Ag Growth International Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 30, 2024

There are 10 speakers on the call.

Operator

Would now like to turn the conference over to Paul Householder, President and CEO of AGI.

Operator

Please go ahead, sir.

Speaker 1

Thank you, operator. Good morning, and welcome to AGI's Q1 2024 results call. I'm joined today by our CFO, Jim Redick. I'll start the call with a review of our results, then turn the call to Jim for additional commentary on the quarter. Following our prepared remarks, the call will be opened for questions.

Speaker 1

To start today's call, I will begin with a few customary comments on safety at AGI. Now firmly established as an important tradition at AGI, our Annual Safety Week is held each year in April. This is the 4th year holding the event, which includes full representation from all of AGI's facilities worldwide. The theme this year is safer acts and safer conditions. While we have made great progress in the KPIs we use to track safety performance, we remain vigilant about enhancing safety at AGI each and every day.

Speaker 1

I would like to briefly transition and address an important topic we are excited to share, AGI's purpose and mission. These are critical concepts that galvanize our teams internally and guide perception and understanding externally. At AGI, our purpose is to fundamentally support the elimination of food loss and hunger. At the end of the day, this is AGI's contribution to the world we all live in and share. To achieve this purpose, we must execute our mission.

Speaker 1

We encapsulate our mission statement as to advance storage, handling and processing solutions that strengthen and secure the global food supply chain. We believe this is a compelling and worthwhile call to action for all our employees, customers and shareholders. From a capital markets perspective, we believe our purpose and mission tie into a succinct statement to describe AGI's current business, key underlying drivers and our contribution to sustainability and societal objectives, a global food security pure play. We take our purpose and mission seriously and use it as one of several lenses which guide our decision making as an organization. Prior to providing a recap of our key strategic priorities and the KPIs we use to track progress and performance, I'd like to make a few comments on the market conditions we are observing across the globe.

Speaker 1

We are increasingly seeing challenging conditions within the farm market, specifically in the U. S, Brazil and Australia, which will have a negative impact on 2nd quarter performance. We are closely monitoring these conditions and are adjusting regional operations as appropriate. There will be better visibility to the Global Farm segment as we move into the second half of the year. Offsetting the outlook and cautious view in our Farm business, our commercial business is well positioned to outperform, enabled by key strategic growth initiatives including the focus on emerging markets and progressing product transfers.

Speaker 1

Based on the composition of the order book, the commercial segment performance is weighted to the second half of the year. Our current outlook for the year remains positive as further detailed in a review of our corporate priorities, including profitable organic growth, operational excellence and balance sheet discipline. For profitable organic growth, 1st quarter revenue dipped relative to the prior year, while EBITDA increased direction with expectations in terms of 2024 results being biased to the second half of the year. Overall, our near record order book continues to reinforce the prospect of full year growth and achievement of our guidance. Adjusted EBITDA growth will be weighted towards our commercial business and supported by a continued operational excellence focus.

Speaker 1

For operational excellence, the Q1 continued to solidify our sustained performance at heightened margins, up over 200 basis points relative to prior year. With the Q1 typically being our lowest margin quarter, we are committed to sustaining overall margin levels towards the 19% range on a full year basis. For balance sheet discipline, we remain on track to achieve our target net debt leverage ratio in 2024. Through Q1, the ratio remained below 3 times level and is a notable improvement over the 3.6 times level from the Q1 of last year. Moving ahead with a review of our Q1 performance by segment.

Speaker 1

Strength in the Farm segment within the quarter was offset by timing of our Commercial segment, which is currently focused on upfront design, engineering and manufacturing work to accommodate a sizable order book weighted towards second half delivery. Our first quarter results show the extent and consistency of the margin levels that AGI can deliver. With revenue lower than prior year, adjusted EBITDA improved 4% year over year through the support of over 200 basis points of margin expansion. Improved gross margins from operational improved gross margins from operational excellence initiatives implemented throughout 2023 and overall cost discipline supported this result. Exiting the quarter, our order book was up approximately 12%, an extremely encouraging position given the challenging market conditions across the farm segment and underscoring the resiliency of our business.

Speaker 1

We have and are continuing to adjust our farm business operations, leveraging our centralized demand planning and revenue management processes and integrated supply chain and manufacturing teams. Within our commercial segment, global demand remained strong, order intake was favorable and the pipeline is robust. This is indicative of a broad level of positive performance across our EMEA, India, Southeast Asia, U. S. And Brazil commercial businesses.

Speaker 1

We continue to work closely with our valued commercial customers partner on delivering projects flawlessly. Turning to a review of revenue results and trends across our segments and geographies. Overall, 1st quarter Farm segment revenue grew by 4% year over year. In our Canada Farm segment, revenue declined 2% versus prior year. This segment faced a very challenging comparable period from the Q1 of 2020 3.

