Ag Growth International Inc.

Thank you for standing by. This is the conference operator. Welcome to the AGI third 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.

Thank you, Operator. Good morning and welcome to AGI's third quarter 2023 results call. I'm joined today by our CFO, Jim Reddick. I'll start the call with a review of our results, then turn the call to Jim for additional commentary on the quarter. Following our prepared remarks, the call will be open for questions. The third quarter marked another record performance for AGI. With margins sustaining the notable expansion from the second quarter, we're confident that many of the tactical and business management changes implemented over recent quarters have taken hold and are steadily becoming company standard across AGI. With revenues and adjusted EBITDA up 6 percent and 20 percent year-to-date and an expanding EBITDA margin profile now over 19 percent year-to-date, the trend towards enhanced and optimized performance across the business is becoming increasingly clear. A noteworthy dynamic for the quarter not captured in the headline sales figures was the favorable role that volume played. With steel prices down approximately 20 percent on average compared to prior year, Strong, underlining volume gains captured through the quarter highlight the pace of growth and robust global demand for AGI products. Before expanding further on our results and providing additional business updates, I'd like to first make a few comments on safety at AGI, given it's a cornerstone of our culture and a priority for our teams around the world. Our old Alberta facility just recently celebrated 10 years of zero lost time incidents. The team at Olds demonstrates that while the company-wide focus on safety has increased in recent years, many of our operations were already holding themselves accountable to high safety standards. This is an encouraging sign and a proud moment for the team at Olds, as well as the rest of AGI. Olds is one of several AGI facilities that have multiple years of zero lost time safety incidents, and we will continue to recognize and celebrate these milestone achievements. Now turning to our third quarter results. Revenues of $410 million were up 2% year-over-year with strong underlining volume growth when normalized for higher prior year steel costs supported by a 5% revenue increase sequentially from Q2. Adjusted EBITDA margins of 20.6% were up approximately 165 basis points year-over-year and helped generate 11% growth in adjusted EBITDA for $85 million total. Across our three corporate strategic priorities, our high-level KPIs are all trending in a favorable direction. On profitable organic growth, year-to-date revenue increase of 6 percent and adjusted EBITDA up 20 percent are quite encouraging, particularly the acceleration of adjusted EBITDA capture relative to the revenue growth. This is a clear indication of the overall efficiency improvement of our business operations and a perfect segue into operational excellence. On operational excellence, adjusted EBITDA margins expanded in the quarter to 20.6 percent. The year-to-date results delivered a margin of 19.2 percent, an increase of 230 basis points versus prior year. Importantly, we are clearly trending above our stated target of 18 percent. This is evidence that the new initiatives to optimize the business and minimize costs are taking hold. We have full confidence that a step change in AGI's margin profile is taking root as these processes and business practices are steadily becoming institutionalized. To reinforce our efforts on operational excellence, we made a key new addition to our executive team in the quarter with the hiring of Kate Glasser, who has assumed the newly created role of Executive Vice President, Global Operations. This is a critical hire and an important addition to help further accelerate the centralization of key global business support functions, such as manufacturing, supply chain, product management, and sales execution, among others. They bring significant experience from a wide range of roles with leading companies in other manufacturing subsectors and will assume leadership of our global operational excellence capabilities and initiatives. As we progress further on our operational excellence journey, we expect support from margins to be just the first realized benefit. Improved internal processes, tools, and overall capabilities will help us enhance the customer experience and create competitive advantages, enabling AGI to continue to gain market share and grow revenue. Our net debt leverage ratio continues to move lower and now sits at 3.2 times. The continued trend lower is inclusive of the settlement of the bin incident in the quarter, which was a large one-time cash outflow that impacted this ratio. We are clearly on pace to exceed our 2023 objectives for managing the balance sheet and look forward to reaching our target steady state of 2.5 times in mid-2024. Once we achieve this milestone and the balance sheet is proven to have stabilized, it will enable us to more aggressively pursue some of our exciting organic growth strategies and global priorities. Moving into a review of our segments and businesses. The farm segment was the anchor contributor to the quarter with stable results in North America complemented by solid growth from our international operations. Our Canada farm business continues to generate reliable contributions to the global farm segment. Revenues were flat year over year in the quarter and up 22% year to date. Margins were again strong in the quarter with growing volumes for our portable grain handling products, manufacturing efficiencies, and more disciplined pricing strategies all supporting the results. Our portable equipment manufacturing facilities continue to review and implement the most efficient ways to increase production while maintaining quality to consistently meet strong fundamental demands. The strategic focus of our Canada Farm commercial team to actively promote new products across both our existing and targeted dealerships is another source of incremental demand for the business, supporting both current and future growth. Our Canada Farm business maintains a positive outlook with an order book up 129% year-over-year with significant strength in portable equipment demand. Demand for permanent grain handling and storage equipment has softened in recent months as growers acclimate to higher interest rates and navigate a drier 2023 season. Our expanding and improving product lines and strengthening customer service