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. To join 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 Housholder, president and CEO of AGI. Please go ahead, sir.

Thank you, operator. Good morning and welcome to AGI 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 US 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 time frame, 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 -on-year basis against last year's record results. We continue to expect solid -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 cat-backed 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 US 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 front line 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 we'll 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 candidate of 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 US 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 volume 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 US. 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 US 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 US, 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 US 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 US 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, remain 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 US 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 transfer is an emerging market growth strategy and our 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 cashflow, 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 EVITA decreased 23%. On an adjusted EVITA margin basis, our second quarter result of .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 US 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 EVITA in the quarter. Our adjusted EVITA 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 EVITA of 53 million and margins of 27.4%. As discussed earlier, the soft US 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 US and internationally. Adjusted EVITA 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 EVITA guidance and our plan to use free cashflow to accelerate the leveraging 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 waiting 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 networking capital, which is a key initiative that supports both our leverage ratio and free cashflow improvement objectives. And now moving on to cashflow. This is an area we discuss frequently internally and we've taken the step to introduce a free cashflow 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 cashflow definition draws from three lines on our cashflow 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 cashflow. Over the last 12 months, our free cashflow has been approximately $65 million, roughly a 25% conversion against adjusted EBITDA. We believe that our last 12 month period is the most relevant timeframe to assess free cashflow performance, given the potential for quarterly swings in this metric, most often driven by working capital. A last 12 month timeframe, smooths out quarterly variations into a more relevant figure, which better represents our free cashflow 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.

Thank you. We will now begin the analyst question and session. Sorry, question and answer session. To join the question queue, you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your hands up before pressing any keys. To withdraw your question, please press star then two. As a reminder, please limit yourself to two questions and rejoin the queue if you have further questions. We'll pause for a moment as callers join the queue. The first question comes from Jacob. Paul from CIBC, please go ahead.

Good morning. How you doing, Jacob? Good, trying to quantify the comments on the department look for the second half of the year. You know, US and Brazil lagged in the first half, but what are you seeing third quarter year to date? It sounds like things are improving. Is this in line year on year?

Yeah, so thanks for the question, Jacob. Obviously the US farm and Brazil farm are something that we're monitoring very closely. A little bit of soft conditions in Q2, particularly in US farm as we commented in the prepared march. That came in slightly below expectations. Offsetting that we saw conditions improve and a number of positive signs across Q2 that supported some optimism into the second half. There's quite a number of items that jumped out for us, Jacob. The first one, we did see steady demand and order intake for our permanent side of equipment for US farm. Most recently, we saw a notable uptick in the inventory turnover for our portable equipment. We initiated Jacob a rebate program for our portable equipment about midway through the second half of the year, partnering up with our dealers to significantly move that inventory and prepare for a stronger second half of the year. That rebate program worked quite successfully and really accelerated towards the end of Q2 and now early into Q3. This gives us a level of confidence that we're making great progress in reducing that inventory level, which was a key measure for us to drive a strong second half of growth. That was absolutely a positive indicator for us. Then just finally, this interesting dynamic with an expected strong harvest forthcoming, coupled with the fact that when we look at the on-farm storage and even into the elevator storage, grain storage levels remain highly elevated compared to prior year. Our estimate has on-farm storage up over 30% versus prior year. When coupled with an expected favorable harvest, it is a positive indicator that we're gonna see an uptick on the permanent side of our equipment as farmers make decisions to purchase this equipment and increase the amount of inventory capacity they have.

Because it's an interesting dynamic in the US with volumes look to be strong for grain, but pricing has been down. In your experience, is it volume that primarily drives a portable business and maybe just a couple of follow-ups there just on how big is US portable now overall farm?

