Ag Growth International Inc.

Thank you for standing by. This is the conference operator. Welcome to the AGI second 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 second quarter M, D, and 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 second 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. With significant progress achieved on key safety KPIs in recent years, we continue to focus on proactive measures to enhance our safety culture. A key component of this is our newly implemented biweekly safety forum. This brings together a global team of safety leaders, coordinators, and plant managers to share best practices, discuss challenges, and develop solutions. This new meeting cadence is a direct connection to and extension of our AGI-wide annual safety week, which I've discussed in the past and was held in April earlier this year. We look forward to continuing to evolve and progress the safety culture here at AGI. Turning to our second quarter results, I am pleased to report Q2 adjusted EBITDA of $54 million which came in at the high end of our expectations. Consolidated revenue for the quarter was $349 million, approximately flat compared to Q2 2024. Our commercial segment continued its strong performance, helping to offset market softness in the farm segment. This performance underscores the resilience of our diversified business model and the benefits of our strategic focus on international and commercial growth bolstered by our capabilities to manage large and comprehensive projects, which are further enabled through product transfers. Our commercial segment continues to excel with strong revenue growth and EBITDA contribution of $37 million, up 58% year-over-year, with positive results from most areas within this segment. We are executing several long-term projects across various international regions, with Brazil and EMEA remaining key growth engines. These regions have seen significant project wins and successful execution of large and comprehensive project solutions. Our integrated offering, which includes engineering, design, equipment supply, and installation, has been a key differentiator. Not to be overlooked, our North America commercial business delivered favorable results across Q2, leveraging a healthy order book. All three of these commercial businesses Brazil, EMEA, and North America delivered impressive double digit EBITDA growth year over year. As a result, adjusted EBITDA margin percent for the overall commercial segment increased to 16.6% from 14.8% in Q2 2024, reflecting our excellent customer relationships, project execution capabilities, and strong revenue growth. Encouragingly, Our quoting pipeline is strong and active across a number of our international regions, providing good visibility and potential that the current momentum can be sustained through the second half of 2025 and into 2026. Brazil, in particular, is an area we have seen strong activity with numerous ongoing projects and several upcoming opportunities of varying sizes. In our view, the pace of activity in Brazil has been driven by three factors, all of which we are well positioned to capitalize. First is the significant push into value-added processing applications. From corn ethanol to soybean crushing, fertilizer blending and feed milling, to food processing, this sector-wide push in Brazil to expand processing capacity has created significant opportunities for AGI and directly leverages our expanded capabilities and product transfers. Second is the overall demand for grain movement and handling. With Brazil now the top soybean producer and exporter globally, the demand for increased efficiency and capacity across inland terminals, export ports, and other collection points has increased substantially. This is a great fit for our broad commercial engineering and product offerings. And third is the demand for on-farm storage. As we are all aware, the grain storage capacity deficit in Brazil is significant. With an expanding crop size and two seasonal harvests, the need for additional storage capacity is also a key driver of the pace of project work we are seeing in Brazil. Our core on-farm storage and handling offering will support this attractive long-term trend. We are seeing similar types of market dynamics and trends across other international geographies, which rounds out the strength we are experiencing in our financial results, order book, pipeline, and quoting activity globally. Overall, our first half of the year in commercial is a clear indication that our differentiated strategy is providing value to our customers and delivering favorable financial results for our shareholders. As expected, the farm segment continued to navigate challenging market conditions through the second quarter. Soft commodity prices, shifting tariff policies, uncertainty on subsidy programs, and elevated dealer channel inventories all contributed to cautious farmer sentiment, particularly in North America. Adjusted EBITDA margin percent in the farm segment compressed year over year due to lower volumes, with some offset from ongoing cost containment initiatives. The timing and shape of an eventual farm market recovery are unclear, and we look towards the upcoming harvest as a possible event to prompt demand and help improve dealer channel inventory levels, though we do not anticipate this to become clear for several months. Overall, the farm segment remains subject to limited visibility into the second half of 2025. Turning to our order book, I am pleased to report that our consolidated order book stands at $660 million, up 4% year-over-year. Similar to the first quarter, the commercial segment was a key contributor with sustained momentum and demand for large-scale projects, particularly in Brazil. Other areas, including LATAM, were also solid contributors to the order book, helping to offset the relative weakness in farm segment order intake. The commercial order book is up 15% year-over-year and accounts for approximately 85% of the overall order book, providing great visibility to our full-year expectations for this segment, as well as into early 2026. The global clothing pipeline remains highly active across Brazil, EMEA, India, and other areas, providing strong potential for the momentum in commercial to be sustained. As example, subsequent to the quarter, significant momentum in our international commercial regions continued with several notable order commitments secured across a mix of geographies with an aggregate value in excess of $100 million. These are incremental to the $660 million order book reference as of the end of the second quarter. Based on the cadence and milestones of these projects, some revenue will be recognized from these contracts in 2025, and more importantly, they will contribute to our 2026 results. Having some established contracts that are already forming the foundation for next year's results is helpful to ensure the considerable momentum we've earned this year continues. Now moving on to a few comments on tariffs. Tariff policies remain dynamic. Leveraging a dedicated internal team, we have successfully implemented several mitigating actions, including negotiations with steel suppliers in both the U.S. and Canada, as well as targeted pricing actions. Through these tactical adjustments and based on current regulations, we anticipate only a modest direct cost impact to AGI in 2025, which has been incorporated into our outlook. We continue to closely monitor as tariffs could impact customer sentiment and overall equipment demand. And finally, a few comments on our outlook. We reiterate our outlook for full-year 2025 guidance for adjusted EBITDA of at least $225 million. With the continued strength in international commercial and the uncertainty in our farm segment, the mix of contributions that underpin the 2025 million guidance has shifted slightly with our favorable expectations for additional strength in commercial to be offset by tempered expectations for the farm segment netting out to unchanged full year guidance levels. We are encouraged by the recent overall revenue performance of the company with second quarter revenue demonstrating a measurable improvement on a sequential basis. We expect top line momentum to continue into the second half of the year as the overall company returns to growth supported by the strong order book and the exceptional performance of the international commercial business. Based on the cadence of the project work in international commercial, including the recently awarded projects received subsequent to the quarter, it should weight our second half EBITDA contributions towards the fourth quarter. In closing, I want to extend my sincere appreciation to our exceptional global team for their commitment and outstanding efforts. The collaboration and resilience are critical to driving our results and growth. Jim, over to you.

