Ag Growth International Inc.

Thank you for standing by. This is the conference operator. Welcome to the AGI second quarter 2024 results conference call and webcast. 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. During the question queue, you may press star then one on your telephone keypad. As a courtesy to management and other participants on the call, please limit yourself to two questions and rejoin the queue if you have any further questions. Should anyone need assistance during the conference call, they 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.

Thank you, operator. Good morning and welcome to AGI's second quarter 2024 results call. I am 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 opened for questions. To start today's call, I will begin with a few customary comments on safety at AGI. I'm proud to announce that the key metrics we use to track safety performance continue to make significant progress. Our last time incident rate decreased to 0.3 over the last 12 months. This is approximately a 60% improvement over 2022 and a 75% improvement over 2021. This type of extraordinary progress over a relatively short period of time clearly highlights the commitment of our workforce to improve safety and working conditions day in and day out. Moreover, we view this as a reliable measure of the meaningful strides we are making with our one AGI culture. Turning to our results, our second quarter was slightly lower than our expectations, largely due to a temporary manufacturing outage in Canada and some expected softness across the farm market such as Brazil, US, and Australia. Several important steps were taken at the end of the first quarter and early in the second quarter to successfully protect margins within challenging market conditions. Actions taken included headcount reductions across certain facilities, tighter SG&A controls, and acceleration of planned facility consolidations within our North America farm grain storage business. Leveraging a recent standardization project for our North America grain storage products, We will be closing our Grand Island, Nebraska facility and transitioning production to other AGI manufacturing facilities, most notably our Westfield operation in Winnipeg, Canada. Strategic decisions that impact our facility footprint are always difficult. We extend our sincere thanks and tremendous appreciation to the outstanding Grand Island team and the employees who have greatly contributed to our success in building our U.S. business. Globally, we continue to advance our product transfer program, securing additional orders and accelerating completion of initial projects that will serve as powerful and important in-region reference sites. We anticipate revenues generated from our product transfer strategy to contribute approximately 4% of total consolidated revenue in 2024 with a clear path to becoming an even more significant contributor over the next several years. For clarity, 2024 product transfer results include incremental orders received subsequent to our press release from earlier this year, where we highlighted $55 million in total product transfer orders received to date. An important aspect of this strategic growth initiative is the minimal capital expenditure required to deliver incremental revenues, which is critical and complementary to our balance sheet discipline. It further speaks to the overall potential of our global business positions. We can meaningfully and efficiently expand our total addressable market to enable accelerated growth across a multi-year timeframe, particularly in high growth regions such as India and Brazil, where we are already well established with local teams and local production capabilities. In addition to product transfers, we continue to realize significant results from our focus on penetrating high growth emerging markets across the Middle East, Africa, and Southeast Asia. These are highly strategic markets with strong growth rates given their large populations and underdeveloped agriculture infrastructure. Deepening our reach in these key markets has been a strategic priority for AGI over the past several years. Emerging markets will be a meaningful contributor to 2024 results, and similar to product transfers, are at the start of an ongoing multi-year growth trend for AGI. As we get into more discussion on the quarter, I'd like to turn to an update on our three strategic corporate priorities. As a reminder, these include profitable organic growth, operational excellence, and balance sheet discipline. For profitable organic growth, revenue and adjusted EBITDA increased sequentially, though came in lower on a year-on-year basis against last year's record results. we continue to expect solid year-on-year growth for the full year through a strong second half performance supported by a record order book, continued execution of large product transfer and emerging market projects, and steady order intake with improving farm segment market conditions. For operational excellence, second quarter margins increased sequentially and were quite strong relative to historical second quarter results. Our margin performance and resilience are key indicators that AGI's margin profile has substantially moved higher, even within challenging market conditions. We remain on track to deliver on full-year margin performance expectations. For balance sheet discipline, we are on pace to achieve our target net debt leverage ratio of 2.5 times in 2024. A heightened focus on free cash flow generation