Ag Growth International Inc.

Thank you for standing by. This is the conference operator. Welcome to the AGI third 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 1 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 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 third quarter 2024 results call. I'm joined today by our CFO, Jim Reddick. I will start the call with a review of our third quarter results and other relevant business updates, then turn the call to Jim for additional commentary on the quarter. Following our prepared remarks, the call will be open for questions. I will begin with a few customary comments on safety at AGI. We recently celebrated an outstanding safety result at our manufacturing facility in Saskatoon which achieved a significant industry milestone of 10 years without a lost time safety incident. This is an incredible achievement, which we appropriately celebrated with a special on-site event and an awards ceremony to recognize the team's commitment to safety. This long-term dedication and discipline around safety is the type of result we are aiming for all facilities across AGI. It is a terrific example of our safety culture which aspires to ensure that each and every AGI employee around the world, regardless of where they are working, returns home in the exact same safe condition as they arrived at work. Congratulations to the Saskatoon team. Turning to our results. Our third quarter was lower than our expectations. While nearly all areas of AGI continue to perform well, with good line of sight to fourth quarter and full year results, The U.S. farm market did not pick up from a slow first half, which was a key headwind to third quarter results. In particular, our portable grain handling product lines were impacted. A combination of elevated dealer level inventories, declining farmer income, and low crop prices all contributed to challenging U.S. farm market conditions. We are very encouraged to see a strong third quarter margin result and a stable outlook for margin performance for the full year. This performance was delivered despite the mixed challenges stemming from the soft result for our portable business in the U.S. farm market. Offsetting this margin headwind was a steadfast commitment to cost control and further progress on several operational excellence initiatives aimed at streamlining efficiency across AGI. Our ability to effectively mitigate mixed dynamics and stabilize margin performance is a highly differentiated capability that AGI did not possess just a few short years ago. Activity in the international areas of our commercial segment continues to be robust and encouraging, which is a direct result of our focus on our three strategic growth initiatives, including product transfers, emerging markets, and growth platforms. Progress on these initiatives has led to a strengthening of our commercial segment throughout 2024. Across Q3, We continued that favorable trend by successfully winning several new and significant customer contracts. Our outstanding team supporting Brazil secured several projects with a combined value of approximately $105 million. This impressive Q3 achievement complements the already strong commercial segment order book supported by activity in EMEA and Asia-Pacific. Visibility to a highly active and attractive commercial pipeline across Brazil, EMEA, and Asia Pacific provides potential for further wins and sustains strong performance across 2025. Last quarter, we highlighted several areas that gave us confidence in the second half of 2024. Many of these still hold true, while others have not yet fully materialized. Most businesses across AGI continue to perform well, particularly within international commercial. Our order book remains extremely strong and sits at a record level exiting the third quarter. Favorable international commercial contributions remain on track and will play a critical role in delivering fourth quarter results and a strong start to 2025. The early positive signs in U.S. and Brazil farm markets, particularly the U.S. farm market, did not accelerate. Aggregate dealer inventory levels slowly improved and will take additional time to normalize. U.S. farm market conditions are the contributor to our third quarter results and our revised full-year outlook. Order intake in North America farm remained slow across the third quarter. The strength in the commercial order book has remained impressive and continues to accelerate. These large and sophisticated commercial projects will be significant to both Q4 results and into 2025. Product transfers and emerging market growth strategies are delivering. with revenue on track for low single-digit contribution to total consolidated full-year revenue. Finally, operational excellence initiatives continue to deliver as expected, further supplemented by recently executed actions to streamline costs aligned with market conditions. As we get into more discussion on the quarter, I'd like to provide an update on our three strategic corporate priorities. For profitable organic growth, Our 2024 expectation now calls for a slight decline in year-over-year revenue and adjusted EBITDA, primarily owing to difficult U.S. farm market conditions. Given we are on pace for a near record year for consolidated results amid a very difficult time within our largest market and business, we are pleased to see the resilience of our overall diversification strategy working. Intense efforts to update our growth plans and strategies across our North America farm business are complemented by the strong international commercial outlook and together are supportive of AGI returning to our growth path next year. For operational excellence, third quarter margins were quite strong relative to historical third quarter results, especially after factoring in the impact of farm segment mix. For the full year, we are on pace for a similar margin result to last year. Our ability to demonstrate a consistently strong and stable margin performance is a clear sign of the step change we have achieved in realizing sustainably higher margins through