Ag Growth International Inc.

Thank you for standing by. This is the conference operator. Welcome to the AGI fourth 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 and 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 fourth 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. Before we get into the discussion on our results and other business updates, I'd like to provide a brief update on our progress in enhancing safety across AGI. I'm pleased to announce that 13 of AGI's global facilities have now gone one year without a lost time safety incident. This is a huge achievement for our teams and a considerable improvement compared to just a few short years ago when we began a structured process to track and improve safety across AGI. Our progress has been supported by a significant and ongoing focus on near-miss activity, paying close attention to both the identification of near misses as well as corrective actioning. We track our near-miss data on a case-by-case basis and aggregate statistics across AGI. In 2023, we logged nearly six and a half times more near-miss cases than we did in 2022 and 14 times more than 2021. The company-wide commitment to improving safety is undoubtedly a key part of our culture. Now turning to our fourth quarter and full year results. Our record fourth quarter results helped to close out another record year for AGI. It has now been four straight years of record results driven almost entirely by organic growth, overcoming significant and varied challenges across some of the markets we serve. For the fourth quarter, consolidated revenue was up 1%, primarily supported by growth in the farm segment. Growth was impacted by steel costs generally trending lower year over year. Assuming a constant steel pricing environment, Our revenue levels would have been approximately 5% higher than prior year, which more clearly highlights our growth and general market share gains. Fourth quarter adjusted EBITDA was up 43%, with a margin of 19.3%, representing approximately 570 basis points of expansion year over year. Our fourth quarter caps off an exceptional year for AGI, particularly for margins, which finished the full year at 19.3%, a 320 basis point year-over-year improvement from 16.1%. Margin performance for the year was well above our stated objectives, which we walked up throughout the year from 17% initially to 18% and then 18.5%. With another quarter of very strong margin results in hand, we have clearly entered a new era of performance and profitability across the company. AGI has not performed at these margin levels in well over a decade prior to the strategic move into the commercial segment and establishing our international footprint. Accounting for our business, product, and geographic mix, AGI has never seen profitability at these levels. Our three corporate strategic priorities continue to exceed expectations. For reference, these priorities include profitable organic growth, operational excellence, and balance sheet discipline. A few comments on each of these priorities, which collectively and individually are performing well ahead of our stated objectives. For profitable organic growth, we are encouraged by our KPIs of annual revenue up 5% and adjusted EBITDA up 25%. With 2023 being another year of pure organic growth, we are pleased with our continued success despite areas of regional disruptions and changing macro conditions. Our resilient business model, along with strong fundamental demand for equipment and solutions to protect and move valuable crops, continues to drive our results. We see strength across all areas of AGI, and I'd like to take a few minutes to highlight three specific areas that will make outsized contributions towards our goal of $2 billion in revenue within our strategic planning horizon. These include product transfers, international and emerging markets, and our growth platforms. I'll provide an update on each with insights on how they will individually contribute to our growth strategy in 2024 and beyond. On product transfers, we have made tremendous strides through 2023. In early February, we issued a press release outlining our progress on the first set of product transfer initiatives, including cumulative orders secured to date of approximately 55 million. Many of these orders were signed in late 2023 following the completion of manufacturing to sales knowledge transfer activity. Sales in the second half of 2024 will leverage these recent orders as valuable customer reference sites to further stimulate demand, adding to a strong and active pipeline. On international and emerging markets, we continue to see strong demand for our products and solutions in areas outside of North America. In 2023, our international regions combined to surpass $500 million in total revenue. Over the medium term, we are targeting international businesses to contribute 40% to 45% to our total revenue mix. For context, in 2023, it was 34%, and just a few short years ago, it was 25%. Over the last three years, the international businesses have collectively grown at a 23% CAGR. A strategic focus on emerging markets such as Africa and Southeast Asia provides an additional tailwind for continued strong international growth. We saw a significant uptake in orders within these emerging markets across the fourth quarter. A focus on international growth not only helps AGI achieve our overarching revenue objectives, it also strengthens the diversification of our overall business. This diversification has and will continue to be a key differentiator between AGI and and many other agriculture industry peers