Ag Growth International Inc.

Thank you for standing by. This is the conference operator. Welcome to the AGI first quarter 2025 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. Before we begin, we caution listeners that this call contains forward-looking information and that actual results could differ materially from such forecasts or projections. Further, in preparing the forward-looking information, certain material factors and assumptions were used by management. Additional information about the material factors that could cause actual results to differ materially from the forecasts or projections and the material factors and assumptions used by management in preparing the forward-looking information are contained in our fourth quarter MD&A and press release, which are available on the AGI website. 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 first quarter 2025 results call. I'm joined today by our CFO, Jim Reddick. I'll start the call with a review of our results, then turn the call to Jim for additional commentary on the quarter. We will then open the call up for questions. As usual, I'd like to begin today's call with a few comments that highlight our ongoing commitment to safety at AGI. In late April, our global teams came together to participate in our fifth annual Safety Week, a cornerstone event for safety at AGI. This is an important opportunity for our teams to unite around a common priority in making our operations and facilities as safe as possible. This year's theme was Spot It, Report It, fix it, and was focused on proactive, near-miss, and hazard identification. With safety metrics improving significantly over recent years, we continue to shift to a more proactive approach for detecting and neutralizing potential safety risks before they become a safety incident. Safety is a key part of our culture, and I am privileged to participate in events such as our annual Safety Week. Thank you to all who participated and supported making this another safety milestone event at AGI. Turning to our first quarter results, I'm pleased to report Q1 adjusted EBITDA of 31 million, which came in just above the high end of our expectations for the quarter. Consolidated revenue for the quarter was 287 million, a decrease of 9% compared to Q1 2024, with significant strength in our commercial segment, helping to offset some of the ongoing industry-wide challenges that largely impact our North America farm business. Our overall first quarter performance, inclusive of our strong order book, reflects the resilience and strength of our diversified business model, which has allowed the company to continue to drive strong results amidst challenging conditions in certain regions. The commercial segment continued to perform exceptionally well. with first quarter revenue increasing by 53% year over year to $192 million. Our international regions, particularly Brazil and EMEA, drove this growth through the execution and delivery of several large-scale turnkey projects. Commercial revenue from Brazil and EMEA increased significantly relative to prior year, demonstrating solid momentum in our two largest international business units. The commercial segment's adjusted EBITDA margin expanded to 12.8%, reflecting the successful execution of our operational excellence initiatives and the benefit of some higher margin turnkey projects. Revenue in our North America commercial business was down slightly in the quarter, though the team has been diligent in managing the quoting pipeline and was able to secure several new project wins in the quarter. The North America commercial order book, Excluding Foods, is up nearly 40%, and along with a robust pipeline, sets the stage for solid performance in upcoming quarters. Overall, our strategic focus on building and establishing the right processes, teams, and capabilities in the commercial segment over the last few years continues to deliver favorable results. As expected, our farm segment faced market headwinds in the first quarter, particularly across North America. Crop prices remain low while higher dealer inventories steadily improve, though remain elevated. Volatile tariff policies and a lack of clarity of potential government farmer subsidies in the U.S. create a degree of uncertainty that impacts farmer sentiment in both the U.S. and Canada. The farm segment remains subject to these challenging conditions, which are expected to last through at least the first half of 2025, with limited visibility to the second half. We remain focused on what we can control and are closely managing our costs across the farm business, from direct labor, manufacturing and supply chain costs, to overheads and office costs. In addition, we remain in close contact with our farm dealers, ensuring we are fully aware of and coordinated on any shifts in market conditions. We will continue to closely manage the situation and look towards progressing through the growing season towards harvest, as a potential catalyst to stir demand and improve market conditions. Turning to our order book, I'm pleased to report that our consolidated order book stands at a near record level of $725 million, up 5% year-over-year. The commercial segment has been a critical contributor to this result, with sustained momentum in demand for large-scale projects and engineered solutions, particularly in Brazil, where the order book is up over 200%. Other areas, including North America commercial, are also solid contributors to the order book, helping to offset relative weakness in farm segment order intake. The overall commercial order book is up 26% year-over-year, providing great visibility to our full-year expectations for that segment. The global quoting pipeline remains active, particularly commercial, as we monitor any potential broader impacts the ongoing tariff discussions could have on the global economic outlook and capital spending. In addition, we observed an encouraging trend in our farm order book, which increased 25% sequentially versus Q4 2024, with order intake ticking up for permanent storage and handling products across North America. While it's too early to declare a definitive change in where we are in the North America farm market cycle, this is an encouraging data point and is an area we continue to monitor closely. Moving on to a few other key topics relative for AGI in the first quarter and the remainder of the year. Tariffs continue to be an area we regularly monitor for developments and potential impacts to AGI. As of today, the current tariff policies outline that U.S. MCA compliant products will be exempt from additional tariffs, which includes AGI's Canadian-made equipment. That said, the Canadian-made steel content that goes into Canadian-made storage and permanent handling products sold into the U.S. is currently subject to a 25% tariff. Assuming current policies and regulations remain in place, we estimate a relatively minor direct cost impact in 2025 attributable to newly imposed tariffs, and this has been factored into our outlook. Overall, tariff and