Yeah, great question. And you're spot on, Jacob. That is the dynamic that we're closely watching this year. To answer the question, yes. Volume, we have seen drives demand a little bit more so than the commodity prices, because ultimately there does need to be investment to move and store the grains. Now, no doubt commodity prices have been a headwind this year that is leading to a lower farmer income. The interesting aspect of that is that has led farmers to keep a high level of storage on their facility. So it just further emphasizes the expectation for investment in storage and handling equipment. The second half of your question, portable of the portable product line, our portable equipment in the US is an extremely strong part of our business. We have an excellent market share position in portable. We did have high inventory levels of our portable equipment across Q1 and Q2. That is why the rebate program and the notable progress that we have made over the past several months in moving that inventory, it has been pretty important. We typically see the second half of the year to be the strongest demand portion of the year for our portable equipment. That is typically when a lot of farmers make investments in portable equipment. It's when we run our early order program to support restocking across our network, moving that inventory in advance of this anticipated demand cycle was important. And we saw that occur pretty favorably for us at the end of Q2.

And this is probably still your highest margin product?

This is our highest margin product, absolutely, Jacob. And it is predominantly why you see elevated farm margins relative to commercial margins. It's on the back of our portable equipment. So having this product move and being in a better position on our portable product lines, both across Canada and the US is encouraging for us.

Believe it there, thank you. Thanks, Jacob.

The next question comes from Andrew Wong with RBC Capital Markets. Please go ahead.

Hey, good morning, guys. It's Harrison Reynolds on for Andrew Wong. Really appreciate the commentary so far. Just switching over to commercial, can you guys give us a sense of how much of the larger project revenues are realized as the projects progress versus what gets realized when the projects are completed? And then kind of as a follow-up, can you characterize the size and number of large product project deliveries in H2? Is it possible any of this ends up getting recognized in 2025?

Yeah, that's a fantastic question. And it's one that we've given more and more attention to as we've gained further success in accelerating the growth on the commercial side of our business. Just commenting there for a moment, if you look at our strategic growth initiatives around product transfers, around emerging markets, and even in our growth platforms, they naturally bias towards an improving commercial segment and growth on the international side. So the fact that our commercial order book is up as much as it is, that the international order book is up as much as it is, is a clean measure on the progress that we're making across those growth initiatives. Now, recognizing that that dynamic was going to occur, we did increase our attention into revenue recognition across these commercial projects, because they can be lumpy, because some of them are quite large in magnitude. At the beginning of this year, we implemented a more gradual revenue recognition program on a percentage of complete basis, and that was done largely to mitigate the timing impacts of subtle movements of the delivery of these commercial projects. That's largely in place, particularly for all of our most significant projects. So that decreases our risk of the timing impact that commercial can have on our overall results. So the net answer is that we do not see a high level of risk from a timing standpoint on the delivery of our commercial projects, largely on the back of that percent of complete revenue recognition program that we implemented at the beginning of the year. Now, in terms of the makeup of our commercial order book, size and number, one of the positive aspects of our order book in commercial is the diversity that is included in that order book. We do have a number of very large commercial projects. I would put that number around three to four. We've had three to four large commercial projects that have been always scheduled to deliver in Q3 and more notably in Q4. Now, those handful of very large projects are complemented by an extensive portfolio of very high number of small and medium projects. So that diversification in project size and number within our commercial order book also adds a level of resiliency to our revenue recognition.

Awesome, that's very helpful, thanks so much.

You got it.

The next question comes from Steve Hansen with Raymond James, please go ahead.

Yeah, thanks Ed for the time, appreciate it. Paul, I just wanna follow up on Brazil in particular. The market there has understandably been going through some changes, commercial versus on-farm, but one of your large competitors had reported fairly strong on-farm results at least on a -over-year basis and have talked about some of the stimulation programs going on down there with the government. That wasn't referenced necessarily directly by you guys, but just curious maybe as to why you might be lagging there to some degree in that context and how important you might think those stimulation programs are from a support standpoint or on a support basis,

thanks. Yeah, fantastic Steve, thanks for the question. And yeah, we'll keep a very close eye on our valuable competitor down there in Brazil. So we did get a look at their results. If you look at our Brazil business, I'll talk a little bit about farm and commercial. I'm gonna start with commercial just quickly because I know the point of your question is on the farm segment. But yeah, we've seen overall very strong performance from our Brazil business. Just commenting quickly, our Brazil order book entering into the second half of the year is net-net up 50% over prior year. So in total, we feel very good about our Brazil business, particularly where it is gonna end up in the second half of the year. Now more specific to your comment around farm, our Q2 results on the farm segment for Brazil were soft. If you recall, Steve, we had a very strong performance in Q1 Brazil farm. Net-net year to date, our farm business in Brazil is directly in line with where we were last year. In addition to that, we do agree that a number of the programs that have been initiated in Brazil are positive indicators that that farm segment is going to continue to improve combined with a favorable outlook on the harvest. Net-net, we would agree that the second half of