who exhibit a more pronounced susceptibility to agriculture industry cyclicality. Our growth platforms include our digital, food, and feed businesses. Digital and food went through extensive restructuring efforts in 2023, and we see a strong setup for both in 2024. A few comments on each of these three areas. In 2023, the digital platform generated positive full-year adjusted EBITDA for the first time, an incredible turnaround in a short period. As with all other business units inside AGI, the digital team has developed a robust and detailed three-year strategic plan to drive growth and expand market share within and outside of our core U.S. market. For our food platform, investments made in developing the sales team and expanding customer relationships is yielding positive results with the order book up nearly 40% year over year. This provides confidence that the food platform is positioned to deliver a strong rebound in 2024 following a comprehensive restructuring exercise across 2023, which is now nearing completion. Our feed platform is an area we are quite excited about. In late 2022, we assembled an internal team to develop a vision and strategic plan for AGI to expand into this large and attractive market. The team took notable strides across 2023, primarily growing the sales pipeline and building our brand, reputation, and commercial relationships. In 2024, we expect the feed platform to deliver incremental growth for AGI. Turning to an update on our next corporate strategic priority, operational excellence, measured with adjusted EBITDA margin as our KPI. Our success in securing margin gains throughout 2023 was a significant driver of our strong overall results. Progress was faster than expected, beating expectations set through multiple guidance increases throughout the year. Consistent and structured cost controls implemented across the entire supply chain, as well as the administrative level of the company, delivered a greater than 300 basis points EBITDA margin improvement in a single year. Through sustained focus, disciplined planning, and centralized coordination, we have steadily institutionalized new operational excellence processes and tools. We anticipate sustaining and stabilizing our adjusted EBITDA margin levels in 2024 and going forward. And finally, our balance sheet discipline corporate strategic priority continues to trend ahead of expectations with our net debt leverage ratio improving to 2.8 times. This level represents nearly a full turn improvement over where we started the year. Through our ability to closely adhere to a T-leveraging plan, we are ahead of the three times level we targeted by year end and have a clear path to achieving our stated objectives of 2.5 times in 2024. We are closely considering options to use some of our balance sheet capacity to implement attractive growth initiatives such as meaningful capacity expansion in India. Our business in India has doubled since 2019 and generates a company-leading margin profile. With the addition of several product transfers, the growth potential for our business in the world's most populous country is extremely exciting and we recently acquired land as a site for future expansion. Detailed project planning is still in progress with final approvals targeted in 2024 to support groundbreaking in 2025. Moving on to an overview of our results for the farm and commercial segments by region. Overall fourth quarter farm segment revenue and adjusted EBITDA grew by 4% and 44% respectively year over year. I'll provide a few highlights on the performance of our Canadian, U.S., and international regions. Canada farm segment revenue decreased slightly in the fourth quarter, mostly due to a particularly strong comparable in a record fourth quarter in 2022. For results to stabilize near this record level is quite positive. and a strong signal of the strength of this business heading into 2024. U.S. farm results included revenue growth of 15% year over year, which anchored the overall performance of the global farm segment in the quarter. Success in launching a revitalized early order program supported by our centralized revenue management and demand planning teams helped grow demand for our portable grain handling equipment. Looking ahead to 2024, We continue to monitor market conditions carefully and anticipate dealer replenishment cycles to provide sales momentum into the second quarter. International farm segment revenue decreased slightly in the fourth quarter. The Asia-Pacific region, and more specifically Australia, experienced tight market conditions. Brazil experienced a more challenging market than anticipated, with results coming in below expectations. To help further support growth of a farm business in Brazil, new financing structures have been set up with local partners, which were officially rolled out in early 2024. Overall, the farm segment order book continues to trend higher year over year, supporting our optimism heading into 2024. Now moving on to a review of our commercial segment. Commercial segment revenue and adjusted EBITDA decreased 1% and increased 17% respectively in the fourth quarter. Revenue was driven by a strong result from India, offset by modest pullbacks in other regions. Nearly all regions benefited from expanding margins due to accelerated success in implementing operational excellence initiatives. I'll provide a few highlights on the performance of our Canadian, U.S., and international regions during the quarter. Canadian commercial segment revenue decreased in the fourth quarter for similar reasons to the Canadian farm segment, a very