Speaker 1

Within the quarter, strong demand for our portable grain handling equipment continued to drive results. In our U. S. Farm segment, revenue was flat versus prior year with an even mix of contributions from portable and permanent grain handling equipment sales. Order intake was soft through the quarter as farmers monitor the outlook for the upcoming crop.

Speaker 1

U. S. Farm is a key market for us and as outlined earlier, we are carefully monitoring market conditions making adjustments across the business as necessary. Our International Farm segment posted an increase in revenue of 41% versus prior year. Strong results in Brazil from key project deliveries help support results and offset some weakness from other areas, notably Australia.

Speaker 1

Based on market conditions and our order book mix, we expect Brazil to be weighted more towards commercial as the year progresses. However, we've recently announced some key financing programs and options for farm segment customers in Brazil, a new sales tool we plan to fully leverage across all channels to help combat overall difficult operating conditions. Now turning to Commercial segment results. Our Canadian Commercial segment faced difficult conditions throughout the Q1. Customers are moving cautiously and timing of new projects is unclear in many instances.

Speaker 1

The team is focused on building our pipeline and continuing in-depth discussions about their plans, keeping AGI well positioned to win orders as projects eventually move forward. Our U. S. Commercial segment fared better than Canada, though still down slightly year over year. Healthy customer demand for grain handling in storage equipment and resurging demand for fertilizer equipment was offset by a slower result in the food side of our commercial business.

Speaker 1

Lower food performance was due to challenges faced during order execution. Overall demand for our food products and solution remains strong. The food order book is up approximately 35%, outpacing overall order book growth, providing a solid setup for increasing momentum into the second quarter second half as initiatives to improve order execution are implemented. The International Commercial segment result was driven largely by project timing. The order book for International is extremely strong, broadly across EMEA, Brazil and India.

Speaker 1

All regions have directly benefited from our strategic growth initiatives. EMEA has increased focus on achieving positive results across emerging markets, specifically Middle East and Africa. India and Brazil have been a key focus for product transfers, gaining significant traction within fertilizer, grain storage and material handling solutions. The positive outlook for our second half remains as projects progress through execution and move into delivery. As we enter the Q2 and look ahead for the rest of the year, we remain squarely focused on key near term objectives that will enable us to continue growing the business throughout 2024 and beyond.

Speaker 1

I'll provide a few comments on each and note the items included here are presented in no particular order. Executing the commercial order book. We have an exciting mix of larger scale projects, particularly in our international regions, which we are focused on executing to plan. Successful commissioning of these projects will serve as a value reference site further supporting order pipeline development activity. Completing initial set of product transfers.

Speaker 1

Our first wave of product transfers continues to progress with several now transitioning into execution and order delivery, particularly in India and Brazil. We continue to focus on and support these product transfers to ensure they are fully ramped up in advance of moving on to other priorities, including potential net new product transfer initiatives. Monitoring North America Farm Market. As noted above and in our disclosure, we are carefully monitoring customer behavior in this critical market, anticipating a challenging Q2 while proactively working through scenarios to swiftly react to a range of market outcomes. Cash flow focus.

Speaker 1

We have steadily increased focus on our cash flow metrics to ensure we are fully capturing the benefits of our growing EBITDA. We are reviewing potential KPIs in this area to ensure we are transparent and accountable to all parties on how we are performing. Achieving target balance sheet metrics. As mentioned earlier, we are now under 3x leverage and are confident that reaching 2.5 or lower is achievable in 2024, most likely in the second half of the year. Sustaining margin performance.

Speaker 1

We are confident that AGI has stepped up into a new bracket of margin performance through the benefit of our operational excellence capabilities. The higher commercial segment mix and softening North America farm business is a headwind to overall consolidated margins. So overall, we expect full year margins to be relatively consistent with 2023. 2025 India Expansion. Finally, we continue preparations and detailed planning for an eventual India expansion investment.

Speaker 1

Having secured land for a future site, we are steadily progressing detailed plans for a new facility anticipating additional spending and groundbreaking in 2025. Overall, we are encouraged with how we are currently positioned with the value of our diversified and resilient business model clearly on display in both our results and our outlook. Against the backdrop of tightening conditions in certain farm markets, our ability to deliver adjusted EBITDA growth and meaningful margin expansion in Q1, along with a strong order book and favorable full year outlook is exceptional. Before handing the call over to Jim, I'd like to reiterate our commitment to delivering a strong 2024, successfully navigating both the challenges and opportunities in front of us. We have an exceptional global team focused on providing value to our customer partners through an extensive product line, rigorous project execution and increasingly streamlined operations.

Speaker 1

AGI will continue to benefit from the growing importance of food security and building a highly functioning and efficient global food supply chain, a critical trend that is important to each and every one of us. I will now hand the call over to Jim.

