Ag Growth International Inc.

Thank you for standing by. This is the conference operator. Welcome to the AGI second 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'll 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 follow-ups. I would now like to turn the conference over to Paul Householder, President and CEO of AGI. Please go ahead, sir.

Thank you, operator. Good morning, and welcome to AGI's second quarter 2023 results call. As usual, I'm joined by our CFO, Jim Reddick. I'll start the call with a review of our results as well as an update on outlook for the remainder of the year, then turn the call to Jim for additional commentary on the quarter. Following our prepared marks, we'll open the call for questions. The second quarter was, again, a record for AGI, making it seven record quarterly performances in a row. The strong second quarter results were marked by an exceptional gross margin performance. Many of the operational excellence initiatives set in motion late in 2022 and early 2023 are ahead of plan. Pricing discipline, manufacturing efficiencies, input cost and supplier management, and several other activities. These initiatives came together in the second quarter to drive margins to the levels not seen in any quarter since 2016. Combined with consistent overall demand for AGI products across product lines and geographies, creating a balanced and resilient sales profile, we were able to generate an all-time record quarter for adjusted EBITDA. The second quarter capped a favorable first half for AGI, with H1 sales and adjusted EBITDA growth of 8% and 27% respectively, and adjusted EBITDA margins of 18.5%, trending well above our initial goal of 17% for the full year. Given our success in growing the business, We also continue to make notable strides in our efforts to reduce key balance sheet ratios. Before expanding further on our results and providing additional business updates, I would like to make some comments on safety at AGI. We recently completed our third annual Safety Week, a global event that brings together team members from around the world to discuss and review safety protocols. With our ongoing focus on safety awareness, I am extremely proud to announce that 11 of our facilities have now gone more than one year without a lost-time safety incident. Our collective focus on safety is paying off, and reaching these types of safety milestones clearly demonstrates the commitment of our employees, who are unquestionably the heart of AGI. Now turning to our second quarter results. Sales of 390 million were consistent year over year and showed strong underlying volume growth when normalized for higher prior year steel costs. Adjusted EBITDA margins of 22.6% were up more than 550 basis points year over year and helped generate 33% growth in adjusted EBITDA, up to 88 million. Across our three corporate strategic priorities, our high-level KPIs are generally trending in a favorable direction. for profitable organic growth, sales growth of 8% across the first half of the year is encouraging, once again demonstrating the resiliency of our business. For operational excellence, the extremely strong second quarter margin speaks to accelerated progress across many initiatives, from centralized procurement strategies, more sophisticated and segmented revenue management tactics, manufacturing efficiencies, reduced use of outsourcing and overtime, digital reorganization, among others. In several ways, the Q2 margin performance was the culmination of many efforts made across the company. It is important to understand that these improvements are the result of structural changes to our processes, teams, and to the way we manage the business. As these changes are steadily institutionalized, we expect many of the benefits of our operational excellence approach to be sustained going forward. For balance sheet discipline, as expected, our net debt leverage ratio continues to move lower by carefully managing cash flow while also growing adjusted EBITDA. Moving into a review of our segments and businesses, the farm segment was the anchor contributor to the quarter, with Canada leading the way. Similar to the first quarter, Canada farm was a key growth region for AGI. Sales were up 11% year-over-year and with excellent margins. Strong volume for our portable grain handling products, in addition to disciplined pricing strategies, helped deliver this result. Increased throughput and higher production levels at key manufacturing facilities ensured AGI was positioned to meet strong demand. Looking ahead to the second half of the year, our Canada farm business maintains a positive outlook with an order book up 77% year over year, supported by significant order intake in May and June. both months setting records in a typically slower part of the year. The