capabilities, combined with a consistent trend for rising grain volumes, lead us to anticipate an even brighter outlook for Canada Farm as we look towards 2024. The U.S. farm business continued to perform well in the quarter, with revenues stabilizing year over year. Unlike Canada, the U.S. farm business featured a more balanced sales mix between portable and permanent handling equipment solutions. The U.S. business has seen a steady rise in contributions from dealer conversions as efforts to win business with new customers and penetrate new geographies generates tangible business results. Similar to the Canada farm business, the ongoing focus on manufacturing efficiencies has yielded a sustained uptick in the margin profile of our U.S. farm business. The order book is down slightly relative to last year, with several activities initiated to strengthen ahead of 2024, such as leveraging product transfers and enhancing sales strategies through product, market, and customer segmentation. Contributions from international regions drove the growth of the farm segment in the quarter. This is yet another important reminder of the benefits of our diversified and resilient overall business model. With exposure to different agriculture regions throughout the world, AGI continues to deliver profitable organic growth and is able to consistently overcome regional pockets of weather, political, or economic disruption. As the international side of our business continues to grow, the benefits of diversification and the stabilizing impact it has on our results will strengthen. The performance in international farm was led by Brazil, where revenue set an all-time record with farm representing the majority of the sales mix from the country. A record soybean crop and near-record corn crop drove overall activity and an improving farmer sentiment, despite some offset from higher interest rates. While non-steel input costs provided some headwinds to margin capture, the farm team in Brazil continues to perform well. The third quarter results are particularly impressive given the challenging economic conditions in Brazil, which demonstrates a significant demand for AGI products and capabilities in this region. In Asia Pacific, our farm business is largely concentrated in Australia, which delivered another steady quarter. The portable grain handling product transfer to India continues to progress across the extensive product line with the first models shipped, assembled, and tested in Australia by our dealer partners. Having local production capabilities in India provides more competitive supply, support, and service to the strategically important Australian market, which will enable long-term demand and growth. In EMEA, dealer engagement efforts in continental Europe have supported pockets of permanent grain handling and storage solution demand. The farm segment in EMEA is a smaller piece of our farm business and is an area where we are looking to find ways to further unlock opportunities. In aggregate, our farm segment continues to be a key contributor to AGI's overall results. With an order book up 22% and an expanding margin profile, the outlook is bright for year-end and heading into 2024. Now turning to our commercial segment results. Similar to the farm segment, it was areas within our international business that contributed to the overall positive result and stabilized segment performance. The third quarter featured another strong result for the commercial segment in South America and for Brazil in particular. Results were underscored by the final commissioning activities on two very large and complex commercial projects for key customers. These are milestone projects for the local team in Brazil and represent a significant increase in the sophistication of our project execution capabilities. Recently executed product transfers and the associated increase in local capabilities are expanding the Brazilian team's market range and project scope well ahead of expectations. As we deepen and extend our project experience, we are well positioned to play a leading role in the development of agriculture infrastructure across Brazil, from routine orders to significant and complex commercial-level projects. our Asia-Pacific commercial revenues were flat, with some softness in Southeast Asia offset by continued strength in India. Already a leading contributor, the margin profile in India continues to expand as operational excellence initiatives and penetration of higher-end markets combine to drive margins upwards. This is evidence that the operational excellence initiatives are not just North America-centric. Progress is being made at AGI facilities all around the world. On the product transfer front, The success in setting up the storage bin line has attracted interest from local customers with large operations across India. Establishing strategic partnerships with customers who are enticed by local production with products tailored to the region are an expected source of accelerated growth. This is true not just for India, but in all regions where active product transfers are taking place. Our EMEA region was again able to generate fairly stable results despite pressing conditions. In lieu of the slowdown in customer purchasing activity, the team continues to focus inward on operational excellence initiatives and has been successful in driving significant gains in gross margins. This favorably positions our EMEA region to accelerate EBITDA growth as sales and activity ramps up over time. We have begun to see notable pockets of strength in demand throughout the region as the EMEA order book has grown 17% year over year, and we are further encouraged by large and highly active pipelines. One additional comment on our EMEA region as it relates to the evolving situation in the Middle East. While we do not have assets, operations, employees, or meaningful revenues from the areas where conflict has taken place, we continue to monitor the situation closely. Results in our North America commercial segment were mixed. The core commercial business in the U.S., the largest subsegment within North America commercial, posted significant increases in revenues and adjusted EBITDA. Meanwhile, the core commercial business in Canada and the food platform continue to navigate challenging conditions with efforts focused on rebuilding the order books. Taken together, the North America commercial segment revenues decreased by 6 percent, but gained from expanding gross margins and disciplined SG&A to deliver solid, incremental adjusted EBITDA growth of greater than 8 percent year over year. North America Commercial was one of the leading contributors to the overall consolidated adjusted EBITDA growth in the quarter and continues to provide good momentum to our results despite the headwinds in the food platform. And finally, a few comments on our AGI digital business. The challenging and rapid business transformation executed through the first half of the year continues to pay off with the digital business generating nearly 2.5 million in positive adjusted EBITDA in the quarter. This follows last quarter, where digital achieved its first-ever break-even performance. The digital business has solidified a firmly positive outlook for full-year adjusted EBITDA. We are now focused on accelerating the growth of our digital business and have several new international opportunities to help further boost performance, an exciting development for an AGI business unit that has primarily been U.S.