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Earnings call: AGI reports mixed Q3 results amid US farm market headwinds

EditorAhmed Abdulazez Abdulkadir
Published 11/11/2024, 13:36
AGGZF
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AGI (Ag Growth International Inc.), a leading provider of agricultural equipment and solutions, reported a challenging third quarter in 2024, with consolidated revenues of $357 million and adjusted EBITDA of $69 million, which represent declines of 13% and 19% year-over-year, respectively. Despite the soft US farm market, the company highlighted a strong international commercial presence, particularly in Brazil, and a record level order book. AGI's President and CEO, Paul Householder, discussed the company's resilience and strategic focus on international growth, while CFO Jim Rudyk provided updates on financial guidance and operational initiatives.

Key Takeaways

  • Consolidated revenues for Q3 2024 stood at $357 million, a 13% decrease year-over-year.
  • Adjusted EBITDA for the quarter was $69 million, down by 19% from the previous year.
  • The adjusted EBITDA margin remained resilient at 19.2%.
  • International commercial activity was robust, with a 75% increase in international commercial business from the prior year.
  • Full-year adjusted EBITDA is expected to be around $280 million, with margins near 19%.
  • AGI is targeting a net debt leverage ratio of 2.5x by 2025, with current leverage at 3.1x.
  • A share repurchase program is being prepared, reflecting management's view of the stock's undervalued price.

Company Outlook

  • Full-year guidance anticipates an adjusted EBITDA of approximately $280 million.
  • Margins are projected to stabilize around 19% for the full year.
  • The company's diverse business model and solid project pipeline are expected to drive stronger performance in 2025.

Bearish Highlights

  • US farm market challenges persist, with high dealer inventories and low crop prices.
  • The portable grain handling product lines were specifically impacted in the US.
  • Working capital investment has significantly decreased to $195 million.

Bullish Highlights

  • Canadian farm segment revenue increased by 13% due to higher demand for permanent equipment.
  • Brazil secured $105 million in new contracts, contributing to the record level order book.
  • Free cash flow over the past year was approximately $111 million, showing a strong conversion against adjusted EBITDA.

Misses

  • Consolidated revenues and adjusted EBITDA both saw significant decreases year-over-year.

Q&A Highlights

  • The company is actively managing inventory and production to align with market demand.
  • There is a focus on international commercial growth, especially in Brazil and India.
  • ERP system costs are expected to continue through 2026.
  • Share repurchases will begin opportunistically, regardless of leverage targets.
  • Q4 is expected to be strong, driven by large project completions in the commercial sector.

AGI's Q3 performance reflected resilience in the face of a challenging US farm market, with the company making strategic adjustments and focusing on international growth opportunities. The company's commitment to safety was also underscored by a significant safety milestone at the Saskatoon facility. With a diverse business model and a strong project pipeline, AGI is positioned for improved performance in the coming year, while continuing to prioritize operational excellence and balance sheet discipline.

InvestingPro Insights

To complement AGI's Q3 2024 earnings report, InvestingPro data provides additional context for investors. Despite the challenging quarter, AGI's market capitalization stands at $721.99 million USD, reflecting the market's current valuation of the company.

One of the key InvestingPro Tips highlights that AGI has maintained dividend payments for 21 consecutive years. This consistency in dividend payouts, even during challenging periods, may be reassuring for income-focused investors. The current dividend yield is 1.26%, which, while modest, demonstrates the company's commitment to shareholder returns.

Another relevant InvestingPro Tip indicates that AGI is trading at a low P/E ratio relative to near-term earnings growth. This is supported by the PEG ratio of 0.13 for the last twelve months as of Q3 2024, suggesting that the stock may be undervalued relative to its earnings growth potential. This aligns with management's view that the stock is undervalued, as evidenced by their preparation of a share repurchase program.

The company's revenue for the last twelve months as of Q3 2024 was $1,037.39 million USD, with a gross profit margin of 32.05%. While the revenue growth was negative at -7.79% over this period, it's worth noting that AGI remains profitable, with analysts predicting continued profitability this year, as per another InvestingPro Tip.

For investors seeking a more comprehensive analysis, InvestingPro offers additional tips and metrics beyond those mentioned here. In fact, there are 7 more InvestingPro Tips available for AGI, which could provide further insights into the company's financial health and market position.

Full transcript - Ag Growth International Inc (AGGZF) Q3 2024:

Operator: This is the conference operator. Welcome to the AGI Third Quarter 2024 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. [Operator Instructions] I would now like to turn the conference over to Paul Householder, President and CEO of AGI. Please go ahead, sir.