Speaker 2

Thank you, Paul, and good morning, everyone. For today's call, I'll touch on 4 areas, including an overview of our Q1 results, an update on balance sheet metrics, a few comments on cash flow and finally a recap of our outlook for the remainder of the year. On a consolidated basis, 1st quarter revenues of $315,000,000 decreased 9% over last year's record Q1 results. The trend in expanding gross margins continued from previous quarters and combined with ongoing SG and A cost containment improvements drive approximately 200 basis points of adjusted EBITDA margin expansion. Overall, adjusted EBITDA of $50,000,000 grew 4% in the quarter and clearly demonstrates the resilience of our business.

Speaker 2

Our farm segment delivered $189,000,000 in revenue, growing 4% year over year. Adjusted EBITDA of $45,000,000 grew 17% year over year with margins expanding by approximately 2 75 basis points to 24%. Similar to recent quarters, the margin result was a combination of operational excellence initiatives as well as the product mix tilted towards our portable grain handling equipment. In the commercial segment, revenues of $126,000,000 were down 24% year over year. Adjusted EBITDA of $13,000,000 declined 40% year over year with margins contracting roughly 2 75 basis points to 10.5%.

Speaker 2

Project timing impacted the quarter and we are looking ahead to the remainder of the year where we move into execution and delivery of our sizable commercial order book, particularly in international regions. Moving on to our balance sheet. We continue to make consistent and meaningful progress on our working capital metrics and key leverage ratios, clear indicators of the structural improvements we are making to how we manage the business. From a balance sheet perspective, we remain disciplined with our credit facility usage. Our net debt leverage ratio of 2.9 times in the quarter marked a significant improvement from 3.6 year over year and is our 2nd consecutive quarter under the 3.0 level.

Speaker 2

As noted in our last quarterly call, the Q1 required some inventory investment in connection with our commercial order book. We plan for this to normalize as we move into the second half of the year and execute on order deliveries. We are well on track to achieve our stated objective of 2.5 times in 2024, most likely in the second half of the year. Turning to working capital investment, which continues to be a key focus across the organization. Our net investment of $223,000,000 in the first quarter was up from $191,000,000 year over year.

Speaker 2

On an annualized percentage of sales basis, working capital intensity increased from 14% to 18% year over year. However, this comparable period analysis includes the impact of the accruals related to large non recurring provisions, which have since been settled. Normalizing for this would demonstrate a clear improvement in our total net priority and we continue to strive for further improvement to ensure we can grow the business without an excess working capital drag. However, it is worth repeating that the makeup of our order book may require us to temporarily invest strategically in working capital in the first half of twenty 24. The overall underlying trend still points to a clear and ongoing improvement.

Speaker 2

Connected to our success in managing the balance sheet and optimizing business performance is our progress on managing cash flow. Funds from operation of $31,000,000 was up over 47% from $21,000,000 in the Q1 of last year, driven primarily by a reduction in cash taxes. Funds from operations as a percentage of adjusted EBITDA continues to trend higher, indicative of improving conversion of adjusted EBITDA into cash flow. Finally, turning to our outlook. We are pleased to reaffirm our previously stated adjusted EBITDA guidance for 2024 of at least $310,000,000 This is supported by a near record order book level that's generally weighted towards commercial.

Speaker 2

While our overall outlook for the full year has not changed, we have observed a trend in commercial project timing, which has further shifted expected deliveries into the second half of the year. As a result, we expect all of the full year 2024 adjusted EBITDA growth over 2023 to occur in the second half of twenty twenty four, with first half twenty twenty four adjusted EBITDA results generally expected to be down relative to first half twenty twenty three. On balance, Diala continues to remain bright for AGI. And with that, I'll hand the call back to the operator and open up the lines for

Operator

Our first question is from Jacob Bout with CIBC. Please go ahead.

Speaker 1

Good morning. Hey Jacob.

Speaker 3

So you're maintaining your annual EBITDA guidance, but yet it seems you're a bit more cautious about farm both in the U. S. And Brazil. What's the offset? Is it higher margins?

Speaker 3

It sounds like you're basically maintaining your margin guidance or is it more commercial work?

Speaker 1

Yes, Jacob. Thanks for the question. And we're absolutely remain confident on our ability to continue to grow this year with a lot of that focus as you rightfully point out by us to the second half was underscoring. There's really a couple of things that are underscoring our confidence in delivering that growth. The first one as we highlighted in our prepared remarks, our order book.

Speaker 1

I mean sitting here today with our order book up 12%, we'd be extremely excited about that in any condition. So we certainly view that as an exceptional position to be in this year. The second one, we're seeing very positive results relative to our strategy. Our focus on growth and the specific levers 3 and we made a number of moves to prepare ourselves to 3 and we made a number of moves to prepare ourselves to support growth and now we're seeing those play out very favorably and that's reflected in our commercial order book with a bias to international. And it's specifically around initiatives that we put in place in India and Brazil and the projects that we won at the end of 2023.