the year within the farm segment accelerated results. So, okay,

that's helpful. Thank you. I appreciate that comment. Maybe just going back to, I think there was a reference, Jim, perhaps, you're referencing maybe a working capital build on the commercial side just to manage through some of these large projects in the Q3. Did I catch that right? I think Q2 is typically the peak. You said there could be some sort of shift, and I'm guessing that's related to these larger commercial projects. Maybe if you could clarify that, that'd be helpful.

Yeah, thanks, Steve. Yeah, so normally in our business, our working capital grows early part of the year, Q1, Q2, and then starts to level off Q3 and Q4. That's a typical pattern we've seen for many years. As we continue to diversify and get stronger internationally and in the commercial space, as the mix of our commercial and farm levels out, this year is unique in the sense that commercial is a little bit of a higher mix than farm, or we expect it to be higher mix than farm. And with that, and some of the projects that are underway, we've begun to build on those projects and procuring the inventory. So we expect this year, our working capital to slightly uptick in Q3 and then right size in Q4. So typically the back half of the year, you see a release of working capital or a drop in our working capital, and it contributes a lot to strong cash that we generate in our free cash for the back half of the year. We expect to see that pattern this year as well, but it'll be more skewed towards Q4 as we continue to fill out the order book or fill out the orders and produce for the commercial projects for the back half of the year.

Okay, thank you, appreciate the comments.

The next question comes from Gary Ho with Desjardins Capital Markets. Please go ahead.

Thanks, good morning. So I think in your prepared remarks, you mentioned shifting sentiment on the farm side, particularly from dealer channel checks. So just curious how much of your revised 300 to 310 guidance reflects this better sentiment. Just wanna size up this variable. And I think you also mentioned that you need average order intake in the second half to hit this number, is that right? And then a related question, I think Q3 is usually stronger than Q4, but Paul, you just mentioned in one of the questions that there's larger commercial projects delivering in Q4. How should we think about the split between the two quarters?

Terrific, Gary. Thanks so much for those questions. And yeah, let's start with the farm segment, guidance order intake. We do see within our business a shifting sentiment within our farmers, particularly in the US, as we mentioned in the prepared remarks, Canada has actually been pretty steady, has looked good, continues to look good. That business is largely performing consistent with prior year with a very positive order book and a solid outlook for the second half. So really the softness has been in the US. That's where we've been focusing our attention. The positive sentiment, it comes from some of the points that we've made. Largely the outlook for the harvest continues to improve. Some of the most recent expectations that we've seen is for a record harvest. There is gonna be a very strong harvest. That's quite a lot of brain for the farmers to move in store. Historically, that has led to a pretty significant uptick in order intake and order deliveries in the second half. So that is a key measure of the improving sentiment that we are expecting and starting to see. And then the second one, which really is key, we touched on it with Jacob's comments is the accelerated movement of the inventory for our portable product line across our dealer network. That inventory was rather high in Q1 entering Q2. It was part of the reasons why we were expecting softness in the Q2 results, particularly with US Farm, with a low level of orders within the quarter for portable. Now that that inventory has favorably moved, it does position us much better heading into the second half of the year. Those are key elements for the improving sentiment. That is consistent with our guidance and where we left our guidance at 300 to 310, expecting growth this year over prior year. As we looked at where we are at this point of the year, the revenue that we have booked, our order book that we'll book in the second half, you can do the numbers, that leaves an element of order intake that we need to achieve and deliver within the quarter. We analyze that in a great level of detail. We compare that expected order intake across the past four to five years and the amount of order intake that we would require to hit our guidance is actually on the lower end of what we have achieved over the past four to five years. So that gives us a little bit more confidence in our ability to achieve the results and deliver growth over prior year.