extremely efficient business operations. For balance sheet discipline, our focus on free cash flow generation continues to show sustained improvement. Our leverage ratio and depth levels improved year over year, and we continue to closely monitor with a view of achieving our two-and-a-half times target in 2025. Now turning to a review of our results and trends across segments and geographies, beginning with our farm segment. Overall farm segment results for the third quarter were challenged as the U.S. navigates generally soft market conditions. Farm segment revenue from our Canada region increased 13% versus prior year through a significant increase in demand for permanent equipment and a moderate increase for higher margin portable grain handling products. As a percentage of mix within the farm segment, Canada is less weighted to portable equipment relative to the U.S. owing to the strong storage business and brands we possess in Canada. We continue to carefully monitor order intake in Canada as it helps us to deliver and implement the appropriate plans and tactics to ensure momentum can be sustained in 2025. The U.S. farm segment has been particularly slow this year due to tepid farmer sentiment. Aggregate dealer inventory levels of farm equipment continue to slowly decline and remain above average levels, creating near-term challenges for equipment suppliers, including AGI and our portable product lines. With harvest conditions generally trending favorably and the new crop working through the supply chain, dealer inventories of portable equipment will continue to improve, gradually returning to more balanced levels. This will be supportive of a recovery in our U.S. farm business, an area we will continue to closely monitor. In addition, we are confident that the appropriate business actions have been implemented through Q2 and Q3 to restructure and reposition our farm business to limit the headwind as we look ahead to 2025. These actions include updated rebate and incentive programs to stimulate demand, as well as right-sizing our cost structure to mitigate margin pressure. Farm segment revenue from our international regions decreased 18% year over year. While a very strong first quarter pulled some revenue ahead from the remainder of the year, We are encouraged to see significant increases in margins for our permanent equipment in Brazil from operational efficiency initiatives made at the manufacturing level. As we navigate the current market, the notable grain storage deficit in Brazil suggests that this market will be a good leading indicator of overall farm market recovery. Early business indicators such as quote activity are positive and trending above prior year. Results from Australia were steady in the quarter. The team continues to focus on building out our portable business and dealer network across Australia, especially with production capabilities advancing in India. Now turning to our commercial segment. Commercial activity across all international markets remains robust with EMEA and Asia Pacific helping to stabilize overall third quarter performance. In Canada and the U.S., we navigated slower overall activity while our Brazilian operations were awarded several large-scale projects late in the quarter, which are now fully underway. The Canadian commercial segment is positioned for an uplift in activity and results. Efforts to rebuild the order book are beginning to pay off with a significant increase in orders exiting the third quarter. The order book now sits at a record level for the quarter and up significantly relative to last year. activity in our U.S. commercial segment remains steady. With a healthy order book, this segment is set up for a strong fourth quarter and consistent overall results for the full year. The reorganization of our food platform continues, with revenues stabilizing and the order book remaining strong, though there is more work required on solidifying order execution and margin capture. The international commercial segment was effectively flat in the third quarter as a very strong EMEA result, was offset primarily by Brazil and the broader LATAM region in South America. There is a timing element to be mindful of as our international commercial projects have been generally weighted towards Q4 of this year with several large orders secured late last year. The EMEA region continues to be a bright spot for the company with another strong quarter and a very strong order book, which benefits from solid execution of our emerging markets growth strategy. The focus and success within emerging markets such as the Middle East and Africa is the key contributor to the ongoing momentum and success for the business in Q4 and across 2025. Our Brazilian commercial business is showing significant signs of accelerating results driven by our strategic focus on expanding local capabilities and broadening market segment reach. The benefits of this strategy are clearly visible in our recent signing of approximately $105 million in new projects, which will begin contribution in the fourth quarter and across 2025. An extremely robust pipeline provides added confidence in the potential for this business. Finally, our India business remains a solid contributor to AGI's overall results with a stable third quarter and a sizable increase in order book. The lift in the order book is directly attributed to product transfers with well-established manufacturing capabilities for bins, and permanent material handling, complemented by ongoing demand for rice milling equipment. Overall, our international business is performing extremely well. This performance is a direct result of our strategic shift towards the commercial segment achieved through our three growth initiatives, including product transfers, emerging markets, and growth platforms. The strategy is working, creating accelerated demand across all regions and leading to a strong order book that positions AGI well for our fourth quarter and provides exciting momentum heading into 2025. In total, our international commercial business now represents a sizable majority of the