Speaker 1

So those items are certainly giving us the confidence that we're going to be able to deliver to our current guidance. And I'd say the third one, Jacob, is just the team and the talent and the capabilities that we have in place globally. We're very well set up to not only deliver on these exciting projects that we have within our commercial order book, but also manage through the situations that we're seeing in some of the farm segments.

Speaker 3

Okay, that's helpful. Maybe just my second question here on U. S. Farm. This cautiousness that you're seeing, is this across all product lines, permanent versus portable?

Speaker 1

Yes. Great question, Jacob. And we keep in very close contact outstanding dealer partners. Our team spent a lot of time over Q1 traveling out, visiting with our farmers, visiting with our dealer partners to really get a very insightful and close read on the market. Yet we are seeing that pressure in both the permanent and the portable side particularly in the U.

Speaker 1

S. Jacob, one exception I would say to that is our portable product line in Canada continues to be quite resilient. The outlook for portable in Canada remains positive and it's really a close attention on the U. S. Both portable and permanent that we're watching.

Speaker 1

Obviously, as we noted, we'll get better clarity on that in the second half. As we further progress through Q2, we start to get early signs on how the upcoming crop is going to come in as well keeping a close eye on commodity prices.

Speaker 3

And what is the U. S. As a percentage of farm? And maybe just if you can comment on how things are going as far as U. S.

Speaker 3

Dealer conversions and adding new dealers?

Speaker 1

Yes. U. S. Farm is an important market for us. I'd probably say it's in say the 20% to 25% of our total business.

Speaker 1

And then, in terms of dealer conversions, that's obviously been a key strategic lever for us to drive growth within our farm segment. We're building exceptional relationships with those dealers and our upcoming dealer partners. I would say progressing to plan. We continue to make progress and we continue to make headway and expect to even across 20

Operator

24. The next question is from Michael Doumet with Scotiabank. Please go ahead.

Speaker 4

Hey, good morning guys.

Speaker 1

How are you doing Michael?

Speaker 4

Doing well. Thank you, Paul.

Speaker 2

On the I think first question, on

Speaker 4

the commercial delays, is can you maybe expand on the why as those projects were delayed? And maybe explain a little bit of confidence as to why you think they reaccelerate in Q3?

Speaker 1

Yes, for sure, Michael. And I would categorize the delay in those commercial projects as really minimal to be candid. I mean when we were exiting 2023, we had pretty good visibility at that time that our commercial order book was strongly weighted to the second half of the year. So, yes, we just saw a little bit of the normal movement from quarter to quarter that you often see in commercial. We saw a little bit of that in Q1, which put some pressure on our results in the commercial segment in Q1, some of that shifted to Q2.

Speaker 1

That was a that's a pretty early in the year shift. There's plenty of time for those projects to get executed and delivered. That's why we're confident it's not going to have any material impact on our full year performance for commercial. Our order book in commercial extremely strong. We're progressing to plan on the execution of those projects.

Speaker 1

A lot of those are already entering manufacturing. They've progressed through engineering and they're entering manufacturing. So we're literally manufacturing the products now and we'll continue to do so across Q2 that we will be delivering in Q3 and Q4. So that type of visibility gives us confidence in delivering to our expectations for commercial.

Speaker 4

Super helpful. And I guess going back to the North American farm, I'm a little curious as to what drove the negative revision versus your expectations just a couple of months ago. If I look at crop prices, they were weak for, I guess, the last several months. So is it more that you're seeing the weakness on the end user demand or is there more destocking at the dealer level that's impacting some of the near term?

Speaker 1

Yes, for sure, Michael. And as you pointed out, we're keeping a very close eye on that U. S. Segment spending a lot of time with our customers and our dealer partners. And the change that we observed in Q1 was really at the farmer side and the farmers moving forward with purchases.

Speaker 1

That didn't that slowed down a bit in Q1. That led to slightly higher inventory levels across our dealers, which ultimately culminated in softer order intake across Q1 that we expect than we expected. So in Q2, one of the things that we're watching closely is that dealer inventory. We expect that dealer inventory to start to move across Q2, so that as we enter Q3, we're in a net net better inventory position at our dealers. And then again, with that visibility on how the crop comes in, any movement in commodity prices, we're noting that they kind of inched up a little bit recently.

Speaker 1

We'll keep a close eye on that. But those type of indicators will ultimately influence farmer sentiment in the second half of the year. I'll just further comment that some of the feedback that we're getting from farmers right now is certainly biased towards the cautious optimism. So that sentiment resonates right now through the market and we'll look to continue to keep a good read on it.

