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Ladies and gentlemen, and welcome to the Ag Growth International Inc. 2021 Second Quarter Results Conference Call. [Operator Instructions] Note that this call is being recorded on Thursday, August 12, 2021.And I would like to turn the conference over to Tim Close, President and CEO. Please go ahead, sir.
Good morning. Thank you for joining Jim Rudyk and I to discuss our second quarter results and the outlook for the balance of 2021. I will make a few remarks on highlights from the quarter, then hand the call over to Jim for a more detailed recap of our second quarter and then open the call for questions.Our strong second quarter was anchored by exceptional results in our Canadian and U.S. farm markets, in addition to meaningful contributions from Brazil, India, and our Food Platform. The second quarter and our outlook going forward, are key indicators of the resilience of our diversified business model, which has moved into a sustainable growth mode from our build out and investment base.Consolidated backlogs are up 69% year-over-year, providing solid momentum from the first half of 2021, going into the second half of the year and then into 2022.After years of careful planning, research, investment, product development and building customer relationships, AGI Brazil is rapidly gaining market share and scaling operations. Q2 sales were up 180% year-over-year or up 230% in local currency, a record quarter in Brazil. Our Brazilian business has clearly hit an inflection point, becoming a positive contributor to overall AGI results, as well as a significant player in this large, growing and strategically important market. Backlogs in our Brazilian business are up 112%, including notable strength in the Farm segment. We expect continued growth in Brazil into the into the second half of 2021 and into 2022. As COVID and supply chain related issues ease, our outlook for continued growth in margins in Brazil are also reinforced.The broader LatAm market also reported very strong Q2 results of 65% year-over-year. Our operations in India posted strong results in Q2, with sales up 32% or up 40% in local currency; a very strong result in what is seasonally the slowest quarter for this business. India is the second largest producer, second largest consumer, and the largest exporter of rice in the world. Demand for our high-quality equipment and solutions remain strong. Backlogs in India are up 45% and sit at a record high underpinning our robust outlook for second half results in this market. Progress has also continued on setting up a local grain bin manufacturing line to further expand our offerings and business in India.Food Platform sales were up 49% in the second quarter as food manufacturers continue to actively and aggressively invest in new equipment and facility upgrades. The U.S. market led the way, with sales up 92%, as the benefits of strong strategic relationships supported this growth.In EMEA, Food Platform sales were up 66%, with increasing share of wallet from existing customers augmented through adding additional new customers. Our Food Platform backlog is now up 175% year-over-year. The U.S. market is again leading the way with an increase of 308%, a solid contribution across both the food and beverage end markets.Our International Food Platform backlog are now up 56%, a significant activity in our European business. We expect the Food Platform to be an area of ongoing strength with pent-up demand for customers, who have had somewhat reduced opportunities to move projects ahead, given COVID related restrictions.Our Farm segment anchored the quarter, with sales up 17% year-over-year, benefiting from strong contributions from Canada, the U.S. and Brazil. Double-digit volume growth was complemented by high single-digit price increases, partially offset by a significant FX impact. Portable products experienced a strong first half performance and demand remains robust across U.S. and Canada.Farm systems also had a strong first half with significant strength in the U.S. and international markets, particularly in Brazil. Further integration and bundling of our AGI SureTrack solutions into our farm systems offerings such as our AGI SmartBin initiative is adding to demand and supporting this growth. Looking forward, we expect continued strong results from the Farm segment.Backlogs remain very healthy. The U.S. outlook is favorable, and activity in Brazil is accelerating. We expect the Farm segment to finish well ahead of prior year based on its well-diversified global business portfolio and strong pricing programs implemented across the first half of the year.Commercial platform sales were up 7% in the quarter, the softness in Canada and India offset by double-digit growth in the U.S., APAC and South America. This growth was achieved despite some areas experiencing significant delays in steel availability, which led to revenue recognition be deferred to future quarters for some projects. Our Commercial platform backlog is up 41% year-over-year with notable strength in the U.S., up 57% as well as international up 53%. EMEA has had strong sales intake and the dip versus a strong comparable in 2020 is