Canada Farm Order Book is exceptionally strong, signaling solid fundamental demand for AGI products and services to reinforce our confidence in a favorable performance this year as well as the years ahead. The U.S. farm business continued to perform well in the quarter, with sales stabilizing at levels significantly above what we would have expected just a few years ago. a signal that our efforts to grow market share in this strategically important region continue to pay off. In addition, the second quarter was marked by a meaningful improvement in margins for our U.S. farm business with product mix, SG&A discipline, and manufacturing efficiencies all playing a role in the result. The order book for U.S. farm is up 3%, demonstrating growing demand for AGI products. We have been carefully monitoring local weather conditions to assess potential impact on customer behavior and demand. While the dry conditions have generally begun to subside in early Q3, we continue to carefully monitor overall market dynamics. Contributions from international regions in the farm segment in the quarter were varied, but overall supportive. In Asia Pacific, we continue to have success in establishing the AGI brand in Australia, where our portable grain handling products are growing in popularity. As the portable grain handling product transfer to India is completed, enabling local production with more competitive supply, support, and service, we anticipate a further uptick in demand into 2024. In EMEA, dealer engagement efforts in continental Europe have supported pockets of permanent grain handling and storage solution demand. In South America, farm sales improved sequentially from Q1 to Q2. The shift in sales mix from farm to commercial in Brazil, which we noted in the first quarter, was reflected in the makeup of the order book entering Q2. Steady improvements in market conditions, including expectations for another record-setting crop, have provided increased confidence to Brazilian farmers. As a result, we observed a significant increase in farm customer ordering as the quarter progressed. The overall Brazil order book, inclusive of commercial, posted a phenomenal increase of over 160% from the first quarter and is now weighted towards farm. With a strong order book and highly active pipeline, we have good visibility to an outstanding Q3 for Brazil. Brazil is an important market for AGI as well as global agriculture markets, especially in lieu of supply disruptions in Eastern Europe, and we are optimistic that Brazil will continue to be a strong contributor to our results. Overall, our farm segment continues to be a reliable growth engine for AGI. With an expanding margin profile and an order book up 27% year over year, we see a strong setup for further growth and success in the second half of 2023. Moving on to some commentary on our commercial segments and international businesses. Starting with the broader APAC region, which together with India makes up our Asia-Pacific geography. Overall sales were slightly down in the quarter. Strong sales from India, as this business builds on last year's exceptional results, were slightly offset by commercial sales from the broader surrounding APAC region. Sales were up 17% in India as demand for rice milling products continues. This growth was supported by targeted promotional packages in new areas within India where our rice milling business is underpenetrated. India is a leading margin contributor across our mix of global businesses and and a continued focus on effective cost management enabled an acceleration of profitability in the quarter. The order book in India supports a strong outlook in the second half of the year. It's up 10% and very close to record levels, including an exceptional month in June where order intake set an all-time monthly record. The outlook for additional growth is further supported by rice milling exports outside of India. as activity is now starting to ramp following a targeted effort on market trials and quoting across Southeast Asia, Africa, and Lithuania. In terms of product transfers, India continues to make progress on grain storage and portable grain handling equipment. On grain storage, the quoting pipeline continues to ramp and order intake is increasing with several wins in the quarter. Further transfer of some additional grain storage accessories and components will help the India team reduce costs and lead times further increasing our competitiveness to win grain storage projects. For portable grain handling equipment, the first trial units have been produced locally and shipped to Australia for further testing. In anticipation of building future volume, we have secured expanded facility space to accommodate an increase in production. Our South America region, encompassing both Brazil