Speaker 4

Perfect. Thanks very much.

Speaker 1

You got it, Michael.

Operator

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

Speaker 5

Yes. Good morning, guys. Thanks for the time.

Speaker 4

Paul, on the margin front, it sounds like

Speaker 5

your order book is skewed towards commercial, again, predominantly in the back half. So from a margin cadence perspective, should we expect first half to sort of show a little bit similar to the Q1 or we get some margin improvements and then we have a bit more of a headwind in the back half, is that the way to think about it?

Speaker 1

Yes. It's a great question, Steve, because you're absolutely right. When you look at our portfolio of products in our different segments, we do see different margin performance across farm and commercial, farm typically being higher, commercial being slightly lower. So with the increase in our commercial activity, which we're extremely excited about, that does translate to margin pressure. If we look back at 2023 and the outstanding margin performance that we achieved, the 300 basis points, we always categorize that 200 basis points of that was fundamental, moving us from 2016 to 2018 and about 100 basis basis points was a tailwind on margins.

Speaker 1

So now looking out at the full year, that tailwind has shifted to a headwind by it to commercial putting a little bit of pressure on margins. We look to offset that with continued progress from an operational excellence standpoint. So from a full year Steve that's kind of where what we're looking at is maintaining consistent margins to prior year, maybe moving in that 18% to 19% -ish range, guiding closer to the 19%. When you look at Q2, I think that's where you're going to see a little bit of softness in our farm segment that we're forecasting impact margins. If you look back to Q2 of 2023, it was extremely strong from a farm basis and specifically from a portable basis.

Speaker 1

That was one of our higher margin quarters due to extremely favorable margin mix. In prior year, we will not have that margin mix in Q2 of this year.

Speaker 5

Okay, that's helpful. And then just taking a step back on the organic CapEx story, the site secured overseas. I mean, what is the urgency to move on that? I know these are long lead projects, but do we need to spend like just maybe just walk us through the capital outlays that we should be expecting over the next year or 2. It sounds like it doesn't start till next year really, but what are the plans that we should start to think about as a model going forward?

Speaker 1

Yes. Thanks Steve. And it is an area that we're extremely excited about. We've commented for a while the tremendous performance that we've had across our India business. It's just been fantastic growth really since we acquired Milltec over the past 4 plus years.

Speaker 1

And so that's ultimately the drivers for us looking to make that investment. I would say that we have instilled and will continue to instill a high level of CapEx discipline. So our decision to move forward with the investment in India came with a fair amount of business scrutiny, business evaluation and financial measures. The ultimate drivers on that are 2 fold. First is expanding our capacity centric to our rice milling business.

Speaker 1

We've grown that business substantially. We've largely doubled it or even more so over the past 3 to 4 years. We anticipate a continued strong market in the rice milling going forward. So a portion of that justification is manufacturing capacity expansion within rice milling. The second one that we're equally excited about is adding the additional capabilities in India to even better support the product transfers that we've moved down there, the bins, the permanent material handling, the portable material handling as well as future product transfers that we have planned.

Speaker 1

So we'll add the right manufacturing capabilities built out over time so that we can successfully execute to those product transfers. And net net, the reason that's so exciting is because it is fundamentally increasing our total addressable market. That's the premise on product transfers. That's what we're seeing playing out in 2024 on the commercial side and is what's going to be a strong growth driver for us in 2025 and beyond. The CapEx spend in India is going to be more weighted to 2025 and will be a multi year build out.

Operator

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

Speaker 6

Thanks. Good morning. Just a first question on the top line, soft commercial that drove that 9% down year over year. And I guess indirectly your $310,000,000 EBITDA guidance and flat margins implies top line growing by roughly 5%, 5.5%. Paul, you're monitoring the Farm segment for Q2.

Speaker 6

Are you still expecting full year revenue growth this year? Maybe you can talk about the puts and takes in achieving that?

Speaker 1

Yes. Thanks, Gary. And you got it exactly right. Thanks for the question. We are continuing to watch that farm segment.

Speaker 1

Our order book being up 12% is a fantastic position to be in. If you look at our farm portion of that order book, we typically give visibility out say 3 to 4 months on farm and then commercial gives us visibility out say 6 to 9 months. Our order book is pretty weighted to the commercial side that gives us decent visibility out into the second half of the year and it supports our guidance for both, as you noted, revenue growth and EBITDA growth with stable margins and our guidance to 310 and the growth behind that we would expect to see a similar growth at the top line as well.

Speaker 6

Okay, perfect. And then my second question,

Speaker 7

I just want to get

Speaker 6

an update on the product transfer initiative. I think in early February, you provided Street with a $55,000,000 order book number. Just wondering if you know where that stands today, if not like directionally where it is and perhaps where you are seeing some of those orders come in from and I think in your prepared remarks you talked about net new product transfer this year, maybe shed some light around that too?

