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 0. 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 MDNA 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 the 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 inventory steadily improve, though remain elevated. Volatile tariff policies and a lack of clarity of potential government farmer subsidies in the US create a degree of uncertainty that impacts farmer sentiment in both the US 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 outlined that US 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 US 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 cashflow, 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 the MIA. Adjusted EBITDA margins of .9% were down from .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 cashflow. On an LTM basis, our free cashflow is approximately $41 million. As outlined in previous calls, across 2025, free cashflow will be leveraged to support working capital requirements in the commercial segment. That said, we are pleased to see positive cashflow 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 cashflow profile from four or five years ago, signaling a better balance between our investment plans and financial performance. Another cashflow 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.

Thank you. We will now begin the analyst question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset 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 will pause for a moment as callers join the queue. The first question comes from Kyle McPhee with Cormark Securities. Please go ahead.

Hi, everyone. First one from me, can you guide us to how much more capital may need to go into the working capital lay accounts for CBO for these commercial projects that you're executing on? You classified it as kind of long-term, not non-current accounts receivable. That indicated maybe over a year before you could monetize this.

Yes, thank you, Kyle. Appreciate the question. So a couple of things just as background. So this is in response to what we're seeing is some incredible opportunities in places like Brazil and EMEA where we've been able to capitalize on the work we've been doing over the past few years to participate and win some of these large-scale, what we call turnkey projects. So these are bigger in scope, bigger in nature, and some of the requirements of these projects, particularly in Brazil, are for us to help the customer from a financing perspective. The financing arrangements typically are anywhere from three to five years. However, this is not unusual for us. So we did this last year where in the farm segment we had the same scenario where we were able to arrange a financing structure that enabled third parties to do the financing for those projects. So we expect to do the exact same thing here. From a timing perspective, you're talking anywhere from two to four months to have everything in place. And so what you'll see in our results, and you saw it in Q1, is a temporary increase, particularly in our non-current receivables. And then as we put in place the financing structure, that will be reduced significantly.

Got it, okay, thanks for that additional color on that. Second one for me, now you're benefiting from major tailwinds for the commercial side of your business, and I have two kinds of questions about that. So first, how much of this is concentrated in maybe a handful of major projects that you're executing and may not repeat next year versus it being more widespread across a lot of activity around the globe? And then second, regardless of that answer, do you think you can still be building on top of such a strong year for commercial as you get into 2026? Like how much visibility do you have on more year over year growth next year, commercial backlog replenishment throughout the rest of this year?

Yeah, Kyle, thanks for that question. We are quite pleased with the progress that we've been making on our commercial segment, particularly on the international side. It's great to see the results of the strategy that we put in place several years ago. The team has done an outstanding job executing against that strategy and driving success in the growth levers that we've articulated here in the past few calls, our product transfers, emerging markets, and our growth platforms. When you look at the diversification of the project that we've won in the commercial space, we do have very good diversification. We continue to win what we would categorize as small and medium sized commercial projects. They are quite important, as you're alluding to, Kyle. We want that strong diversification in our order book. So quite a number of complimented projects in that small and medium size, both represented in Brazil, as well as EMEA, Southeast Asia, and more recently down into India. Good point, we are, and we're very pleased to be winning some of the large commercial projects, large turnkey projects, most notably down in Brazil. Within the past six months, we secured a number of large orders at the tail end of Q3 and across Q4, which will support our results in 2025. We also, Kyle, have a very active quotation pipeline of both small and medium as well as large scale projects. So going forward to your point, we expect to continue to be able to secure some large projects, complimented by a strong intake of small and medium sized projects, which does give us a level of confidence that the progress that we've been making from the commercial standpoint will translate into 2026. Further to that, we are quite excited about the progress in the execution of our strategic growth platforms. All of these were identified and promoted because of our expectation that they're gonna have quite a lot of runway in terms of contributing strong growth out in the foreseeable future. So even beyond 2026, we see a potential and opportunity for good commercial performance out for the next two, three years and beyond.

Great, appreciate all that, Kyle. And I'm gonna squeeze in one more just on that working capital dynamic. When you potentially monetize those commercial long-term receivables, is that feeding into your goal of keeping leverage in the mid threes or would that be an incremental benefit?