strong comparable period. Recall our fourth quarter 2022 results were up over 120 percent versus 2021 and set a record level for Canadian commercial business. There is a clear focus on pipeline and quoting for this business entering 2024. U.S. commercial revenue was effectively flat in the quarter. While the food platform order book is recovering nicely, strained year-over-year results in food offset a solid performance from the grain side of our commercial business in the U.S. Similar to Canada, there's a clear focus on pipeline and quoting entering 2024. International commercial revenue was up slightly in the fourth quarter, supported by a 29% increase in India, which continues to be a remarkable growth engine for AGI. Commercial revenues in South America and EMEA were both down slightly due to project timing, with specific customer requests to delay shipment of completed equipment. The EMEA region continues to secure meaningful long-term project work from emerging markets such as Africa and the Middle East. This success is a reflection of our robust strategic planning efforts and the excellent collaboration we have across our outstanding global teams. Our order book for commercial is up significantly year over year and reflects particular strength in the EMEA region. Given the project-based nature of our commercial segment business and the timing of the orders, we anticipate an acceleration of commercial results to be most pronounced in the second half of 2024. Before handing the call over to Jim, I would just like to recap a few key points. 2023 was a tremendous success for AGI. we are tracking well ahead of expectations across all corporate strategic priorities and the respective KPIs we use to monitor progress. With an all-time record order book in hand, up 25% versus prior year, we are well positioned entering 2024 to build on our series of consecutive record results. Our diversified business model and unique positioning within the agriculture sector sets us up for another strong year at a time when other agriculture sectors are expected to navigate cyclical impacts. AGI will continue to benefit from the growing importance of food security and building a highly functioning and efficient global food supply chain. I'll now hand the call over to Jim.

Thank you, Paul, and good morning, everyone. For today's call, I will touch on five areas, including an overview of our disclosure changes, a quick recap of our fourth quarter results, an update on key balance sheet metrics, a few comments on cash flow, and finally a recap of our outlook for the upcoming year. I'll begin with a few housekeeping items on our disclosure practices, which is an area we continue to refine in order to make our quarterly reporting more clear and helpful. Going forward, we have decided to disclose our total order book on a dollar basis. and eliminate the percentage changes by region and segment. This simplified approach should help provide greater context and be more straightforward to track. It's important to highlight that the order book primarily reflects our activity in the project-based businesses across AGI, which generally have longer multi-quarter sales and production cycles. It doesn't fully capture the activity of our catalog-based businesses, which have more rapid sales and production cycles that can often mean order receipt and product delivery occurs within the same quarter. As a result, these would not be captured in our order book disclosure. In general, our project-based businesses are aligned with our commercial segment and our catalog-based businesses are aligned with our farm segment. Our new order book disclosure should help provide readers with better clarity on AGI's growth prospects, but it's important to be aware of the nuance that it weighs more towards our commercial than our farm business. Another key disclosure change initiated this quarter includes the collapsing of our international subsegments into a single consolidated international total. We believe that a simplified approach will be more effective in helping readers monitor and understand our strong growth trends across our international businesses, collectively which, as Paul described in his opening remarks, is a key growth area for AGI going forward. Now, moving to a quick recap of our fourth quarter results. On a consolidated basis, fourth quarter revenues of $379 million increased 1% over last year's all-time record quarter. The trend in expanding gross margins continued from the previous quarters and combined with ongoing improvements to SG&A cost containment, drove approximately 570 basis points of adjusted EBITDA margin expansion. Overall adjusted EBITDA of $73 million grew 43% in the quarter and clearly demonstrates our ability to capture additional margins on a relatively stable revenue base year-on-year. Our adjusted EBITDA includes approximately $11 million in transactional, transitional, and other costs, which are primarily related to various plaintiff-driven legal costs to protect our digital technology, digital restructuring charges, and final adjustments to large one-time warranty claims. In addition, our full-year adjusted EBITDA includes expenses related to our multi-year global ERP transformation project, which we kicked off throughout 2023 after first introducing this initiative at our investor day about a year ago. In 2023, we selected an industry leading partner, progressed through a detailed planning exercise, completed development and testing phases, and now have the first wave of deployment to certain business units underway. This is a project with significant