Speaker 1

Yes, 100%, Gary. Thanks so much for the question. As we've commented, we're really excited about product transfers. The key element there is its organic growth. It falls squarely within our current level of capabilities and fundamentally we're growing our TAM globally and that's going to not only supports our growth in 2024, but it will support our growth for years to come.

Speaker 1

Dollars 55,000,000 that we outlined in our order book directly related product transfers, that's in India, that's in Brazil predominantly. It is in other areas across the company where we've successfully executed product transfers. It has trended up from when we made that announcement. That is the trend. We expect that trend to continue.

Speaker 1

We've got a pretty robust pipeline of quoting activity supporting those areas of product transfers and that kind of leads us to the optimism. A lot of our tangible commercial activity is in India in our bins and permanent material handling as well as down in Brazil in our with our fertilizer product line. That's kind of driving right now a lot of our activity. What we expect is closely behind those initiatives is activity in our feed segment, our recently launched feed segment. We got a lot of exciting projects that we're quoting and customers that we're working with predominantly in Brazil and South Africa in Feed and then portable in India as we not only look to support the Australia market, but grow a portable business in India, which we're pretty excited about.

Speaker 1

If you look at India, we're making progress in bins and that product line is starting to move out in the market. We expect bins to be a pull through for portable as portable becomes a means an efficient means in which you load and offload the bins. So I would say that's kind of Tier 2 product transfers that we suspect will continue to support the growth and increase our order book. And then the next one that we've just recently launched and we're getting more and more excited about, we're moving our digital product line down to Brazil. We've installed trial systems at a few of our key customer locations.

Speaker 1

We received extremely positive feedback from those customers. That's motivated us to accelerate that effort. And that will be an activity that we progress in the second half of this year to position us really well entering 2025.

Speaker 6

Okay, great. That's great color. Thanks.

Speaker 1

You got it, Gary.

Operator

The next question is from Michael Tupholme with TD Securities. Please go ahead.

Speaker 8

Thank you. Good morning.

Speaker 1

Hi, Michael. Good morning.

Speaker 8

Thank you. Maybe Paul just to try to circle back on one of the earlier questions. I know you said that on the whole, the commercial segment timing shift wasn't overly material, but just trying to again better understand some of the drivers there. I'm not sure if this if you can talk a little bit about whether this was a small number of projects or if it was a broader shift, if there are any supply issues at play or any factors to just help us better understand what pushed things back to the Q2?

Speaker 1

Yes. Thanks for the question, Michael. And yes, I'll start by saying that there wasn't anything fundamental or structural or anything that has us concerned. No issues with the supply chain, no issues with material that we have on hand, engineering capacity, manufacturing capacity. We remain in very good shape on all those categories.

Speaker 1

And it's a great place to be in. We've invested in our capabilities over the past 2 to 3 years. We've built out very robust functional capabilities and they're all working hard supporting our commercial activity. It's just the typical movement that you see in this commercial space, whereas the timing in which customers take the product. A lot of times we get forecast from customers, they expect to take the product at a certain quarter And then as they start to progress all of the site preparation that is needed for the equipment, sometimes our customers run a little bit behind their schedules and their expectations and they ask us to just hold on deliveries.

Speaker 1

That's largely what is impacting our timing. Now with that said, we recognize that's not the ideal position to be in. So we are making some modifications to say terms and conditions in our contracts that fundamentally will help even some of that timing out, so that we don't or at least the intention is we don't see as much movement from 1 quarter to a next.

Speaker 8

Okay. That's definitely helpful. Thank you. And then then it doesn't sound like it based on what you just described in terms of the drivers to the timing shift to the second half of the year on commercial. But how would you assess the risk of potential further shifting or delays and potentially some of the stuff you expect to deliver and half to somehow not getting delivered in the second half and pushing out into the early part of next year?

Speaker 1

Yes. Thanks, Michael. And as you correctly point out, that's a key element of successfully running a business is to understand what risks are out there, get good visibility to them and then make sure that in our planning, our execution and our activities, we're focused on managing and mitigating those. So yes, we certainly understand what's in front of us. We have such a significant order book in that second half of the year for commercial.

Speaker 1

So we're very mindful and planful of understanding the risks and making sure that we stay on top of that. We don't fall behind from an execution standpoint, a manufacturing standpoint, that the supply chain is very closely tied to our activities, so that the material is there when we need it in a very efficient way and that we're also maintaining that close conversation and partnership with our customers, so that we can mitigate anything on that side of it. And then again, I'll take note that we have made some adjustments in our contracts and our terms largely towards the tail end of Q4 and continued across Q1, which is also squarely aimed at mitigating some of that timing risk.