overall company order book and is up 75% relative to prior year. The international commercial segment has been a key driver of this result during a time where our U.S. farm market business navigates market headwinds. With several sizable commercial orders secured and underway, we are well positioned as a strategic partner to support our customers' critical projects around the world. The resilience and diversification of our business model and global footprint continue to drive near record-level annual performance. We have a strong project pipeline and a secure position as an industry leader with significant long-term growth potential. We have updated our full-year guidance to include adjusted EBITDA of approximately 280 million with margins of approximately 19%. The margin outlook is particularly encouraging given the headwind that mixed plays in our results relative to last year. Our ability to sustain a new and higher level of margin performance relative to historic results is a clear indicator of our commitment and capabilities to consistently drive an attractive margin profile going forward. I appreciate your time this morning and 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, including an overview of our third 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, third quarter revenues of $357 million and adjusted EBITDA of $69 million decreased 13% and 19% respectively. On an adjusted EBITDA margin basis, our results of 19.2% is strong compared to our historic third quarter margin levels. This demonstrates the continued resilience of our margins in a variety of operating environments. The year-over-year margin change is primarily due to the mix impact from a softer U.S. farm result, partially offset by ongoing efforts to streamline SG&A at the corporate level and other cost control initiatives implemented across the organization. Our adjusted EBITDA includes approximately $10 million in transaction and transitional costs that are largely related to legal matters, mostly from our digital business, as well as some trailing one-time costs associated with recently announced facility consolidations. Our farm segment delivered $185 million in revenue, adjusted EBITDA of $45 million, and margins of 24.6%. As discussed earlier, the soft US market, which persisted from the first half of the year, was the main driver of the results. In the commercial segment, revenues of $173 million were down slightly year-over-year as solid growth in EMEA and APAC was offset primarily by slower conditions in North America. Adjusted EBITDA of 31 million declined 10% year-over-year, with margins contracting roughly 90 basis points to 17.9%. The margin result was largely attributable to the impact of mix within India and the broader APAC region. partially offset by success in implementing new manufacturing processes in Brazil and EMEA to capture additional gross margin. Moving on to our balance sheet. We remain disciplined with our credit facility usage, making notable repayments against our senior facilities in the corridor. Our net debt leverage ratio of 3.1 times improved from 3.2 times year over year. While we are focused on managing cash flow and adhering to a disciplined capital allocation approach, the combination of lower adjusted EBITDA expectations for the full year and some incremental fourth quarter working capital needs associated with our international commercial business means that we will likely achieve our net debt leverage ratio target of 2.5 times in 2025. Overall, We feel comfortable operating the business with leverage ratios where they are today, but we recognize the importance of achieving our improvement objectives and we will continue to prioritize progress on managing this ratio into 2025. Turning to working capital investment, which continues to be a key focus across the organization, our net investment of $195 million in the third quarter was down from $243 million year over year. On an annualized percentage of revenue basis, working capital intensity decreased from 15% to 14% year over year. Our teams are well established in new processes and procedures to better manage working capital at the facility level, and this is reflected in the long-term trend of improvement in our working capital usage. And now moving on to cash flow. Over the last 12 months, our free cash flow is approximately $111 million, roughly a 40% conversion against adjusted EBITDA, and a 53% improvement relative to the comparable LTM period from the third quarter of last year. The improvement is partially attributable to a significant cash-out flow made in the comparable LTM period related to the resolution of large one-time warranty provisions. Overall, similar to working capital, we are encouraged to see a clear uptrend in our free cash flow metric over recent years, with progress accelerating. We also continue to closely monitor our capital allocation plans and strategies, balancing debt repayment, growth investments, and opportunities to create value for shareholders. Given our view as a management team that AGI's share price does not reflect the intrinsic value of the company, we are preparing a share repurchase program subject to TSX approval as an attractive option to prioritize within our capital allocation strategy. Finally, turning to our outlook. For 2024, our adjusted EBITDA guidance now calls for approximately $280 million. We have clear visibility into project delivery timing, particularly for our international commercial businesses, which will be a key driver for the fourth quarter. In terms of margin levels, we expect our full year margin levels to stabilize at approximately 19%. We anticipate further incremental operational excellence gains to accrue to margins offset by a shift in mix towards commercial, which is generally lower margin than farm. Overall, our ability to stabilize the step change in margins we realized in 2023 is a clear signal of the meaningful progress we have made as a company to consistently drive profitability and performance to a new level. I'll now hand the call back to the operator and open up the lines for questions.