excitement internally that we expect to fundamentally revolutionize our systems, processes, and overall business intelligence. accelerating our ability to grow while effectively reducing costs. Having robust and agile systems is also a key enabler to help us continue to improve our margin profile. Overall, we are in the first year of what we expect to be a three to four year journey. With AGI having come together through dozens of acquisitions, taking this step to harmonize our systems globally is a critical step in maturing as an organization and uniting as one AGI. We will provide relevant updates on this project as we move through the process and achieve key milestones. Now refocusing on our segmented results. Our farm segment delivered $189 million in revenue, growing 4% year-over-year. Adjusted EBITDA of $47 million grew 44% year-over-year with margins expanding by approximately 675 basis points to 25%. Similar to recent quarters, the margin result was a combination of operational excellence initiatives as well as a product mix tilted towards our portable equipment relative to last year. In the commercial segment, revenues of $190 million were stable with last year's result. Adjusted EBITDA of $36 million increased grew 17% year over year, with margins increasing roughly 300 basis points to 19%. Similar to farm, the benefits of our operational excellence initiatives again contributed to the margin increase. Moving on to our balance sheet, we continue to make consistent and meaningful progress on our working capital metrics and key leverage ratios, clear indicators of the structural improvements we are making to how we manage the business. Working capital investment continues to be a key focus across the organization. Our net investment of $188 million in the fourth quarter was up from $169 million year-over-year. On an annualized percentage of sales basis, working capital intensity increased from 11.3% to 12.4% year-over-year. However, this included the impact of of the accruals related to the bin incident which are captured in our provisions line item. Normalizing for this would demonstrate a clear improvement in both our total dollar net working capital investment and as a percentage of sales. Our KPIs for monitoring working capital are trending very favorably for DSI or days sales and inventory and we also see some early signs that days payables outstanding are sustaining a positive trend. Managing working capital is a priority and we continue to strive for further improvement to ensure we can grow the business without an excess working capital drag. That said, as Paul mentioned in his comments, our order book mix is more weighted towards commercial than it has been in the past with several key project wins beginning to ramp up. As a result, this may require us to temporarily invest strategically in working capital for a few quarters throughout 2024. The overall underlying trend, however, still points to a clear and ongoing improvement. Turning to our balance sheet, we continue to make excellent progress in managing our cash flow and staying disciplined with our credit facility usage. Our net debt leverage ratio decreased to 2.8 times in the quarter, This is a significant improvement from 3.7 times year-over-year and 3.2 times quarter-over-quarter. Importantly, both meaningful debt repayments as well as increasing adjusted EBITDA played a role in the decrease to our leverage ratio. This is the first time AGI has had this ratio under three times in nearly 10 years and is an important achievement, especially in lieu of the impact that the large one-time warranty payment made in the third quarter. We are well on track to reach our stated objective of 2.5 times in 2024. Connected to our success in managing the balance sheet and working down our debt position is our progress on managing our cash flow. Funds from operations in the quarter of $47 million were up from $27 million year over year, an increase of roughly 70%. Funds from operations as a percentage of adjusted EBITDA continues to trend higher indicative of improving conversion of adjusted EBITDA into cash flow. And finally, turning to our outlook, given the combination of an all-time record order book and our expectation to sustain our adjusted EBITDA margin gains from 2023, we anticipate full year 2024 adjusted EBITDA to be at least $310 million. In terms of margin levels, on a go-forward basis, we expect our margin levels to stabilize around these new levels in the 19% range. Of the roughly 300 basis points of year-on-year improvement in our full-year adjusted EBITDA margin from 2023, we believe at least 200 basis points of that is structural and fully attributable to operational excellence initiatives with another 100 basis points due to the higher mix of portable grain handling equipment in 2023. In 2024, we anticipate some further incremental operational excellence gains to accrue to margins, owing to the annualization of activities completed mid-year, in addition to the benefits of some new initiatives. This will be offset by a shift in mix towards commercial, which is typically lower margin than farm. Net-net, at this stage, we expect our adjusted EBITDA margins to stabilize in the 19% range for the full year. One final comment on our 2024 outlook as it relates to the quarterly cadence of our results. Given the project-based nature of our strengthening commercial segment order book and the timing of these orders, we anticipate a gradual ramp-up of our 2024 results, gathering momentum as the year progresses. Thank you, Operator, and we will now open up the call for questions.