Well, so what we'll see through the year, and this is not unusual, working capital typically is a build for us in the first half of the year and then comes down quite significantly through the back half of the year. It will be a little bit higher this year, the build, through the mid half until we put in place that financing structure and then it will drop quite significantly. The one thing that is a bit of a wild card still is the farm segment in the back half of the year. You know, to the extent that that stays where we expect, we would expect overall leverage ratios to be down in the low threes. That's net of the financing program for these large growth opportunities.

OK, that's it for me. Thank

you.

Thanks, Kyle.

The next question comes from Krista Friesen with CIBC. Please go ahead.

Hi, thanks for taking my question. I was just wondering if you can maybe walk us through how you're thinking about margins on your 225 guidance kind of through the rest of the year.

Yeah, sure, Krista. Thanks for that question. Obviously, we've done quite a lot of work on margins over the past several years, significantly improving our overall margin performance. Heading into 2025, we did expect and continue to expect that we'll see some margin pressure versus 2024 predominantly driven from mix. Our farm segment is the higher margin segment relative to commercial. And as we step through the challenges in the North America farm market and see that continue to be under some pressure in 2025, we expect from a margin standpoint that to translate to a mixed headwind, creating some margin softness. Consistent with how we guided in Q4 of last year, we would expect 2025 to perform in a range of 17 to 19% EBITDA margin. The one billed on top of that, Krista, that we are now monitoring is the direct cost impact of tariffs. That wasn't initially in our guidance, the 17 to 19% as of this point in time. We believe the cost impact from tariffs to be nominal and we still maintain an expectation of perform within that EBITDA margin expectation. However, the overall tariff scenario is quite dynamic and we'll continue to monitor as that progresses.

Okay, great. And then maybe just on that, are there any sort of additional kind of cost optimization levers that you can pull on at this point in time? Or are we kind of where you'd like to be on that front?

Yeah, thanks Krista. Operational excellence remains one of our three strategic areas of focus. We do have additional opportunities going forward that we would execute on. One of them, Jim mentioned, I'll mention a couple of here briefly, Krista, one of them Jim mentioned is the implementation of our ERP system. We are making good progress on that. We expect that activity to continue through 2025 and 2026 as the implementation of ERP gets rolled out across our global platform that will translate into operational efficiencies that would be visible within our cost structure. We continue to focus on quite a number of initiatives. We've made outstanding progress from a manufacturing footprint consolidation standpoint. We've consolidated 15 facilities over the past three years, moving operations into other existing facilities. There is opportunity for additional facility consolidation both within North America and notably in India. We've mentioned several times our intention of moving forward with a manufacturing expansion and consolidation in India. That would result in five to six facilities being consolidated down into one. The final one, Krista, that I'll point out, an initiative that we've just kind of kicked off within the past six months is product rationalization across our North America farm portfolio. This is another example of really simplifying our product offerings, which would then flow through everything from supply chain engineering to manufacturing. So there are opportunities and we continue to prioritize those to improve the efficiency and effectiveness of our operations and get to a more efficient cost structure.

Great, thanks. I'll jump back in the queue.

Thanks, Krista.

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

Thanks, good morning. Paul, just wanted to dig through your analysis on the ag cycle. So as you look across your business, maybe if you assume the mid-cycle being indexed to 100, what would the peak and trough cycle be and where are we today? I'm assuming this is the most relevant to your farm segment. Commercials should be relatively stable. And then a follow on, the 300 million that you mentioned, is that more a mid-cycle number or is that, were we looking at kind of more of a peak?

Yeah, thanks, Gary. That is an outstanding question. The current ag cycle that we are stepping through is obviously a very important topic. We've been studying past ag cycles to get more familiar and increase our expectations of what a peak to peak might look like, what a peak to trough might look like. We've referenced back to ag cycles in 2008 and in the early 90s as indicators. What we've seen, Gary, from that analysis is those two ag cycles or a typical pronounced ag cycle, peak to peak can last in duration anywhere from four to six years. And that typically as you come out, you come out to a peak, an elevated peak of where you were going in. That is what we've concluded from the analysis of prior ag cycles. Obviously not a direct indicator of what we can conclude going forward, but more of a reference. Based on our current situation, we would say that we are down in that trough portion of the cycle. That's largely where the industry's expectation is that 2025 will be the trough year. And then we'll start to see some improvements in 2026. Obviously a variable in all that is the para situation. So when you talk about our expectations of the $300 million in EBITDA that we referenced in our opening comments, that would be more of a mid cycle point in that correction. Not coming all the way out to the ending peak, but what we could expect as we progress through the improvements from the trough performance.