-centric in sales and operations to date. Overall, we are pleased with our third quarter results and the strong 2023 so far. We are on pace to close out another record year with all high-level KPIs trending in a positive direction. I'm particularly encouraged to see the significant progress on margin expansion from our operational excellence initiatives. This is quickly becoming a key capability for AGI, along with our broad product portfolio and wide range of geographic positions. Our third quarter results were enabled by excellent contributions from our international geographies, notably Brazil, delivering an all-time record quarter. Our international regions have now collectively delivered over $500 million in revenue over the last four quarters, a key milestone achievement and tangible evidence that our diversified business model continues to drive stable and growing results for AGI. As we look ahead to 2024, we are committed to complementing this enhanced margin profile with accelerated revenue growth initiatives. Leveraging expanded margins, a strong revenue growth, and a deleveraged balance sheet, AGI will continue to create value for all our valued stakeholders, our customers, employees, and shareholders. Thank you for your time this morning, and I'll now hand the call over to Jim.

Thank you, Paul, and good morning, everyone. For today's call, I will touch on four areas, including an overview of our third quarter results, an update on our balance sheet and related key metrics, a few comments on our cash flow, and I'll close out the prepared remarks with a recap on our outlook for the year. On a consolidated basis, third quarter revenues of $410 million increased 2% over last year's all-time record quarter. The trend in expanding gross margins continued from the second quarter, and in addition to disciplined SG&A cost containment, helped to drive approximately 165 basis points of adjusted EBITDA margin expansion. Overall, adjusted EBITDA landed at $85 million, growing 11% in the quarter, and clearly demonstrates our ability to capture additional margins from modest sales increases as the benefits of our operational excellence initiatives take hold. Our farm segment delivered $227 million in revenue, growing 3% year-over-year. Adjusted EBITDA of $62 million grew 22% year-over-year with margins expanding over 400 basis points to 27%. Stable sales in North America were complemented by growth in international regions, notably Brazil. The margin result was a combination of operational excellence initiatives as well as from mix with a weighting towards portable equipment relative to last year. In the commercial segment, revenues of $183 million were stable with last year's result. Adjusted EBITDA of $34 million grew 6% year-over-year with margins increasing roughly 100 basis points. Similar to FARM, The strong results in Brazil helped offset some softness in other areas. Moving on to our balance sheet, we continue to make steady progress on our working capital metrics and key leverage ratios, clear indicators of the structural improvements we are making to the business and how we manage it. Working capital investment continues to be a key focus area across the organizations. Our net investment of $243 million in the third quarter was down from $264 million year-over-year. As a percentage of revenue, working capital investment fell from 16.4% to 14.8% year-over-year on an annualized basis. This is roughly a 160 basis point improvement and continues a clear trend from the last several quarters that shows a sustained improvement in how we are managing our working capital across AGI. Over the last year, we placed a heightened focus on our inventory levels, and in particular, our day sales and inventory, or DSI. Our DSI metrics are a closely managed KPI across AGI, and they continue to make tremendous strides versus recent quarters and year over year. Credit facility management also continues to be a focus area. Our net debt leverage ratio decreased to 3.2 times in the third quarter. This is a significant improvement from 4.1 times year over year and 3.3 times sequentially. This is after factoring in the bid incident settlement repayment. Without that one-time non-recurring cost in the quarter, our net debt leverage ratio would have improved even further. Despite this added cash outflow, we still expect to be at or close to our original goal of approximately three times by the end of 2023. Turning to a few comments on cash flow, funds from operations of $64 million were up from $56 million year over year. Similar to last quarter, 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. And finally, turning to our outlook, we remain excited about the path we are on to close out 2023. We are encouraged that the order book continues to grow and is up 3% year over year. This is in light of a few areas across AGI where we are rebuilding the pipeline, most notably our food platforms. We have clear line of sight to the end of 2023 and have reiterated our outlook for the full year with adjusted EBITDA of at least $290 million. In addition, we have updated our full year margin guidance with adjusted EBITDA margins now expected to be of at least 18.5%, up 50 basis points from prior guidance of 18%. This represents a significant step up in results. when the last several years of consecutive successive record results are taken into consideration. Achieving this level of growth and profitability on a consistent basis is a clear indicator of AGI's growth trajectory and the types of opportunities available in the markets we serve around the world. Thanks, everyone, for your time, and we'll now open up the call for questions.