timing related, we'll revert to solid growth heading into the remainder of the year.As expected, our Canadian Commercial platform sales were soft in Q2, down 47% with both grain and fertilizer sectors coming off peak prior activities. Our backlogs are down 22% year-over-year in this segment. We note that it sits -- current backlog sits at its highest dollar amount so far this year. We still expect a pickup in activity in the second half of 2021, and begun seeing increased quoting activity.Turning to our Technology segment, our sales were up 58% in the quarter on an as reported basis. On a retail equivalent basis, sales of CAD 7.8 million, were down 9% year-over-year. Regardless, this is a strong performance across the board, and a slight decline relative to last year on a retail equivalent basis was expected given the change in our sales programs.Technology segment adjusted EBITDA was negative CAD 1.9 million in the quarter, given the expansion of the team to facilitate continued growth and the ongoing integration of Farmobile. Removing the negative impact and CAD 1.5 million related to Farmobile, the segment was close to breakeven on an EBITDA basis.We made significant progress in the quarter to help position the Technology segment to rapid growth. During the quarter, we achieved substantial procurement supply chain achievements, we completed additional production automation projects, and had strong results in on-boarding additional SureTrack dealers.In the quarter, we also completed the acquisition of Farmobile. Farmobile brings market-leading technology, which has accelerated AGI's participation in carbon and in sustainability initiatives. Farmobile's ability to automatically collect significant amounts of agronomic and machine data in an easy-to-use interoperable format has made the company a key participant in numerous carbon sustainability programs, where reliable and verifiable data is essential. These programs include participation in industry group initiatives, as well as direct programs with individual corporations. The objectives of these programs are diverse. They range from data collection within carbon markets, participation in sustainability sourcing projects, yield assessment and ESG measurement.Farmobile Co-Founder, Jason Tatge, was announced as the new leader of the AGI SureTrack in the quarter. Jason has an ideal background to grow the business and accelerate our technology development. We continue to forecast substantial growth over 2020 in our SureTrack business for the full year, with a robust second half expected.A few updates on items relevant to the grain bin incident from last fall. Work has begun at 1 of the 2 customer sites and is expected to be completed by the fall of this year. The second customer has decided to remediate themselves and with other suppliers. Based on remediation work completed so far, we have recorded an additional CAD 7.5 million to the previously disclosed CAD 70 million accrual. This increase is primarily the result of additional engineering, steel and labor cost required to ensure satisfactory product solution as well as additional legal costs. To-date, we have spent approximately CAD 25 million of the accrual. We have also recently received 2 legal claims related to the bank loans. We are in the process of assessing these claims. We are confident that we have a number of legal and contractual defenses and AGI will fully defend our legal position. And as previously stated, we continue to expect that insurance proceeds will partially offset the costs related to the incident.We are closely monitoring the dry conditions across the U.S. and Canada. However, the bulk of the U.S. grain belt has received adequate rainfall, and current USDA projections are calling for an increase in U.S. corn soybean production. The situation is more acute in Canada with severe drought across much of the Prairies. However, the strong early season ordering activity has helped offset some of the impact of the drought in Canada. And we will carefully monitor the situation going forward.As discussed on our last call, steel price and steel availability was a key focus across AGI. In the second quarter, we were able to effectively manage the situation and mitigate the impact through steel positions taken in prior quarters through price increases. Q2 was a strong quarter in a difficult environment with outstanding work from our global teams as they manage the difficult supply chain environment, producing exceptional financial results across the first half of the year and setting us up for a strong close to the year with a robust backlog. The high backlogs are a combination of input-related price increases as well as strong volume growth. In addition, much of the growth in Brazil, EMEA, India, U.S. Farm and Technology, as well as our Food Platform are fundamental market share gains. It's also great to see the benefits of our global growth, which has mitigated the impact of regional drought conditions and would have had a much more pronounced impact on AGI in prior years, highlighting just how much stronger AGI is today.I will now turn the call over to Jim for a review of the quarter and further discussion of our 2021 outlook.
