives, including strengthening our dealer network and channel partners, with those relationships serving as one of the key drivers of growth within this large and strategically important market. To further support growth across our U.S. and Canada farm businesses, we recently completed a product transfer of a farm duty permanent material handling system from Brazil. After initial testing and market study, this product is now officially being rolled out to our dealer network in Q2. Initial orders are already surfacing in line with our expectations. This is an exciting new product offering with many innovative features that we expect to further energize our sales pipeline and order book in the quarters ahead. Our North America commercial business had a solid first quarter, sales and EBITDA up mid-single digit percentage. The order book grew 13% versus last year and is up 58% versus two years ago, reflective of the dramatic turnaround of the business. While the success for this team has been fantastic, we are seeing some softness in fertilizer equipment markets and demand. As part of our one AGI and operational excellence commitment, we have been completing an effort to consolidate our two U.S.-based fertilizer equipment facilities. This will enable us to improve our cost structure, narrow the product catalog, focus sales efforts, and develop a more competitive edge in this attractive market for AGI. While North America Commercial has been a leader in adopting many key OneAGI principles, the journey is ongoing and we still have more room to grow. Our Brazil operation posted growth of 9% in the first quarter as we steadily gained market share. We are pleased with these results given challenging conditions in recent months. Farm customers have showed some resistance to execute projects as they adjust to a new political climate and a rising interest rate environment. Farm segment activity did accelerate throughout Q1 and we expect a sequential improvement in Q2 and across the remainder of the year. As a result of some softness in farm, we saw a significant mix towards the commercial segment in the quarter. These commercial projects had an unusually high percentage of third-party pass-through content in Q1, leading to a downward gross margin impact. Overall, the Brazil operation has firmly adjusted EBITDA positive. With an order book up 11% in Brazil and 34% across the broader South America region, The outlook for 2023 remains bright and is further supported by the expectation of a record crop in Brazil. In addition, the team in Brazil has recently finalized the development of new dryer and storage products with key specifications tailored to this market. This will help develop the farm segment pipeline and drives our expectation for sequential strength in Brazil results throughout 2023. On the commercial side, the pipeline remains active and the team is working with many well-established customers know and trust AGI. Finally, the team in Brazil has developed a new manufacturing layout plan to create additional capacity and operational efficiencies, which will be implemented in the second half of 2023. This will help ensure we can accommodate the expected rise in volume throughout the rest of the year while managing our capital expenditure budget near term as we continue our focus on balance sheet management. our EMEA region continues to produce solid results. Sales grew 6% in the first quarter, overcoming both a challenging year-on-year comparable and a constrained operating environment from the ongoing conflict in Eastern Europe. A decrease in the EMEA order book is reflective of the completion of some large projects. Our focus remains squarely on building the order book in regions outside of Eastern Europe, in addition to capitalizing on recent product transfers such as fertilizer equipment. Encouragingly, we continue to see strength across the Middle East supported by recent orders and new customer relationships. As we strengthen our relationships with these customers and increase our market activity across the Middle East, we see a broader investment cycle coming together. Through our recent moves, we are well positioned to capture additional opportunities and accelerate pipeline activity in this key region. Moving on to our food business, which as a reminder is now part of the commercial segment from a financial reporting perspective. As expected, results are retrenching as Anchor customers pause their spending following a multi-year phase of major investment. Recently, our food platform began a deep integration and unification effort similar to the process that North America Commercial successfully completed over recent years. The new organizational structure developed for our global food platform includes key leaders from our North America Commercial business who bring valuable insights, learnings, and experiences from the prior transformation. This will help accelerate the food transformation and make the path to success shorter. While advancing the plan around food unification, the critical near-term focus for 2023 is to strengthen our order book and diversify the customer base within this large and extremely exciting global platform. We are pleased to announce that these efforts have yielded early project wins with new and large customers, consistent and supportive of our short- to medium-range plan for the food business. While this unification effort will take a bit of time, the process is underway to execute a performance turnaround similar to our North America commercial business. And finally, a few comments on our digital business. Our overall near-term objective remains to right-size the cost structure while also positioning for growth by narrowing the collective focus of the digital team on core products with the highest growth potential. I'm pleased to share that the comprehensive reorganization initiated in January is having the intended impact. First quarter sales grew 17% with notable gross margin improvement. The extensive restructuring efforts have drastically reduced the negative adjusted EBITDA drag. Q1 was marked with great progress, though it is still early days in the effort. Further actions were recently implemented in Q2 to help accelerate the path to break even EBITDA for this business. An objective we believe is achievable by early 2024 which will be a major accomplishment for the team. We are excited to start off 2023 with an excellent first quarter, and it's clear that the focus around our three key strategic priorities is helping drive progress and results. Our KPIs across the organization point to a strong setup for 2023, and as a result, we have increased our full year adjusted EBITDA guidance. We look forward to another record year, and I'd like to thank all our employees, customers, suppliers, and partners for their contributions to the first quarter and going forward. I'd like to now hand the call over to Jim for further commentary on our Q1 performance.