Paul Householder: Thank you, operator. Good morning, and welcome to AGI’s third quarter 2024 results call. I'm joined today by our CFO, Jim Rudyk. I will start the call with a review of our third quarter results and other relevant business updates, then turn the call to Jim for additional commentary on the quarter. Following our prepared be remarks, the call will be opened for questions. I will begin with a few customary comments on safety at AGI. We recently celebrated an outstanding safety result at our manufacturing facility in Saskatoon, which achieved a significant industry milestone of 10 years without a lost time safety incident. This is an incredible achievement, which we appropriately celebrated with a special onsite event and an award ceremony to recognize the team's commitment to safety. This long-term dedication and discipline around safety is the type of result we are aiming for all facilities across AGI. It is a terrific example of our safety culture, which aspires to ensure that each and every AGI employee around the world, regardless of where they are working, returns home in the exact same safe condition as they arrived at work. Congratulations to the Saskatoon team. Turning to our results, our third quarter was lower than our expectations. While nearly all areas of AGI continued to perform well, with good line of sight to fourth quarter and full-year results, the US farm market did not pick up from a slow first half, which was a key headwind to third quarter results. In particular, our portable grain handling product lines were impacted. A combination of elevated dealer level inventories, declining farmer income, and low crop prices, all contributed to challenging US farm market conditions. We are very encouraged to see a strong third quarter margin result and a stable outlook for margin performance for the full year. This performance was delivered despite the mix challenges stemming from the soft result for our portable business in the US farm market. Offsetting this margin headwind was a steadfast commitment to cost control and further progress on several operational excellence initiatives aimed at streamlining efficiency across AGI. Our ability to effectively mitigate mix dynamics and stabilize margin performance is a highly differentiated capability that AGI did not possess just a few short years ago. Activity in the international areas of our commercial segment continues to be robust and encouraging, which is a direct result of our focus on our three strategic growth initiatives, including product transfers, emerging markets, and growth platforms. Progress on these initiatives has led to a strengthening of our commercial segment throughout 2024. Across Q3, we continued that favorable trend by successfully winning several new and significant customer contracts. Our outstanding team supporting Brazil secured several projects with a combined value of approximately $105 million. This impressive Q3 achievement complements the already strong commercial segment order book supported by activity in EMEA and Asia Pacific. Visibility to a highly active and attractive commercial pipeline across Brazil, EMEA and Asia Pacific, provides potential for further wins and sustained strong performance across 2025. Last quarter, we highlighted several areas that gave us confidence in the second half of 2024. Many of these still hold true, while others have not yet fully materialized. Most businesses across AGI continue to perform well, particularly within international commercial. Our order book remains extremely strong and sits at a record level exiting the third quarter. Favorable international commercial contributions remain on track and will play a critical role in delivering fourth quarter results and a strong start to 2025. The early positive signs in US and Brazil farm markets, particularly the US farm market, did not accelerate. Aggregate dealer inventory levels slowly improved and will take additional time to normalize. US Farm market conditions are the contributor to our third quarter results and our revised full-year outlook. Order intake in North America farm remained slow across the third quarter. The strength in the commercial order book has remained impressive and continues to accelerate. These large and sophisticated commercial projects will be significant to both Q4 results and into 2025. Product transfers and emerging market growth strategies are delivering, with revenue on track for low single-digit contribution to total consolidated full-year revenue. Finally, operational excellence initiatives continue to deliver as expected, further supplemented by recently executed actions to streamline costs aligned with market conditions. As we get into more discussion on the quarter, I'd like to provide an update on our three strategic corporate priorities. For profitable organic growth, our 2024 expectation now calls for a slight decline in year-over-year revenue and adjusted EBITDA, primarily owing to difficult US farm market conditions. Given we are on pace for a near record year for consolidated results, amid a very difficult time within our largest market and business, we are pleased to see the resilience of our overall diversification strategy working. Intense efforts to update our growth plans and strategies across our North America farm business are complemented by the strong international commercial outlook and together are supportive of AGI returning to our growth path next year. For operational excellence, third quarter margins were quite strong relative to historical third quarter results, especially after factoring in the impact of farm segment mix. For the full year, we are on pace for a similar margin result to last year. Our ability to demonstrate a consistently strong and stable margin performance is a clear sign of the step change we have achieved in realizing sustainably higher margins through extremely efficient business operations. For balance sheet discipline, our focus on free cashflow generation continues to show sustained improvement. Our leverage ratio and debt levels improved year-over-year, and we continue to closely monitor with the view of achieving our 2.5x target in 2025. Now turning to a review of our results and trends across segments and geographies, beginning with our farm segment. Overall farm segment results for the third quarter were challenged as the US navigates generally soft market conditions. Farm segment