Thanks, Tim, and hello, everyone. For today's earnings call, I'd like to cover 3 topics. First, I'll provide a brief overview of our financial results. Second, I'll discuss our balance sheet, and finally, I'll provide an update on our outlook for the coming quarters and 2021 overall.Our second quarter results continued the momentum from a strong first quarter. Trade sales of CAD 302 million, were up 15% from CAD 261 million year-over-year. Broad-based strength across our Farm segment as well as our Commercial and Food platforms helped offset a few isolated pockets of softness, notably the Commercial platform in Canada and EMEA.Adjusted EBITDA of CAD 46.2 million, was up 5% from CAD 44.1 million year-over-year. Adjusted EBITDA margins of 15.3% were down 160 basis points from 16.9% year-over-year. As anticipated, steel price and input cost inflation had an impact on gross margins, which decreased 230 basis points to 29.9% in the quarter. Those steel positions taken in prior quarters and our ability to pass along costs, helped alleviate some of the cost pressure. Along with SG&A discipline, decreasing 50 basis points to 16.0% of trade sales as compared to Q2 2020, we were able to minimize the pressure on adjusted EBITDA margins in a tough supply chain and operating environment.Farm segment adjusted EBITDA margins increased from 23.5% to 25.3%, as product mix, sales volume, a disciplined effort on cost containment, pricing action, as well as scaling off of a relatively flat SG&A base for this segment, all combined to drive the strong results for the quarter. Commercial segment adjusted EBITDA margins decreased from 13.3% to 9.4%, as input cost inflation pressured segment margins in both the Commercial and Food platforms. Though this was also partially offset by scaling off of a relatively flat SG&A base for the segment.As Tim mentioned in his comments, the Technology segment posted adjusted EBITDA of negative CAD 1.9 million in the quarter, though by removing the negative CAD 1.5 million impact of Farmobile, adjusted EBITDA of negative CAD 0.4 million is close to breakeven now. Overall, our second quarter results demonstrate a highly resilient result amid challenging operating conditions.Moving onto our balance sheet. In the second quarter, we continued to closely manage our senior debt-to-EBITDA ratio, which now sits at 2.8x versus 2.4x at the end of Q1 2021 and versus 3.0x at the end of Q2 2020. The sequential increase in the ratio is largely the result of an increase in working capital and investment-related activities. The working capital increase was due to steel price, sales mix and a reduction in our warranty provisions as remediation work continued in the quarter. Investment-related spending is primarily related to the acquisition of Farmobile and our ongoing CapEx requirements.Excluding our CAD 150 million accordion, we have over CAD 129 million in available undrawn credit facilities and approximately CAD 55 million of cash on hand. While we closely monitor our liquidity position, we do not have any bank covenant concerns. A disciplined capital management approach, in combination with our strong results and growing EBITDA, will naturally reduce our leverage ratios over the coming quarters and years.And finally, a recap of our outlook. Supported by a strong backlog, up 69% year-over-year, we anticipate robust trade sales growth throughout 2021, with particular strength in Q4 2021 trade sales. And we continue to expect full-year trade sales and adjusted EBITDA to be strong and above fiscal year 2020 levels. Thank you very much for your time. And with that, we will turn it back to the operator to take any questions.
[Operator Instructions] And your first question will be from Jacob Bout at CIBC.
Backlog continues to be strong, but in the MD&A, you mentioned that there has been some pre-buy ahead of steel price increases. Can you -- are you able to quantify what that pre-buy actually looks like? And then maybe also provide how many months of work is there in backlog? How should we think about that?
Jacob, for the pre-buy, we had a bigger impact in the growth of our backlog in Q2, and now it's actually, it's leveled off and been quite sustainable over the last few months given strong intake, really across the board and around the world. So that will have some impact as we go into 3 and 4. In terms of time of backlog, I mean, that takes us -- we've got pretty significant amount of the remainder of the year-end backlog. So, you are out of 3, 4, 5 months, and we are in some markets, some segments booking into 2022 in probably a little bit more than we would have been in prior years.
And then the CAD 190 million lawsuit, a, was that a bit of a surprise? And b, how does that square with your CAD 77.5 million accrual?
Yes, look, we did expect to see some of those activity out of the incident and our accrual, we spent a lot of time on in the detailed facts and working with our advisors, legal and otherwise, and so that represents our expected costs associated with the incident. We can't really comment on other clients.