Thank you, Paul, and hello, everyone. For this call, I'd like to address four areas, including an overview of our first quarter results, an update on our balance sheet and related key metrics, a few comments on our cash flow, and finally, an update to outlook and guidance for the year. In the first quarter, our farm segment delivered 182 million in sales, growing 21% year-over-year. Adjusted EBITDA of 38 million grew 34% year-over-year, with margins expanding 200 basis points to 21.1%. Growth in Canada and Australia coupled with steady contributions from the U.S., drove the Q1 result. In the commercial segment, sales of $165 million grew 17% over prior year. Adjusted EBITDA of $22 million grew 10% year-over-year, with margins softening about 80 basis points, mostly on a shift in mix from commercial within Brazil, as Paul outlined in his earlier remarks. The increase in other which represents general corporate costs was up about 5 million or 68% year on year and includes several one time costs that we expect to normalize out over coming quarters. The impact on several SG&A efficiency initiatives already underway will help us steadily lower SG&A as a percentage of sales as we move through 2023. As Paul mentioned, the digital restructuring and food platform unification are two key initiatives supportive of expected SG&A improvements. In addition, as the setup of our Chicago facility is well-progressed, we are addressing redundant costs that were important for knowledge transfer from our facilities to the central office. This process was initiated in Q1 and will continue through coming quarters. One other housekeeping item, Many of you may have noticed the change in terminology from backlog to order book. This is a straightforward update to how we reference our committed orders. There is no difference to the calculation, but we believe that for AGI, the term order book is more easily understood than backlog. Moving on to our balance sheet, we continue to make meaningful progress in our leverage ratios and working capital metrics, key indicators, for the structural improvements across the strategic priority. Working capital investment is a critical element of our operational efficiency and balance sheet improvement focus. Our net investment of $191 million in the first quarter was down from $226 million year over year, a strong result considering this was achieved in tandem with growing sales. As a percentage of sales, working capital investment fell. from 19% to 14% year over year on an annualized basis. Significantly less incremental working capital investment was required sequentially from Q4 22 to Q1 23 relative to Q4 21 to Q1 22 last year, despite strong growth in sales. This is a clear signal that our initiatives and commitment to operational excellence are taking hold. A key contributor to this result has been our focus on inventory and DSI, or day sales and inventory metrics, which we are managing closely on a facility by facility basis by leveraging our new centralized corporate resources in Chicago, promoting greater coordination and collaboration across facilities. While we are encouraged by our results, we expect more progress on this front through the rest of 2023. From a balance sheet perspective, our KPIs continue to trend positively. While we did make a relatively small draw on our revolving credit line in Q1, we note that the sequential increase in senior facilities of $28 million is down significantly from an $86 million increase in Q1 last year. Nevertheless, our net debt leverage ratio was 3.6 times in Q1. This is a significant improvement from 5.2 times year over year and 3.7 times sequentially. We are on track to achieve our previously stated target of getting this metric towards the low threes by the end of 2023. Longer term, the steady state leverage ratio target remains 2.5 times. I'm particularly proud of the progress made in these high-impact areas while achieving another record Q1 sales and adjusted EBITDA result. From a cash flow perspective, Q1 delivered strong funds from operations of $21 million, slightly offset by higher non-operating costs such as interest and taxes. Our funds from operations calculation typically excludes changes in net working capital, and if we were to include this, The result from the first quarter shows significant improvement year over year. And finally, turning to our outlook, we remain excited about 2023 performance, supported by our order book up 7% year over year and up more than 25% versus two years ago. We are encouraged the order book continues to grow despite a few pockets where we are rebuilding the pipeline, such as in EMEA, and our food segment. Given the strong Q1 result and our favorable outlook for the year, we are raising our full year 2023 adjusted EBITDA guidance to be at least $265 million, up from at least $260 million. Thank you for your time, and we'll now open up the call for questions.