and the broader LATAM region, delivered sales growth of 64% in the quarter. Good results in Brazil driven by mix, complemented by a very strong quarter for the broader LATAM region, drove the favorable South America results. The overall order book across South America is down 14%, primarily due to timing as the broader LATAM business resets from a strong second quarter, and Brazil continues to deliver an attractive order pipeline. The outlook for the commercial business across South America remains encouraging. particularly as strategic plans to penetrate food, feed, fertilizer, and rice milling platforms continue to gain traction. South America is an important contributor and a critical piece of our overall growth story. Our EMEA business continues to generate stable results despite the unstable situation in the Eastern European market. Sales in the quarter were down 10% largely due to timing on the shipment of a few projects that will push to the third quarter. Similar to other areas of AGI, gross margin expansion and tight SG&A control enabled the region to drive heightened profitability and increased EBITDA contribution. The EMEA order book is up year over year and now represents a complete recovery of the impact from the Eastern European conflict as the shift to Middle East and Africa gained consistency. Overall order intake in June was significantly above prior year, providing optimism that the strategic investment in sales support resources across Africa, and Middle East is paying dividends by accelerating sales growth. The EMEA region remains highly competitive as industry capacity adjusts to the reality that two large buyers of food infrastructure in Ukraine and Russia are currently not coming to market with the same level of investments as they were pre-conflict. The EMEA's team's ability to still deliver impressive results despite these challenges is yet another indication of strong demand for AGI products the benefits from our strategic plans, and the outstanding performance of our local teams. The North America commercial business, which for reporting purposes now includes most of our global food platform, was down 19% in the quarter, with most of that result being directly attributed to a decline in the food platform as well as softness in the fertilizer market. While the overall North America commercial order book is down in both Canada and the U.S., This is also largely weighted towards the food platform, which, as previously discussed, is in the middle of an extensive restructuring initiative. Both the food and fertilizer teams have recently won a few nice-sized orders and are showing early signs of improvement, though we do not anticipate a sustained turnaround in these areas for a few more quarters. The order book for core North America commercial grain handling and storage products is up year over year and is serving to stabilize results. The heightened focus on operational excellence initiatives have helped drive margin expansion, and we expect our North America commercial business to continue to deliver positive EBITDA growth. And finally, a few comments on our AGI digital business. Early in the quarter, a second significant phase of restructuring was completed. Our leadership team is now fully in place. An overhauled approach to business management, including improved pricing strategies and overall reduced cost structure, has led to a dramatic improvement in financial results. The second quarter was the first time the digital business posted positive adjusted EBITDA. This is well ahead of our internal target, where we aim to achieve this milestone by the end of the year. An outstanding achievement from the team leading the turnaround efforts, who now turn their full attention from cost control and stabilization to accelerating growth. Overall, the second quarter highlights the clear benefit of rallying our global team around common and consistent objectives, profitable organic growth, operational excellence, and balance sheet discipline. We have achieved substantial progress across all three areas during the first half of the year. Our diversified and resilient business model continues to deliver stable and consistent growth and is now bolstered by operational excellence initiatives that are accelerating margin expansion. With a strong first half in hand, we are clearly on our way to another banner year for AGI. We are confident in the outlook and have increased our full-year guidance for both adjusted EBITDA as well as adjusted EBITDA margins. Jim will provide additional details on our updated full-year guidance. We are optimistic about the second half of the year and see further potential in late 2023 and early 2024 as we progress across our businesses in transition, such as food and fertilizer. I'll now hand the call over to Jim.