Next question will be from David Newman at Desjardins.
Solid impressive results here, and the backlog was very impressive. So it looks like you're gaining momentum. Just trying to understand the steel dynamic a little bit better, because I was -- the one thing that kind of came out when I read the filings is that, it seems like Commercial was a bit of an area, where it was impacting, whereas in Farm, it seemed to be you're getting the pricing. So is there a lagged impact this has been pushed out, because your inventory positions may have buffered due to a certain degree? And why Commercial more so than Farm? And is it related to supply chain hiccups and things like that?
David, couple of things here. As you saw, our margins in the Farm segment, gross margins were actually strong -- stronger than last year. We do expect some margin pressure in Farm, despite very, very strong sales and our ability to maintain costs in other areas. But that is the area where some of our pre-buy of steel, we still saw some benefit of the purchasing activity we did earlier in the year to help offset some of the cost. Remember in the Farm segment, part of that business, we operate from a catalog, where we're able to raise prices and we did so a numerous times in advance of the steel -- as a reaction to the steel cost increases. So we are able to benefit from buying some steel earlier and the timing of when the price increases went in, we were able to offset some of the increase quite nicely. That, and also just higher volume in the Farm business helps us put more throughput of volume in our business more efficient -- efficiencies we gain, which naturally help our gross margins as well.However, in the Commercial business, I think we talked about this in previous quarters, but we typically when we quote business, we would hold -- historically, we would hold quotes open for up to 30 days. We reacted in the environment of rising steel cost to cut that timeline significantly. Now we're at the stage where when we quote an opportunity, they are only about for 7 days. And so there is still where some projects, that big projects that take some time to move from quote stage to actual production that went through Q2 that impacted us on a margin perspective, where the quote was valid and when we bought the steel, the steel costs were higher than what quote was. And so, we've adjusted for that process in our bidding for big projects in 2 ways. One, we've reduced the window that the quotes are valid for. But secondly, we're introducing more and more clauses that allow us to revisit the price if the cost of the input, primarily still vary by more than a certain percentage.
Got it. Very helpful. And if you look at backlog, which is very, very impressive, offset by maybe the lagging impact of some of the steel as you've kind of worked through your inventory of steel and you're facing, I guess, more of the curve. Are you as confident in the guidance that you gave us in 1Q of being much higher, stronger than last year, as you are today? In other words, is the backlog and the top line going to lift it, despite some margin pressure in terms of dollars, such that you're kind of in the same zone?
Yes, so good question. Couple of points to make on that. So when we look at this year, given where we're at in the year, the backlog that we have available, we feel very, very good about the year. We actually are starting to see a lot of opportunities that take us through into early next year as well, which is very strong, continue to be strong. However, we do have impacts from steel that everyone, there is some supply chain challenges. Last quarter we guided that it will put some pressure on margins in Q2 and Q3, we saw that in Q2 with our EBITDA margin down slightly. We will see a bit of that in Q3. However, we see a very good rebound in Q4 from a margin perspective. But overall, in terms of our business, if I look at the range of estimates that are out there, we feel very good and feel good actually about the high-end of the range even with, and this is important, even with the challenges we have with the supply chain, the -- if you look at our results too, we're working with a third-party in our Technology business, we will incur significant costs there, that we do not normalize out. We've got FX pressures that we deal with that in Q2 were more pronounced than we expect for the rest of year, but still not a headwind. So even with all of the -- and the acquisition of Farmobile, which initially is a bit of a negative move on our EBITDA. But even with all that, we still think we'll be -- we're confident with the guidance and more so on the high end of the guidance.
And last one from me. Just overall, on the Food and Commercial backlogs, overall, how much of this do you think is a function of not just the reopening trade and normalization, but also maybe a change in consumer, or maybe I'll say, [ pet ] behavior or people buying pets? And how much is supply chain investment into -- after this whole incident over the last 18 months of COVID that food supply chains are critical and governments need to invest in infrastructure. How much of those is that all playing into kind of these rising backlogs in Commercial and Food?