Speaker 8

Okay. That's all very helpful. Thank you. If we maybe just in terms of the full year guidance, adjusted EBITDA guidance being maintained, but talking about all of the expected growth coming in the second half of the year, whereas half one adjusted EBITDA being down year over year. Just to help with modeling, is there anything you can sort of offer up in terms of helping us understand the degree to which you would expect half one adjusted EBITDA to be down year over year?

Speaker 2

Yes. So I think it's the farm in the U. S. Is a bit of the thing that we're monitoring closely. From a perspective though, if you look at last year, last year we had about 54% of our earnings in the back half of H2.

Speaker 2

This year we expect it to be slightly more as a result of the weighting towards commercial. And so, when you put all that into perspective, while we think it may be down in the first half, it won't be significantly down, but we do expect it to be slightly down really just because of that shift.

Operator

The next question is from Tim Monciello with ATB Capital Markets. Please go ahead.

Speaker 2

Hey, good morning. Hi, Tim.

Speaker 9

Doing great. Yourself?

Speaker 1

Good, good. Thanks.

Speaker 9

Great. Just wanted to follow-up on the guidance. And you said you're saying that farm demand, obviously, you've been talking a lot about in this call that you're monitoring that. But what are the assumptions that you have baked into guidance around farm? It sounds like that's kind of outlook there is weakening while commercial remains strong and might even be improving.

Speaker 9

So like what type of downside have you baked into farm for the year?

Speaker 1

Yes. I mean, it's a great question, Tim. And it is the process that we always go through when we're looking at providing the guidance. It's the process that we've gone through the past 2 years is the same that we go through this year and ahead of every quarter. And what that process is, is we take a measure of where we're at from our order book.

Speaker 1

We understand what's going on in all of our markets globally and we've obviously focused a lot on what's going on in U. S. Farm for the right reasons. And then quite frankly, we model out the different scenarios. We look at how the year could play out and we'll typically look at 3 at least 3 different scenarios and then based on that we position our guidance appropriately.

Speaker 1

So that's the exact same scenario that we went through and coming up with the guidance that we have and gave us the confidence to reaffirm our full year outlook.

Speaker 9

So would your base scenario be for growth in farm on a year over year basis?

Speaker 1

Yes. When we look at our growth expectations for the year, growth is going to be heavily weighted towards commercial. When you look at our performance typically Tim, you go back over the past few years, we've been fairly balanced around 50% farm, 50% commercial, sometimes it's 52%, 48%. We expect that as we end this year, it will be further biased towards commercial with the majority of our growth this year delivered from our Commercial segment. We can't predict exactly the farm.

Speaker 1

We've got visibility out 3 to 4 months. A lot is going to be dependent on some of those drivers that we're watching, how the crop comes in, what happens to commodity prices. Those are some of the scenarios that we played out to get a pretty good read on it. But fundamentally, as we've noted, the growth is going to be more weighted to commercial this year than we've seen in previous years.

Speaker 9

Okay, that's helpful. And then on the commercial side, 6 to 9 month commercial visibility and order book, did you get new commercial orders today, can you still get them deliver revenue in 24 do you think?

Speaker 1

Yes. Fantastic question, Tim. And it's one of the things that again underscores a bit of our enthusiasm. We had nice order intake across our commercial regions in Q1. We have a fairly robust pipeline of projects that we're quoting.

Speaker 1

We expect order intake to be good as well across Q2. And what we would say, Tim, is we are definitely still within the window of being able to win commercial projects, execute and deliver those within the calendar year. So we're still in play of continuing to add projects into the commercial order book that will tangibly impact our 2024 results.

Operator

The next question is from Maxim Sytchev with National Bank Financial. Please go ahead.

Speaker 7

Hi, good morning, gentlemen.

Speaker 1

How are you doing, Mac? Good morning. Good morning.

Speaker 7

Good morning. Good morning. Paul, maybe the first question for you, talking about kind of commercial. As you were rebuilding your order book throughout 2023, do you mind maybe talking a little bit around sort of the commercial terms and how competitive it was to rebuild the backlog just so that we can frame sort of the risk profile of what you're going to be delivering and so forth. So, yeah, any color would be great.

Speaker 7

Thank you.

Speaker 1

Yes. Great question, Max. One of the things that we like to talk about quite a lot on AGI, why we think we are a bit unique is just the diversification that we have in the business. We talk a lot about diversification across farm and commercial as well as geographic diversification. But even within our commercial business, we have extensive product project, customer end market diversification.

Speaker 1

So if I look into and start peeling the onion on our terms and conditions and the mix and the makeup of that commercial order book, Without getting into a lot of specifics, Max, I would say it's very indicative, it's very consistent on the type of mix that we would see in commercial order book in prior years. Nothing substantially jumps out. We've got a lot of new projects, new customers from the product transfer standpoint that's getting quite a lot of our attention. We've also won some extremely large, some of the largest projects we've ever won. We've won those right in our sweet spot of product lines, capabilities, customer base regions.