trade policies have been a prominent topic for global markets with the full potential impact remaining to be seen. Tariff and trade policies could ultimately impact our current financial outlook should it hamper farmer sentiment aggregate equipment demand, and the global economy more broadly. We remain vigilant and are actively reviewing and implementing options to mitigate tariff or trade-related actions, including inventory stocking, supply chain strategies, and manufacturing options, among other tactics. Now moving on to our 2025 guidance. We reiterate our outlook for full-year 2025 guidance for adjusted EBITDA of at least $225 million. For the second quarter, we are targeting adjusted EBITDA in a range of approximately 50 to 55 million, with a similar pattern to Q1 in terms of farm softness being offset by strength in commercial. As we move into the second half of the year, we anticipate the extent of softness in our year-over-year comparisons for the farm segment to become less pronounced as the second half of 2024 experience the initial impact of the current North America farm cyclical downturn. Through extensive engagement with our top shareholders, a topic that has surfaced is the analysis and understanding of the current ag cycle and what a mid-cycle EBITDA could look like for AGI. Of course, we do not know when the cycle will turn or the pace at which a recovery will take place. We can make some commentary on this topic based on previous ag cycles and our current performance, which we believe are helpful for listeners who are trying to understand what an eventual recovery could look like. Based on our analysis and support from third parties, the farm segment cycle has a pronounced reset about once every 20 years, which generally lasts a few years before returning to and extending beyond the prior cycle peaks. During this period, we have and will continue to navigate the farm segment dynamics as well as focus on growing our commercial segment, all while implementing ongoing company-wide operational efficiency improvements. Before the reset in 2023, the farm segment cycle was peaking and AGI was nearing 300 million in adjusted EBITDA. This was prior to the current momentum of our commercial segment growth initiatives more recently materializing from successful execution of our differentiated strategy. As we look forward over the next few years, we expect the farm segment to fully recover and our commercial segment to grow at a steady pace. With these expectations, we would be in excess of 300 million EBITDA within our near-term planning horizon, though exact timing will depend largely on the North America farm recovery. To conclude, I want to express my gratitude to our outstanding global team who continue to drive AGI forward each and every day. While we navigate a variety of market challenges and uncertainty, I'm energized by the teamwork, collaboration and success we are having in executing our growth strategies, particularly for international commercial. Jim, over to you.

Thank you, Paul, and good morning, everyone. Today, I will touch on four areas that include a quick overview of our first quarter results, an update on key balance sheet metrics, some comments on cash flow, and a quick recap of our capital allocation priorities. On a consolidated basis, as expected, revenue and adjusted EBITDA were down from Q1 2025 amid challenging conditions in the North American farm market. This was partially offset by the momentum in our commercial segment driven by key projects in Brazil and EMEA. Adjusted EBITDA margins of 10.9% were down from 15.9% in Q1 2024. This is mostly due to a higher weighting of commercial revenue relative to farm. Cost containment on the SG&A side helped to mitigate further slippage in the Q1 2025 margin results. One item worth expanding on is our other segment expenses that are deducted from adjusted EBITDA, which increased to $12 million from $8 million year over year, largely due to the timing of certain expenses. As a reminder, These are largely unallocated corporate costs among a few other miscellaneous items. In the quarter, we experienced an uptick in certain legal costs as well as a decrease in other income, which drove the increase. Going forward, the approximate level of these costs should be around $10 million on a quarterly basis. Moving on to our balance sheet, our net debt leverage ratio of 3.6 times was driven largely by the anticipated temporary increase in our working capital needs for our commercial segment. In a moment, I'll provide some further commentary on our ability to reduce working capital throughout the year, which will help improve our leverage ratio, though for 2025, our current objective is to stabilize our net debt leverage ratio in the mid 3x range. Next, let's look at cash flow. On an LTM basis, our free cash flow is approximately $41 million. As outlined in previous calls, across 2025, free cash flow will be leveraged to support working capital requirements in the commercial segment. That said, we are pleased to see positive cash flow generation despite the temporary increase in working capital needs. We note that while $41 million is a bit lower than what we've generated in the last few years. It's still well above our free cash flow profile from four or five years ago, signaling a better balance between our investment plans and financial performance. Another cash flow topic to review is connected to our growth in international commercial, particularly in Brazil. For large projects where project financing is required, AGI has provided or arranged financing options for our customers. Last year, we were successful in monetizing receivables for our Brazilian farm business with a third-party partner. We are actively progressing a similar structure for our commercial business in Brazil. This would have the benefit of reducing our working capital and improving our leverage ratio. We expect to have further updates on our plans in this area in the second or third quarter of this year. And finally, an update on our capital allocation priorities, which generally remain consistent with our prior discussion. One area we prioritized early in the quarter was executing our share repurchase program. In the first quarter, we repurchased $9 million in shares, bringing our total repurchase program since inception late in 2024 to a total of $20 million with approximately 425,000 shares repurchased or about 2% of total shares outstanding. We are now reassessing further share repurchase plans as we navigate through the first half of 2025. Other key areas of capital spending in 2025 include operational improvements such as the ERP implementation. Our capital budget for 2025 inclusive of maintenance, ERP intangibles, and select operational improvement opportunities remains approximately $70 million. Importantly, and for clarity, this budget does not include the temporary working capital requirements necessary to support several of our large commercial projects. I'll now hand the call back to the operator and open up the lines for questions.