Yes. Well, it's a good comment, David. Though that's definitely a factor, we will see -- have seen -- we'll take just a fewer points. There is a bit of a rebound or pickup in projects post-COVID. I don't know if that's -- I think I'd characterize it more just a resumption of prior activity. And then there is a food security, there is a supply chain redundancy aspect or expansion to account for similar sort of disruptions going forward. I think that's more prominent and more top of mind than maybe it had been in the past. And then, if you look at our fundamental growth around the world, in EMEA, in Italy, out of Italy, India, in Brazil and food and tech, and U.S. farm, a fundamental market share growth. So we're gaining share, while -- a lot of those are also very, very high growth markets of themselves. So it's a little bit of everything, but certainly the factors you highlighted are coming up a little bit more active.
Next question will be from Steve Hansen at Raymond James.
Just a couple, if I may. Just on the lawsuit quickly. I know you can't comment too much. But is there -- are there any milestones around timing we should expect or just how long do you think these types of situations will take to resolve, is it 6 months, 2 years, just trying to get some context?
Yes. We expect it to take some time. These are complex issues and clients, obviously, we expect it will take years.
Okay, understood. And then just circling back now on the demand environment, particularly in Brazil to start, you described some really great growth down there, Tim, taking market share. In a market like that where they don't have the severe drought type issues we're facing there, how are those customers reacting to steel price environment? Is the backlog or is the order flow continuing down there? I think you're continuing to see momentum. I think you described that. I'm just trying to understand the demand side impact of steel relative to some of the crop dynamics.
Yes, demand is very strong in Brazil, and the steel dynamics has been more extreme than most or many other parts of the rest of the world. In some cases, if you've got steel, then that's the real deciding factor on who gets the project. So it's an area that our team is extremely focused on. We've been aggressive in acquiring and supporting our inventory positions on steel, but demand is very strong.
Okay. That's good to hear. How should we think about then the balance of margins? I think, Jim, you described earlier, Q3 is going to see some sustained pressure to some degree. Fourth quarter we should get a rebound with some magnitude. Is the recovery that you expect in Q4 going to get it back to where we were before? Just the steel price does seem like it's really lingering here -- high. I'm trying to understand the back half dynamics a little better.
You mean from a margin perspective, Steve, or from [ purchase dollars ].
No, a margin perspective, Jim.
Yes, that's where we expect to see some stabilization. What I mean stabilization, parity between the pricing and the input costs, you have some variability as you've got timing issues, but we see that coming together in Q4. And then as steel eventually adjust to whatever a normalized steel cost would be, we'll see more normalization back to expected continued improvement in our gross margins, because of all the investments we've made over the years, we're starting to see some nice efficiencies as we scale. Our diversification approach that we've gone through the past several years, you're seeing the benefits right now. I mean, arguably the number of headwinds with COVID, the steel, the FX, people talk about the drought in North America, all of those things aside, and we're producing continued strong growing results in those types of environments, just really I think is a strong restatement of the benefits of being diversified and being able to capitalize on different parts of the world and different regions of the world.
No, that's great. And just maybe a housekeeping type item. But on the FX sensitivity, we have seen some relief in the dollar here recently down to, [ of course, CAD 0.80 ]. But is there a sensitivity we should think about it from an EBITDA standpoint or I'm not sure how to think about it exactly.
It's still a headwind versus prior year, but yes, it is nice to see some relief for sure at least from a Canadian perspective, Canadian dollar perspective, and so -- but it's still down versus the prior year.
[Operator Instructions] And your next question will be from Andrew Wong at RBC.
Just wanted to ask on the Tech segment, it sounds like some of the changes you're implementing there are almost complete. Can you talk about what the feedback has been from the customer side following some of those changes? And how we should think about the sales growth trajectory over the next 6 or 12 months?