complements ongoing efforts around working capital improvement and CapEx discipline, which will help us accomplish this objective. Now turning to a review of revenue results and trends across our segment and geographies, beginning with our farm segment. Overall farm segment results for the second quarter were challenged as key markets such as the U.S. and Brazil navigated generally soft market conditions. In addition, one of our Canadian facilities experienced a temporary unplanned outage which delayed deliveries expected in Q2 into the second half. This is an unusual event as our planned maintenance program and team are quite strong and do an excellent job of driving high manufacturing utilizations. For clarity, this is a Q2 timing item and will not negatively impact the full year. While the first half of the year was slower for our farm segment, We do see early signs of improving conditions across these markets and momentum that could pick up through the rest of the year. These indicators include demand for storage equipment, increasing inventory turnover across our farm dealer network, and the prospect of a very large harvest. I will provide a bit more color on each of these points. Within our farm product mix, we have seen solid demand for storage and other permanent products. It is important to note that our dealers generally carry minimal inventory of these products. Typically, orders are placed with AGI as they are received from end users, leading to relatively fast and efficient channel activity. Over recent weeks, we have seen stable to increasing demand for storage and other permanent products. This early positive shift in farmer sentiment translates directly to revenue generation and serves as an important leading indicator of potential future demand for other AGI farm products, such as portable handling equipment. For our product lines where we manage and leverage dealer inventory, most notably our portable handling equipment, we are seeing increasing dealer inventory turnover based on direct feedback from our dealer partners, observations from the frontline sales team, and measured uptake from a recent rebate program. Net-net, this is another positive signal that demand is improving. Also supporting our optimism for the farm segment is the positive outlook for the upcoming crop. Grain harvest estimates are robust with expectations for a favorable crop in most grain growing regions, including across North America. We expect the sheer volume of grain that will need to move through the food supply chain will be supportive of further improving farmer sentiment. leading to a positive impact on equipment purchasing decisions for AGI products. Our Canada farm segment revenue declined 6% versus prior year, largely due to the temporary production outage reference earlier. Overall, we feel good about our Canadian farm segment performance on an absolute and relative basis, noting that conditions are more favorable than other farm-centric markets. We are equally optimistic about the second half based on expectations for improving market conditions, generating solid demand across our grain storage, permanent material handling, and portable handling products. As anticipated in our first quarter earnings call, the U.S. farm segment was particularly slow in the second quarter due to cautious purchasing behavior, higher dealer inventories, and tepid farmer sentiment. several notable actions were taken across the quarter to effectively manage costs, capacity, and manufacturing utilization through the slowdown. These actions supported both the right-sizing of business operations relative to second quarter market conditions, as well as structural changes that will serve as an operational excellence tailwind for several quarters to come. Importantly, the outlook for the upcoming crop has improved across the second quarter and appears to be tracking towards a strong harvest. As with Canada farm, this potential for large crop volumes supports an improving farmer sentiment, which is a key demand driver, particularly for grain storage products. To further explore this demand dynamic, it is relevant to note that multi-year low crop commodity prices have led to higher than normal on-farm grain storage inventories across the U.S. When combined with the size of the upcoming harvest, it creates a strong incentive for grain storage investment. With many existing on-farm storage silos remaining full, there potentially would be insufficient storage capacity for the new harvest without investment. This dynamic, along with our tactical adjustments made to further stimulate the market, creates a potential for pronounced rebound in U.S. activity across the second half of the year. Our international farm segment posted a decrease in revenue of 27% versus prior year with challenging market conditions across Brazil and Australia. As with the U.S., several actions were taken in Brazil to ensure our operations aligned with market conditions. To gain operational leverage, we intend to maintain these actions across the second half of the year as market conditions improve. To further drive growth and order intake, we continue to promote our new finance programs. As with the US market, the upcoming harvest in Brazil is expected to be strong, supporting optimism for a strengthening second half. Conditions in Australia have also improved, as measured by our dealer partners working through inventory positions in our portable handling products, with some restocking already occurring. Now turning to