Great. Okay. That's great, Keller. Thanks for that. Then my following question, just with all the tariff noise between China and US, there's speculation Brazil could stand out to benefit. Wondering if you're beginning to see that on the ground. I know in the past you've identified Brazil as a key international growth driver. And I think in an earlier question, you kind of talked about the quotation pipeline in Brazil being pretty strong. If you can elaborate on that, that'd be great.

Yeah, great question, Gary. One of the things that we are very pleased with and encouraged with is the overall geographic footprint of our business. We've got very strong positions in all of the key ag geographies around the world, excluding China. So very strong presence across North America, Brazil, EMEA, India, Asia Pacific. One of the things that helps us out with is managing the dynamics of global impacts of the ag market. And more specifically, as one area may be experiencing specific challenges that oftentimes translates into a tailwind in another region as the global ag supply chain adjusts. To your point, Gary, that is a bit of our expectation of what we could see as an impact of tariffs and the situation between the US and China, particularly on soybeans as China potentially shifts away from a soybean supply in the US that could translate to an increase in soybean demand down in Brazil. We are seeing a significant amount of commercial activity in Brazil. That is also supported by that potential dynamic as Brazil continues to invest in and build out the infrastructure necessary to move commodities such as corn and soybean out to ports to support that trade activity. So not only, Gary, would you expect to see improvements on the farm segment, absolutely you would see improvements on the commercial segment, which we are seeing right now. On the farm segment, we are seeing some encouraging signs, albeit early, that we could see improvements in the second half of the year down in Brazil. The most notable one is our quotation activity, which is up just about twofold of where it was this time prior year. We are still a bit early in the cycle down in Brazil on when decisions are made and capital equipment are made. We expect that to happen within the next few months, and we will continue to monitor that closely.

Okay, perfect. Thanks for those comments. Those are my two.

Yeah, you got it, Gary.

The next question comes from Michael Topholm with TD Cowan. Please go ahead.

Thank you. Good morning.

Hey, Michael.

Good morning. Regarding the farm segment, I wonder if you can talk a little bit more about dealer inventory levels in farms, specifically, I guess, where they sit now versus what would be normal for this time of year, and then perhaps you can maybe provide your thoughts on when we could see a return to normal levels.

Yeah, thanks, Michael. Occurring challenges in the North America farm segment as we step through that ag cycle, one of the things that has contributed to some of the challenges that we are seeing is higher inventory levels across the dealers. I would build on that, Michael, and just clarify that that's really an overall channel situation. We've made and will continue to make progress in improving the inventory position across our dealers for our product. And when I mention our product, that's specifically our portable equipment. Our dealers no longer inventory the permanent side, the bins, and the permanent material handling. It's just the portable equipment. We've continued to make progress. We ran that rebate program, started in Q3 prior year. We ran it through Q4, even into a little bit of Q1. That was helpful, driving down inventories. We expect our inventory levels, Michael, to continue to come down across Q2 and Q3. Our ultimate goal is to have our inventory levels back at a normal point in advance of the early quarter program that would occur in that October, November time frame this year. That's what we're working towards, and that is our current expectations of when we can see our inventory level return to a more normal state.

Great. That's helpful. Thank you. And then I want to talk about commercial for a minute, I guess, just thinking about your response to Gary's last question there, talking about Brazil and potentially the dynamics there as it relates to reaction and response to tariff and trade uncertainty. But I'm thinking about commercial more broadly. It sounds like you're very upbeat on the outlook for that segment. I'm just wondering, when you have discussions with customers, sort of at the margin, are there any customers that have expressed to you that they're getting a little bit more cautious in any way just while they're sort of navigating the current trade-related uncertainties that exist right now?

Yeah, Michael, the question is right on point for sure. It's something that we're paying a very close attention to given the extremely positive momentum right now that we do have in the commercial segment. I mentioned that our pipeline is quite robust. We're currently negotiating quite a number of large deals, particularly in Brazil, but across our entire international commercial segment. We're listening very closely for those type of signals. We have not heard them yet. We'll continue to monitor. That's obviously subject to change as we progress through a lot of the tariff uncertainty. But at this point in time, Michael, we have not received those types of indications yet from our customers or from the market.