Yes. Well, we do expect a really solid robust second half of the year in Technology. So we've spent a lot of time onboarding dealers, new dealers for SureTrack, both AGI and other OEM equipment dealers, and that's been very successful. We continue to add more and we continue to get -- to spend a lot of time in training those dealers to get them up speed on selling, what is a very different product line versus the equipment side. So -- and how to successfully incorporate and bundle the technology with the equipment. And so we expect that to continue to gain momentum, and add to our growth rate in the Technology really on a weekly basis, but that will build and produce a more scalable distribution network for us, a channel for us in the dealer side. But we're all -- we're likewise spending a lot of time in building out our other channels, which are going to strategic customers both grain buyer -- grain traders, food processors who purchase directly are looking for supply chain visibility. And we're spending more time on ag retail, and really excited to have a lot of momentum, traction in ag retail as we look at their fleets outfitting their fleets with Farmobile equipment, and to gain our visibility into the operation of their fleets. And it's really strong ROI that that has for those ag retailers. We're spending time on our direct model as well, direct and digital model. So you have these 4 different channels for us coming online in more and more with more and more activity and volume. And so that we expect to carry us through into next year as well and continue to see really strong year-over-year growth in the technology side.
Okay. That's a lot of really good detail there. I just wanted to ask, kind of a follow-up on legal claims, and I know you can't really say very much. I guess, one of the things I wanted to ask is, the original sales for the bins are roughly CAD 20 million, the provisions are roughly CAD 70 million. How are the legal claims as much as in excess of CAD 190 million? If you can just -- if there is anything you can say about that, that would be helpful.
Yes. Look, I guess, we are saying quite a bit in our accrual. So just to circle back to this, our accrual is our assessment of our obligations and our costs associated with this incident.
Do you have any further questions, Mr. Wong?
No, thank you very much.
Next question will be from Tim Monachello at ATB.
First one, just on backlog. Can you give some details on sort of the quarter-over-quarter comparison, just because the sort of year-over-year, I guess, is getting a little bit muddied by steel price inflation?
Yes, so quarter-over-quarter, the backlog actually grew. It continues to be very strong and strong across all areas of the business. So really, really -- and the growth in the backlog, as Tim talked about, alluded to in his comments, introductory comments, we definitely have some benefit of the prices increasing, but you also see strong volume growth as well in terms of the commercial side, more projects including the Food platform, which is just on fire internationally, very strong opportunities and items in the backlog as well.
Okay. If you were to look at the backlog on a margin contribution basis, would that also be at record levels?
The backlog in terms of -- sorry, say that again.
Like if you were to strip out the margin within the backlog, adjusting for cost pass-throughs and things like that, would that also be at record levels?
Yes. So we see our -- when we look forward in the margin profile, so we do see some pressure as some of that backlog flushes through in Q3 on the margin, but coming back nicely in Q4 and then going forward are fully adjusted.
Okay. Second question here, just on the commentary around what you expect for margins in terms of steel cost inflation and that sort of rebounding in Q4. What gives you confidence in that rebound? When you look at the steel pricing, it's kind of like on a stairway to heaven, doesn't seem like it's ever going to start coming down. So what gives you confidence that you'll see some margin pressure alleviation in the fourth quarter?
Yes. Well, primarily, just the backlog, those are orders that we're fulfilling and we've got visibility as to when they're shipping. And so we know what the margins will be for those, because we procured steel for those orders in most of the cases. And so we have -- and you got that coupled with the cost-containment initiatives that are going around in our business, you see SG&A scaling nicely, and then from a gross margin perspective, as I mentioned earlier, you've got a lot more volume being going through our facilities, which can handle more volume, much more volume, and so you get more efficiencies there, which help offset some of the pressure on the margins that the input costs have.
Okay, got it. And the margin in the second quarter, since you outperformed what consensus is looking for, has your view changed on the level of margin degradation that you're expecting through the back half of the year?
Well, yes, we were able to mitigate more than we saw in this quarter. I'd say that, that holds for the remainder of the year. We've done a lot of work around mitigating that supply chain pressure. So as Jim said, we feel pretty good about the remainder of the year, and based on really strong backlogs to carry us through that period.
Okay. And then just wondering on the contingency for the civil, legal issues there. One of the lawsuits was received after the end of the quarter and the contingency, I believe, was at the end of the quarter. Is there a chance that contingency increases based on the lawsuit that was received after the quarter?
No, our assessment was inclusive of all of those facts.
And at this time, gentlemen, we have no further questions. Please proceed.
Okay, fantastic. Thanks for your time this morning. We'll end the call there.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.