our commercial segment. Overall, second quarter commercial segment revenue was flat, as ongoing soft conditions in Canada offset a consistent performance from the U.S. and internationally. Our international regions continue to successfully execute a sizable order book with many key projects now well-progressed and on pace to deliver accelerated results throughout the second half of the year. Equally important and encouraging is a continuing pattern of robust demand and an exceptional order pipeline across our international commercial operations. This heavy demand led to strong order intake and an overall record order book for the quarter, which directly supports the high expectations for the second half of 2024, as well as continued momentum into 2025. Our U.S. commercial segment performed well with consistent demand for grain products, complemented by a rising demand for our food and fertilizer platforms, both of which recently underwent a reorganization process to reposition for growth. We provided guidance back in 2023 that we expect this year to be a turnaround year for our food business, one of our three growth platforms. The food order book is now up approximately 58% over prior year. Combined with the recently implemented initiatives to improve order execution, it is clear that the turnaround is now fully underway. The international commercial business gained significant momentum sequentially, up 50% versus the first quarter, with results also up slightly over last year. Strong first-half momentum, in addition to an exceptional order book, will continue to be a key driver towards an overall record second half of the year for AGI. The EMEA region will be a bright spot for the company in 2024, with a strong second quarter as a precursor to an exceptional second half. The focus and success within emerging markets such as the Middle East and Africa is the foundation for this strong performance. Favorable order intake across the second quarter kept pace with revenue recognition, netting off to keep the EMEA order book at near record levels. Business development activities in Southeast Asia, another prioritized emerging market, remained strong with the order book up 144% versus prior year and sits at its highest level on record by a notable margin. Our Brazil commercial segment is showing strong signs of ramping activity with extremely high order intake, contributing to an overall Brazil commercial order book now up 83% versus prior year, further supporting an outstanding second half. Having progressed through a few challenging quarters of market slowdown, confidence is high that our Brazil business is back on track to delivering strong growth. Finally, a few comments about our India business. Demand for our core rice milling products remained robust, and progress with key product transfer projects is on schedule. notably for storage bins and permanent material handling. With expectations for a favorable monsoon season and an all-time record order book, the business is positioned extremely well going forward. Overall, our international business, largely measured within the commercial segment, is performing extremely, extremely well. Results to date have been in line with expectations, and the outlook for the second half of the year is highly positive. continued demand has tracked well above prior year, leading to a historic record level order book up over 60% versus prior year. Our international business continues to represent a significant growth engine for the company. This is a testament to our exceptional teams, our great geographic positions, and the effectiveness of our growth strategy, in particular, the emerging market and product transfer growth initiatives. Before handing the call over to Jim, I'd like to walk through a few additional comments on the outlook for AGI. We see 2024 coming together largely as anticipated, successfully navigating through a slow U.S. farm market segment within a broader agriculture down cycle. We have updated our full-year adjusted EBITDA guidance to a range of $300 to $310 million, with EBITDA margins greater than 19%. This favorable outlook would extend our multi-year growth trend even amid challenging market conditions. Several factors contribute to our favorable outlook. First, nearly all regions of the business are performing well and or have a solid order book for the remainder of the year. The consolidated order book is at an all-time record for this time of year and up 8% over prior year. Strong contributions are expected from international commercial with key projects underway, increasing confidence for delivery within the second half. We are seeing leading indicators that point to turning sentiment in US and Brazil farm markets, with a positive outlook on the upcoming harvest. Relative to prior years, only an average level of order intake in the second half is required to achieve expected year-on-year growth. Our product transfers and emerging market growth strategies are well on track, And finally, our operational excellence focus and commitment is performing well with notable additional initiatives implemented within Q2 that will accrue incremental benefits as we move forward. Overall, our strategy is working. Despite headwinds across the broader agriculture market, we are confident that our full year results will demonstrate the unique value of our differentiated business model which provides business resilience through diversification across products, markets, and geographies. I will now hand the call over to Jim.