And Gary, just to build, and so I guess the second part of your question was on the Q3 versus Q4, how to think about it. Our business, historically, Q2 and Q3 are the stronger quarters with lower Q1 and Q4. And that's certainly been the case with the mix of farm versus commercial we've achieved historically. But as we continue to grow our commercial business, that business is not as consistent as the farm in terms of when the results come in. And so what we're seeing this year is more back half-weighted, more Q4 weighted. And so relative to prior years, our expectations are to have a good Q3, but a very strong Q4. And so as you think about allocating out the remainder of the earnings we need to achieve for the back half of the year, it will be slightly more skewed towards Q4 versus Q3. That's part of the reason why it's challenging for us to give quarterly guidance, which we don't do, is because of that dynamic. I mean, unlike our agriculture peers, farm is much more predictable. You can tell the patterns, you know when it's gonna hit in the quarters. The commercial business, as you're probably aware, can be a little bit more lumpier in a year. And so predicting out exactly that quarter can be difficult. So we think of our business in an annual cycle, and that's typically why we just stick to the annual guidance. But this year, where we're at, at this point in the year, I can tell you to be more weighted towards Q4 versus Q3.

Okay, that's really helpful. And then my second question, no, you can't comment much on the solicited offer, but now that it's out there and the board has rejected it, has management and board discussed kind of what other ways could you do to kind of service shareholder value outside of just executing on your three pillars? I feel like with the softer first half, might have pushed kind of board to react kind of more proactively. I wanna hear your thoughts on that.

Yeah, fantastic question, Gary. 100% in that management has continued conversation with the very supportive board on the importance of driving shareholder value. That is front and center in quite a lot of the conversations that we had. Obviously, we just finished up our board meeting in which that topic was very relevant. The answer to the question on how we expect to deliver shareholder value and where we see the biggest opportunity, it is in our strategy, delivering to our strategy, executing against our strategy. There is a high level of confidence in the direction that we're going. Our strategy able to deliver not only on 2024, but on the several years thereafter. And we ultimately feel that is by far and away, the best opportunity to deliver shareholder value, which remains obviously a top priority.

Okay, perfect. Answer those comments.

The next question comes from team Monticello with ATB Capital Markets. Please go ahead.

Hey, good morning, everyone. How you doing there, Tim? Most of my, doing great. Most of my questions have been answered, but I'm just curious if you've got a little bit more context on, I guess, margin enhancement initiatives, in particular, the facility closure and the expectations for the costs of that closure through the back half of the year. And then also, where do you stand in terms of, I guess, the inning you're in, in terms of margin enhancement initiatives? You still have a lot to go. Where do you think the margin could end up trending towards over a longer period of time?

That's terrific, terrific. And it's a great topic for us to explore here, Tim, that the margin enhancement operational excellence. So thank you very much for this question. Let me take that question and comment a little bit specifically into the second half of the year and our confidence around delivering margins greater than 19%. We've got a lot of positive initiatives that were underway and that were launched across Q2 that are supportive towards our margin guidance in the second half of the year. First and foremost, we actually do see mix improving in the second half of the year. We commented on some of the mixed headwinds that we had in Q2 on a product line perspective, portable slightly down relative to permanent within the Q2, that improving in the second half of the year. Some mix within our commercial segment with a high level of third party that we saw in Q2, that mix will improve in the second half of the year, particularly as some of these large projects come into play. So even before commenting on operational excellence, there's a number of favorable tailwinds from a margin standpoint as we get into the second half of the year. Turning a little bit to operational excellence, it remains a key focus for us, a highlight of our performance. The effort around the closure of the Grand Island facility, it is quite notable that we'll have a tangible impact on results this year. As well as be a tailwind for us in 2025. And this is worth commenting on because it is an example of the opportunity that we've had from an operational excellence standpoint that we've touched on, really for the past 12 months or so. And it is focused and centered around our opportunity to standardize and rationalize out some of the complexity that is currently inherent in our product lines. In this particular example, Tim, we had two different storage bins, storage silo product lines across Canada in the US. Step one was to move to a standard bin design. This is not only a key step from an operational excellence standpoint, but also very important for us to continue to support and grow our farm business. We now have and will be launching a superior bin design than we've had in the past that will enable us to continue to partner up with our dealers and accelerate our performance within the market. So that product standardization directly supports growth and business results. Now that we have standardized that product, we're able to more efficiently leverage our manufacturing footprint. And in this case, it gave us the opportunity to close our Grand Island facility, which is always difficult to make those type of decisions, and then move that product line up to our manufacturing facility in Canada. That will leave us with a much more efficient, cost-effective manufacturing capability for our important grain storage silo business across North America. That standardization not only helps strive manufacturing efficiency, but cascades through our entire integrated supply chain. It allows us to partner better with our suppliers. We're able to rationalize our supplier base and improve our leverage with suppliers to drive down input costs, as another example. So this was a pretty significant move for us and is gonna be quite favorable for us into 2025. So that's for the latter part of your question, what inning are we in? What other opportunities exist? This is a tangible example of the notable steps that we can take that would provide a step change at our margin level and at our performance level. There are additional opportunities out there of similar size and magnitude that we continue to evaluate. Some of those opportunities, Tim, do exist in North America. And as Jim has commented in the past, they also exist out in India. That is likely the next step that we will take that would be a strategic initiative to consolidate our manufacturing footprint and drive efficiencies in our cost structure and supply chain. So what inning are we in? Using the baseball analogy, I'd say we've progressed from where we were previously in the third inning to now we're in the fourth, fifth type of inning. So there's still a fair amount of positive runway going forward. We continue to see this as a lever that we can use to not only maintain and grow margins, but also be supportive of growth. So ultimately we do see margins remaining in that 19, above that 19% range, and then using the additional benefits to support ongoing growth.