Thank you, Paul, and good morning, everyone. Today, I will touch on a few areas that include a quick overview of our second 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, revenue totaled $349 million, holding steady with our Q2 2024 results. Our commercial segment continues to perform strongly, helping to counterbalance persistent challenges in the farm segment. Adjusted EBITDA of $54 million was near the high end of our expectations. Adjusted EBITDA margins of 15.6% were below prior year, primarily reflecting the increased commercial segment mix with some offset achieved through operational excellence initiatives aimed at optimizing our SG&A spend, including marketing, headcount, and professional fees. Before we talk about the balance sheet, there are two items worth expanding on. One is the other segment expenses that is deducted from adjusted EBITDA, and the second is our transactional, transitional, and other line item in our adjusted EBITDA reconciliation. Our other segment expenses increased to $12 million from $8 million year over year. As a reminder, these are the SG&A costs and other income that are not specifically allocated to either the farm or commercial segment. There are two main drivers of the increase. The first is that we have received less miscellaneous other income due to some favorable sales tax recoveries in the prior year. The second is related to variable compensation accruals and commission expenses which have been aligned to reflect the exceptional performance of our commercial business. Our total company SG&A costs that include these other expenses as well as expenses allocated to the farm and commercial segments continue to improve year over year as a percentage of revenue. Going forward, the approximate level of these other segment expenses should be around $10 million on a quarterly basis. The second callout is our transactional, transitional, and other line item amounts in the adjusted EBITDA reconciliation. These amounts decreased from $12 million to negative $6 million year over year. This is attributable to a recovery of insurance claims as well as an approximate $9 million reduction in fees associated with the strategic review process conducted in 2024, offset by one-time operational restructuring charges. Going forward, we expect the transactional, transitional, and other line item to be a positive number, but trending towards being smaller and less variable than what we've reported historically. Moving on to our balance sheet and cash flow. As expected, our net debt leverage ratio increased to 3.9 times in the quarter, while our free cash flow was approximately breakeven. Both of these figures reflect the sizable but temporary working capital investments required to support some of the large-scale projects we are working on, particularly in Brazil. More specifically, For large projects where project financing is required, AGI has provided or arranged financing options for customers. As discussed last quarter, we are actively in the process of setting up a structure with a third-party partner to monetize significant amounts of the receivables for our Brazilian business, which are largely captured in the non-current accounts receivable line item on our balance sheet. This would have the benefit of simultaneously reducing our working capital and improving our net debt leverage ratio as well as increasing our free cash flow. Recall that last year we progressed through a similar exercise of monetizing farm segment receivables in Brazil, though on a smaller scale. We have experience and relationships that are valuable as we move through this process again. We are targeting the end of the third quarter to finalize the effort to monetize these receivables. Overall, our current objective is to stabilize our net debt leverage ratio in the low to mid three times range by the end of the year. And finally, just a few comments about our capital spending plans for the year. We have reduced our capital budget expectations for 2025. We are now targeting approximately $40 million for the full year, down from our prior estimate of $70 million. The $40 million is inclusive of maintenance, ERP implementation, intangibles, and routine maintenance costs. The main variance between the prior $70 million estimate is movement of our India consolidation project into early 2026 instead of the second half of this year. As a reminder, we have purchased land for the new site in India and have performed summation so that we are in an optimal position to start execution in 2026. One other comment for clarity, the capital budget does not include the temporary working capital requirements necessary to support several of our large commercial projects. We remain very focused on our leverage ratios and free cash flow generation as priority metrics that are relevant to all stakeholders. Our capex expenditures influence both and which is why we routinely review our overall capital allocation strategy and plans. We look forward to accelerating our exciting long-term CAPEX plans, which will be supported by successfully monetizing our Brazilian receivables, as well as an eventual return to more normalized farm market conditions. I'll now hand the call back to the operator and open up the lines for any questions.