Okay, that's great. I will turn it over. Thank you.

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

Yeah, good morning, guys. Thanks for the time. Just want to circle back to the U.S. farm side. One of the challenges we've been hearing about with respect to U.S. portable products in particular is the ability to pass on price, again, in the context of higher elevated inventories out there and pretty volatile steel movements. How do we think about the profile, the marketing profile that is, of the portable segment as you get sort of this recovery pullback? Is it going to be also sort of like below normal until we get back to this normal inventory level? Like how are the dynamics out there in terms of passing on steel price in the context of all this inventory?

Yeah, great question, Steve. We obviously enjoy an outstanding business for our portable equipment, particularly in North America as well as global, you know, extending out to Australia. We have a leading market position both in Canada and in particularly U.S., very strong brand and brand recognition and an outstanding dealer network that does give us good strength and good positioning in the market. We continue to closely monitor the cost and the cost dynamics that are occurring in 2025. We have seen some inflationary pressure on our cost stack, as you note, Steve, particularly on steel. We did move forward with pricing actions in Q1 relative to our portable equipment so that we can sustain margins and compensate for the cost pressures that we're seeing. We're obviously very cautious on managing price versus demand and volumes going forward, but at this point in time, we're optimistic that we will be able to hold on to our margin position across our portable equipment while we progress through the challenging market conditions.

Okay, great. That's good to hear. Just to cling back to the Brazil side again, I think I asked a similar question last quarter, but the performance sounds like it continues to be quite strong, which is encouraging. It is still another departure, though, from one of the larger competitors in the market. I'm just trying to understand what would allow you to outperform so well down there relative to the largest peer. Is it a difference in strategy, product type? How do you attribute that difference in performance?

Yes, Steve, thanks for that. We are extremely encouraged about the performance that we're seeing down in Brazil on the several other parts of our international commercial business directly supported by our strategy. Just to build on your point, in Brazil, we did see revenues in Q1 versus prior year up over 100%. An extremely strong result down in Brazil. That's inclusive of FARM, but obviously carried by our commercial segment. It is a direct result of our strategy. The team that we have down there, we have an outstanding team. Our capabilities are differentiated relative to our peers, particularly our ability to successfully win and execute large, complex turnkey projects. We do believe this is a direct result of the strategy and decisions that we've made and capabilities that we've built over the past two plus years that have positioned us well to capitalize on the exciting market that is developing on the commercial side down in Brazil.

Okay, helpful. Then just real quick one for Jim, perhaps. The free cash flow slide is helpful, as are many of the new slides, frankly, in the deck. Thanks for that. I just want to get a sense for where you think the free cash flow conversion should trend towards here over time. I understand there's some old working capital stuff, but where are we targeting for free cash flow conversion over time?

Yes, so we've been marching up towards a free cash flow conversion rate, depending on how you want to look at it. If you look at it versus EBITDA, of around 30% is what we're managing towards. It'll grow to that level through this year as we fund some of those large opportunities in Brazil and EMEA, but as we put in place the financing structures, we've made quite a bit of progress over the past couple of years. A lot of the one-time costs are now in the rearview mirror. Looking forward, we have a lot of confidence in getting to that 30% level on a regular basis.

Okay, Brie, thanks.

Thanks, Steve.

The next question comes from Andrew Wong with RBC Capital Markets. Please go ahead. Hey, good morning. Thanks for taking my questions.

Just regarding that mid-cycle EBITDA guidance, can you maybe just provide some more details on the revenue that's assumed for a farming commercial? Is that using an 18 to 19%? Is that like margin guidance?

Yeah, great question, Andrew. Yeah, so when we look at that mid-cycle EBITDA analysis, again, that was in response to a lot of excellent conversations that we've had with our shareholders to look to provide some visibility what our performance could look like as we come out of the current cycle that we're seeing in North America Farm. So you can see from the chart provided, we are expecting a recovery in our North America Farm segment complemented by continued growth. In our commercial segment, from a margin standpoint, our expectation is that along with the recovery, we're going to see an experience at tailwind to margins as farm does come back, being our higher margin segment. That should put us back into that 18 to 20% operating range for EBITDA margins. That's currently our expectation and the potential of the business as we recover from the current North America ag cycle headwinds.