Thank you, Paul, and good morning, everyone. For today's call, I will touch on four areas that include an overview of our second quarter results, an update on key balance sheet metrics, some comments on cash flow, And finally, a quick recap of our outlook for the remainder of the year. On a consolidated basis, second quarter revenues of $352 million decreased 10% and adjusted EBITDA decreased 23%. On an adjusted EBITDA margin basis, our second quarter result of 19.3% was down 325 basis points but is still a very strong result compared to our historic second quarter margin results, demonstrating the resilience of our margins in a variety of operating environments. The year over year margin change is largely due to a challenging market in our U.S. farm segment, which impacted both volume and mix, in addition to a higher proportion of lower margin installation services in South America. As well as ongoing operational improvements across the company, our focused efforts to control costs at the corporate level provided a partial offset to adjusted EBITDA in the quarter. Our adjusted EBITDA excludes approximately 12 million in transaction and transitional costs that are largely one-time items relating to our storage product facility consolidation and product standardization initiative in North America. These types of projects rationalize low-volume product lines, standardize our offering, lower overall costs, simplify the supply chain, and improve capacity utilization, all of which will help reinforce and sustain margin improvements well into the future. Our farm segment delivered $194 million in revenue, adjusted EBITDA of $53 million and margins of 27.4%. As discussed earlier, the soft U.S. market, which persisted from Q1 into Q2, was the main driver of the result. In the commercial segment, revenues of $157 million were flat year-over-year with ongoing difficult conditions in Canadian commercial offset by incremental growth in the U.S. and internationally. Adjusted EBITDA of $23 million declined 20% year-over-year with margins contracting roughly 370 basis points to 14.8%. As mentioned earlier, a higher proportion of lower margin installation service revenue within South America and slow conditions in Canada compress segment margins year over year. 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. From a balance sheet perspective, we remain disciplined with our credit facility usage. Our net debt leverage ratio of 3.1 times decreased from 3.3 times year over year. Our full year adjusted EBITDA guidance and our plan to use free cash flow to accelerate deleveraging provide us with full confidence that we will reach our stated objective of 2.5 times by year end. It is also worth noting that in the quarter, we rolled a maturing tranche of our senior unsecured subordinated debentures into our credit facilities. This is in line with our effort to streamline and simplify our overall capital structure over the coming years. We appreciate the support and cooperation of our banking partners to make this a smooth transaction. Turning to working capital investment, which continues to be a key focus across the organization. Our net investment of $220 million in the second quarter was up slightly from $212 million year over year. On an annualized percentage of sales basis, working capital intensity increased from 14% to 16% year-over-year. However, this comparable period analysis includes the impact of the accruals related to large non-recurring provisions, which have since been settled. Normalizing for this would demonstrate a clear improvement in our total net dollar working capital investment and as a percentage of revenue. Starting next quarter, the large non-recurring provisions will no longer be in the comparable period, so year-over-year comparisons for working capital will no longer need this call-out and will be a bit more straightforward to analyze and understand. In addition, the makeup of our order book, with its weighting towards commercial, required some temporary but strategic investment in working capital in the quarter. Typically, the second quarter is our peak level of working capital investment, but that pattern may change slightly as we move into the second half of the year. Nevertheless, the overall trend points to a clear and ongoing improvement in net working capital, which is a key initiative that supports both our leverage ratio and free cash flow improvement objectives. And now moving on to cash flow. This is an area we discuss frequently internally, and we've taken the step to introduce a free cash flow metric into our MD&A, replacing the prior funds from operations metric. The funds from operation metric was more relevant when AGI operated as an income trust, and we felt that now was the appropriate time to refresh our view of how we measure our cash generating ability. The free cash flow definition draws from three lines on our cash flow statement, beginning with cash provided by operating activities and deducting acquisition of property, plant, and equipment, as well as development of intangibles. From our review, this definition is in line with market standard, though we appreciate individual analysts or investors will often apply their own view to determine free cash flow. Over the last 12 months, our free cash flow has been approximately $65 million, roughly a 25% conversion against suggested EBITDA. We believe that our last 12-month period is the most relevant timeframe to assess free cash flow performance given the potential for quarterly swings in this metric, most often driven by working capital. A last 12-month time frame smooths out quarterly variations into a more relevant figure, which better represents our free cash flow generating ability. Finally, turning to our outlook. For 2024, our adjusted EBITDA guidance now calls for a range of $300 to $310 million. As Paul highlighted in his prepared remarks, the timing of our commercial projects continues to support our expectation for a strong second half amongst other important areas of contribution. In terms of margin levels, on a go-forward basis, we expect our full-year margin levels to stabilize above 19%. We anticipate some further incremental operational excellence gains to accrue to margins offset by a shift in mix towards commercial, which is typically at lower margins than farm. And with that, I'll hand the call back to the operator and open up the lines for questions.