Thank you, Paul, and hello, everyone. For this call, I'd like to address four areas, including an overview of our second quarter results, an update on our balance sheet and related key metrics, a few comments on our cash flow, and a few notes on our outlook for the year. On a consolidated basis, second quarter sales of $390 million were stable year over year, very strong gross margins, helped drive over 550 basis points of adjusted EBITDA margin expansion and led to 33% growth in adjusted EBITDA for an $88 million result, an all-time record for adjusted EBITDA in any quarter for AGI. In the second quarter, our farm segment delivered $233 million in sales, growing 3% year-over-year. Adjusted EBITDA of $70 million grew 37% year-over-year, with margins expanding over 700 basis points to 30%. Growth in Canada, the U.S., and Australia, coupled with the onset of many operational excellence initiatives designed to support margins, drove the result. In the commercial segment, sales of $157 million declined 4% year-over-year, Adjusted EBITDA of $29 million grew 22% year-over-year, with margins increasing over 350 basis points. Similar to farm, and as Paul elaborated in his prepared remarks, gross margin expansion due to operational excellence initiatives supported the strong results. Our second quarter adjusted EBITDA included some one-time items that are worth a quick comment to provide a bit of clarity. The accrual related to the BIN incident of $15.6 million was disclosed a few weeks ago in a standalone press release. The $4.9 million for equipment rework relates to the completion of the remediation of the customer site in British Columbia and isn't directly related to the BIN incident. The $8.8 million in transactional and transitional costs includes a few items, including the retention and legal costs in connection with digital reorganization, which underwent a second round of restructuring in the quarter, a broader workforce optimization initiative, also completed in the second quarter, integration work for recently consolidated facilities, and a few other miscellaneous one-time items and accruals. Finally, the $1.7 million in accounts receivable write-down in the quarter reflects our conservative perspective on our last remaining balances from customers in the Russia-Ukraine region. We have no more receivables related to the region on our books with all amounts still owing from this region now fully reserved. If and when any amounts owed from this region are collected, it will provide some incremental cash flow, but for now the timing and amount of any recoveries remain uncertain. Overall, we expect fewer and smaller sized one-time items as we progress through the back half of the year. 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 we are making to support the strategic priority. Working capital investment is a key focus across the organization. Our net investment of $212 million in the second quarter was down from $274 million year-over-year. As a percentage of sales, working capital investment fell from 17.6% to 13.6% year-over-year on an annualized basis. Given the stable sales in the second quarter, both the absolute dollar working capital investment and the ratio as a percentage of sales are clear indicators that our efforts to optimize how we use and manage our cash are steadily taking hold. A key contributor to this result has been our focus on inventory and DSI metrics. We are managing DSI closely and on a facility by facility basis. We are pleased to see DSI continue to make progress on both a year-over-year and sequential basis. From a balance sheet perspective, our KPIs continue to trend positively. Credit facility management is a focus item as we work to optimize how we manage cash flow, and we are encouraged to report that our net draw on our facilities was very minor in the quarter. More importantly, Over the first half of the year, our total draw on debt and credit facilities was $28 million versus $96 million last year. We anticipate the usual trend of lighter credit facility needs towards the end of the year, in addition to strong cash flow, to help us further drive down overall debt levels. Our net debt leverage ratio decreased to 3.3 times in Q2. This is a significant improvement from 4.8 times year over year, and 3.6 times sequentially. We are well on track to reach our goal of approximately three times by the end of 2023. Longer term, the steady state leverage ratio target remains at 2.5 times. Turning to a few comments on cash flow, funds from operations of $71 million were up from $49 million year over year. The step up in available cash flow mirrors the increase in adjusted EBITDA, and demonstrates our ability to capture and convert our growing adjusted EBITDA into cash flow. Looking ahead, our cash inflows are typically stronger in the second half of the year, enabling us more flexibility on how to redeploy and the pace at which we can make debt repayments. The recently announced settlement of the bin incident will have an impact on cash flow, and we expect approximately a $55 million net outflow in the third quarter, in connection with resolution of the matter. Given our strong results in growing adjusted EBITDA, we do not expect this to impact our goal of reaching approximately the three times level by the end of the year. And finally, turning to our outlook. We remain excited about our momentum heading into the second half of 2023, supported by our order book up 3% year over year. We are encouraged that the order book continues to grow despite a few pockets where we are rebuilding the pipeline, most notably our food platform in addition to our fertilizer and EMEA platforms. As Paul outlined in his remarks, we have increased our guidance to reflect the optimism and confidence we have in the business. Our new outlook for full-year adjusted EBITDA is now at least $290 million, up from at least $265 million, and with adjusted EBITDA margins of at least 18%, up from our prior outlook of at least 17%. This updated guidance now indicates approximately a full 200 basis point increase over last year's result of 16%. So thanks everyone for your time and we'll now open up the call for questions.