Okay, thank you. And then just going back to the working capital needs for some of these large projects. So I understand that it's one time. It's non-recurring. But I'm just kind of curious, like as you target these larger projects into the future, and as you grow the business, and you target larger and larger projects, would these also have larger and higher working capital requirements?

Yeah, they will. You're right. The commercial business working capital needs are a little different than the farm side of our business needs. But what's great about the opportunities that we're exploring, they're with extremely large, well-established customers. And what we're finding in various places around the world is that there's a lot of appetite to help in the financing of these projects. And so, to the extent that our business mix continues to be more heavily weighted to these opportunities, we expect to be able to participate in them and find great partners that will assist with the financing so that we can continue to invest and benefit from what we're seeing around the world right now is this upsurge in the build-out of the infrastructure in a lot of the countries around the world.

Okay, so just to clarify, as that mix switches more towards commercial, would your working capital requirements relative to what that mix previously was, does that go up as a percentage of your sales or does that stay the same? Yeah,

so it does go up in the short term, but then as we finance them, it comes back to normal expected levels. Our operating approach for these as we move forward is to finance the growth opportunities entirely with getting these financing programs in place so that it will not be a requirement for us to fund a lot of the customer financing requirements. So, said differently, working capital percentage should be a trend to normal historical levels despite the mix shift into these large commercial projects. Hopefully, that was clear.

Yeah, got it. Thank you.

Thanks.

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

Thanks very much. Can you hear me? All right. I'll just unmute for a second. Can we just talk a little bit about the health of the US farmer currently? Obviously, this ag cycle is a little bit different than past ones given trade uncertainties. If you've got cost inflation, you've got sort of a budding trade with China, and China is a pretty large customer of US ag products. Can you just talk about the characteristics of the sentiment that you're seeing from US farmers on a few different aspects that I just mentioned?

Yeah, fantastic question, Tim. Let's start with the tail end of your question, the farmer sentiment. I would characterize that, Tim, at the beginning of the year as cautiously optimistic. The sentiment was that we could start to see some improvements in the market towards the tail end of 2025. That was in advance of the tariff discussions. At that point in time, the farmers still were seeing some pressure on farmer income. Commodity prices, corn and soybean would be the most relevant benchmarks, have remained under pressure, while input costs have remained high or slightly increasing. Despite that, there was a cautious optimism to farmer sentiment in the second half of the year prior to tariffs. The tariff situation is certainly putting pressure on that cautious optimism, and as we discussed, could have an impact on demand expectations in the second half of the year, particularly as you noted, Tim, the specific impact of that China-US trade dynamic for commodities, and as we've noted previously, soybean in particular. We're seeing some of that even play out within the most recent weeks, albeit early days as we'll have to monitor going forward. In summary, I would put farmer sentiment right around, cautiously optimistic with some pressure on that sentiment based on tariffs and the uncertainty that is created in the second half of the year. Farmer income still under some pressure. One of the barometers that we are watching there as the tailwind would be government subsidies. There's still a lack of clarity there, which could improve as we step through the second half.

In terms of the portable side of the business, with dealer inventories elevated currently, can you speak a little bit about where your revenue for portable stands today relative to mid-cycle levels and how you expect that to change as those inventory levels at the dealers hits normalized levels? Do you see even a sharp inflection or is that a moderate improvement in sales of the portable side?

Yeah, thanks for that question, Tim. Obviously, the current ag cycle is having a direct impact on our North America farm business. We've got the two sides of it, both portable and permanent. They've both been under pressure over the past six months, and we would expect that to continue as we work through the ag cycle. As mentioned previously, our dealers and the channel in general does inventory portable equipment while they do not inventory permanent equipment. This is an interesting dynamic for us. It does enable us to watch very carefully the order intake of our permanent equipment as a potential leading indicator to a shift in sentiment and an improvement in demand. That's where we would expect improvements to manifest first is on the permanent side, which would then correlate to an improvement in our inventory and then be followed up by an increase in demand on our portable equipment. How that curve looks like in terms of a recovery coming out, really can't comment on. It was a pretty sharp decline going into this ag cycle. That's not a direct indicator of what it could look like coming out. What I can say is across our operations and supply chain, we're not only staying close to the market to have good visibility to these potential leading indicators, but preparing ourselves to be able to react to either scenario, whether that's a sharp increase or a more steady increase. Our intention is to be prepared to be able to respond quickly to those changing market conditions.