Speaker 1

So we've got a pretty good mix of projects within our commercial, I'd say in aggregate very consistent terms conditions profile.

Speaker 7

Okay. That's helpful. And then just in terms of kind of drilling down on sort of exposure there, in terms of food, how big of a market is it for you in commercial? Like is it less than 15% or how should we think about this?

Speaker 1

Yes. So right now, our food business, which we're extremely excited about, obviously, it's a growth platform for us, 1 of 2. We highlight both food and digital. Right now, food for us within our commercial, I'd probably say it's in the 10% to 12% roughly, Max. And we think that's about how 2024 is going to play out within food.

Speaker 1

So it gives you an order of magnitude how large it is relative to commercial as well as the total size of the company. That said, we anticipate that food will continue to grow. The growth in food will outpace growth in other areas and we see that 10% to 12 percent increasing as a makeup for the company going forward. A lot of that will be as you've heard our strategic premise growing within our very strong existing customer base, but just expanding that out into new regions, bringing and following our customers down in Brazil over to India, and then as well broadening our customer base across core geographies such as North America and Western Europe.

Speaker 7

Okay. Super helpful. Thank you. And then one quick last question for Jim, if I may. So when we're looking at working capital, potentially some investments there, how should we think about the free cash flow generation in 2024?

Speaker 7

Thanks.

Speaker 2

Yes. So thanks, Max, for that. So we're still very, very confident in our ability to delever continue to delever and get below the 2.5x level this year in 2024. And there's a number of reasons of our confidence in that. One is, our working capital management and discipline remains very high.

Speaker 2

We've been focusing on those 3 key metrics to managing receivables, inventory and payables for quite some time now and continue to make very strong progress. That continues to happen even with our belief that through the next few months anyway, inventory levels may grow, particularly for us to satisfy our demand for our commercial business. And so even though we'll have slightly higher inventory levels for the first for the next few months, because our underlying core metrics and working capital management continue to improve, That cap working capital intensity will get better through the year, which will free up cash to be able to apply to debt repayment. The other aspect of our confidence is in our capital needs. We're very disciplined in what we will spend our money on.

Speaker 2

Paul outlined our focus on our India expansion, which will continue. We also have our investments in our ERP systems that will happen this year. But outside of those 2, we were very disciplined maintenance capital perspective, other growth initiatives and then intangibles. All in, our capital expenditures for the year, we've talked about in the range of between $70,000,000 $90,000,000 before. That continues to hold.

Speaker 2

And so when you combine our when you put all the aspects together with of our growth, our working capital management discipline, and that will result in us freeing up a significant amount of money to be able to pay down debt. So that combined with our growth in our EBITDA will allow us to get below that 2.5x by the end of the year.

Operator

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

Speaker 5

Yes. Just a quick follow-up guys. Just wanted to inquire about the services business and where you're at in that rollout. I know it's only year end since you really talked about it, but that's been an important strategy for one of your larger competitors down south. Just trying to get a sense of where you're at and whether the regional focus in North America or LatAm?

Speaker 5

Thanks.

Speaker 1

Yes, that's perfect Steve. And it is an area that, kind of following behind our focus on product transfers, emerging markets and our growth platforms in terms of what's going to drive our growth. Parts and service is directly following that and one that we'll probably talk more and more about. We obviously have an outstanding parts and service business in India supporting our rice milling business. That is in many ways serving as our benchmark as we look to expand and expand that capability globally.

Speaker 1

Currently our focus is on North America and it's across both our commercial and our farm segment. We've set up a dedicated team there across 2023. That team is now up and running and we're making good early progress in our parts and service business in North America. Probably we'll gain greater traction towards the end of this year and that will be a more significant talking point for us in 2025. We'll probably expand that initiative outside of North America Then the next area that we'll focus on, Steve, as you rightly point out, is down in Brazil.

Speaker 1

We've been very successful in the Brazil market over the past 5 years, significant growth down there. And from a timing standpoint, it gets to a good point where there is going to be an increased demand for replacement parts and service as our equipment has been operating in our customer facilities for a couple of years now.

Speaker 5

Helpful. Thank you.

Operator

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

Speaker 1

Yes, thanks very much. Really appreciate all the great questions here this morning. We would just like to conclude by congratulating our global team on a very successful safety week that we just wrapped up last week, but always excited to see the progress that we're making there. And then just in general, the culture that we now have in place and the collaboration that we see across our one AGI focus is outstanding. So thanks very much.

Speaker 1

I appreciate the discussion this morning.

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Earnings Conference Call
Ag Growth International Q1 2024
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