Okay, that's helpful. And then last one for me, just on the product transfers, you provided some guidance and I think that implies something in the mid 60 range for revenue recognition in 2024. Are you getting visibility into 2025 product transfer demand? And I guess, can you talk a little bit about, your order flow for product transfers and how we should be thinking about that longer term?

Yeah, fantastic question Tim. We're extremely excited about the progress that the teams have made with the product transfers. You got the math absolutely correct. That is what we're expecting for 2024. We're quite pleased from a product transfer standpoint that that's contributing, approximately 4% of our total revenue. We see this continuing to improve heading into 2025. Our pipeline, our quote pipeline in product transfers remains quite strong. We continue to have order intake specifically related to product transfers. So we see 2025 as an opportunity for us to take another incremental step forward in the contributions product transfers is making to our total growth. A lot of this is centered around Brazil and India and bias to the commercial side of our business. So the net impact of continued progress and product transfers will be accelerated growth from the international side of our business under the strength of a growing commercial segment. But a lot of positive activity in Brazil from a food segment, feed segment and fertilizer segment standpoint, those are three of the items that have been part of our product transfer activity. And then also over in India where we have launched our bin and permanent material handling capabilities. We are seeing favorable markets and good demand and interest for those product lines in those markets.

Once again, if you have a question, please press start then one. The next question comes from Steve Hansen with Raymond James, please go ahead.

Yeah, hey guys, thanks for the follow up. I apologize if it was already referenced, but I wanted to go back to the free cash flow conversion topic. Commend you for moving towards that metric. I think it's probably a bit more broadly understood and focused on, but the 25% conversion number I think you referenced Jim, how should we think about that progress going forward and where you expect to be over time?

Yeah, good question and thanks. And so we moved away from that payout ratio analysis that we had done in the past and trying to tie directly into the cash flow statement. And then, so the operating cash flows and then just removing our CAFEx spend to come up with that free cash flow calculation. 25% is the ratio for the LTM basis. We see that continuing through the rest of this year and progressing up to the 30 to 40% range on a go forward basis is what you can expect in our business. And that presumes an appropriate level of investment in CAFEx into the initiatives that we've talked about, the expansion opportunities from an organic growth perspective. So quite comfortable with that number.

Appreciate that, thank you.

This concludes the question and answer session. I would like to turn the conference back over to Paul Householder for any closing remarks.

Thank you very much operator. Really appreciate everybody calling into our results call here in Q2. And as we do with the majority of our results call, just a special thanks to the outstanding team, all the efforts and contributions. And we look forward to a very strong second half of the year, thank you.

This brings to a close today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.