Okay, that's helpful. Then last one for me, just again on the working capital side. As you move into these third party financing regions for commercial projects, can you speak a little bit to potential margin impacts? I assume you'd be earning some margin on the financing portion of those contracts. Is there a negative margin impact when you move to a third party? What's the quantum of working capital outstanding currently that you expect to move into third party financing arrangements to the mid part of the year?

Yes, as we do finance some of these opportunities, there is a cost. However, that cost is factored in as we work with the customer and build the pricing to the customer. So from a margin impact perspective, there would not be any impact from how we see the business for the year. And as Paul talked about our margin expectations for the year, all of that has been factored in. So we're quite comfortable with how we're pricing these opportunities and making sure that the cost of the financing has been built in with the customer. In terms of confidence level, very high level of confidence. As I mentioned earlier, these structures are things that we've done in the past. They're also primarily with vehicles that are very common in the markets that we're working in. And the customer base of ours are very, very high, strongly rated customers. So they're very attractive to a number of financing institutions. So we do not expect any concerns at all. As a matter of fact, we have options that we're evaluating. And so before we rush into doing any of these, we evaluate several bids from financing parties. So the market is quite strong for these financing packages.

Sorry, I meant more the quantum of like the dollar value of working capital that is currently outstanding that you think you can move into these financing arrangements. Just trying to get a handle on kind of what the net cash flow impact is going to be from these financing arrangements through the year.

Yeah, so we will finance a significant portion of the new business that we enter into. So now it'll vary depending on the nature of the customer and the project itself. We will do some of the receivables ourselves, but the majority of it will get financed by these third parties. In terms of absolute dollars, I've talked about before our free cash flow expectations will trend towards that 20 to 30 percent of EBITDAB. There may be a temporary flag through the year as we put these packages together and then offload it. But that's how you should be thinking about in terms of the quantum.

Okay, appreciate it. I'll turn it back.

Thanks, Tim. The next question comes from Maxim Sichev with National Bank Financial. Please go ahead. Hi, good morning. Hi, you're next.

I just had one quick follow-up in relation to what was seen in the US farmer subsidy dynamic. Because, let me find out if I'm wrong. So we had like an ad hoc package that was passed in December. And so what are you guys seeing on the ground right now? Is it the fact that those subsidies are not sort of cycling through or there's still, huddling around whether it's even possible to pay out those packages? Can we just maybe try to sort of provide a bit more color there so we can have better grasp on potentially the back half of the year for the farm? Thanks.

Yeah, thanks, Mike and Max. And that's absolutely one of the variables that we're closely watching across North America farm. And just building on that, we're obviously keeping a close eye on commodity prices and trade. We'd love to see corn get above $5. That's a pretty positive indicator that farmers have now moved into, squarely into a profitability range. Obviously, the government subsidies that could roll out here in the second half would be another tailwind. Specifically, to your question, I think the areas that we're watching specifically on government subsidies is the timing of when they roll out as well as where and how those subsidies will be applied. Still a little bit of lack of clarity and certainty on that as we get better visibility to when they will roll out, how and where they will be provided. That gives us an indication of what kind of tailwind that could lead to from a capital equipment purchase standpoint. That's specifically what we're watching.

Okay. But is it hard to say that you're not accounting for those subsidies to make up the back half of the year or are you sending some sort of 20% probability? How, again, should we be thinking about that?

Our outlook for North America farm in the second half of the year remains pretty cautious until we get better visibility on where demand is, how order intake starts to come in, impacts on tariffs as well as the government subsidies. In aggregate, we're taking a very cautious view on farm for the second half of the years. That's inclusive of the government subsidies.

Okay. That's super helpful. Thank you so much.

You got an ask.

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

Yeah. Thanks very much. I really appreciate everybody joining the call today. I would just like to conclude with a thanks and appreciation to the outstanding performance of our global teams. The resiliency that our teams have shown over the past six to nine months with some of the challenges that we're seeing in some of our markets has been extraordinary, complemented by the outstanding execution of our international and commercial teams in terms of driving our growth strategy. Really appreciate it being nicely done.

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