revenue from our Canada region increased 13% versus prior year, through a significant increase in demand for permanent equipment and a moderate increase for higher margin portable grain handling products. As a percentage of mix within the farm segment, Canada is less weighted to portable equipment relative to the US, owing to the strong storage business and brands we possess in Canada. We continue to carefully monitor order intake in Canada, as it helps us to deliver and implement the appropriate plans and tactics to ensure momentum can be sustained in 2025. The US farm segment has been particularly slow this year due to tepid farmer sentiment. Aggregate dealer inventory levels of farm equipment continue to slowly decline and remain above average levels, creating near-term challenges for equipment suppliers, including AGI and our portable product lines. With harvest conditions generally trending favorably, and the new crop working through the supply chain, dealer inventories of portable equipment will continue to improve, gradually returning to more balanced levels. This will be supportive of a recovery in our US farm business, an area we will continue to closely monitor. In addition, we are confident that the appropriate business actions have been implemented through Q2 and Q3 to restructure and reposition our farm business to limit the headwind as we look ahead to 2025. These actions include updated rebate and incentive programs to stimulate demand, as well as right-sizing our cost structure to mitigate margin pressure. Farm segment revenue from our international regions decreased 18% year-over-year. While a very strong first quarter pulled some revenue ahead from the remainder of the year, we are encouraged to see significant increases in margins for our permanent equipment in Brazil from operational efficiency initiatives made at the manufacturing level. As we navigate the current market, the notable grain storage deficit in Brazil suggests that this market will be a good leading indicator of overall farm market recovery. Early business indicators such as quote activity are positive and trending above prior year. Results from Australia were steady in the quarter. The team continues to focus on building out our portable business and dealer network across Australia, especially with production capabilities advancing in India. Now turning to our commercial segment. Commercial activity across all international markets remains robust, with EMEA and Asia Pacific helping to stabilize overall third quarter performance. In Canada and the US, we navigated slower overall activity, while our Brazilian operations were awarded several large scale projects late in the quarter, which are now fully underway. The Canadian commercial segment is positioned for an uplift in activity and results. Efforts to rebuild the order book are beginning to pay off, with a significant increase in orders exiting the third quarter. The order book now sits at a record level for the quarter and up significantly relative to last year. Activity in our US commercial segment remains steady. With a healthy order book, this segment is set up for a strong fourth quarter and consistent overall results for the full year. The reorganization of our food platform continues, with revenue stabilizing and the order book remaining strong, though there's more work required on solidifying order execution and margin capture. The international commercial segment was effectively flat in the third quarter, as a very strong EMEA result was offset primarily by Brazil and the broader LatAm region in South America. There is a timing element to be mindful of as our international commercial projects have been generally weighted towards Q4 of this year, with several large orders secured late last year. The EMEA region continues to be a bright spot for the company, with another strong quarter and a very strong order book, which benefits from solid execution of our emerging markets growth strategy. The focus and success within emerging markets such as the Middle East and Africa is the key contributor to the ongoing momentum and success for the business in Q4 and across 2025. Our Brazilian commercial business is showing significant signs of accelerating results, driven by our strategic focus on expanding local capabilities and broadening market segment reach. The benefits of this strategy are clearly visible in our recent signing of approximately $105 million in new projects, which will begin contribution in the fourth quarter and across 2025. An extremely robust pipeline provides added confidence in the potential for this business. Finally, our India business remains a solid contributor to AGI’s overall results, with a stable third quarter and a sizable increase in order book. The lift in the order book is directly attributed to product transfers, with well-established manufacturing capabilities for bins and permanent material handling complemented by ongoing demand for rice milling equipment. Overall, our international business is performing extremely well. This performance is a direct result of our strategic shift towards the commercial segment achieved through our three growth initiatives, including product transfers, emerging markets, and growth platforms. The strategy is working, creating accelerated demand across all regions and leading to a strong order book that positions AGI well for our fourth quarter and provides exciting momentum heading into 2025. In total, our international commercial business now represents a sizable majority of the overall company order book and is up 75% relative to prior year. The international commercial segment has been a key driver of this result during a time where our US farm market business navigates market headwinds. With several sizable commercial orders secured and underway, we are well positioned as a strategic partner to support our customers' critical projects around the world. The resilience and diversification of our business model and global footprint continue to drive near record level annual performance. We have a strong project pipeline and a secure position as an industry leader with significant long-term growth potential. We have updated our full-year guidance to include adjusted EBITDA of approximately $280 million, with margins of approximately 19%. The margin outlook is particularly encouraging given the headwind that mix plays in our results relative to last year. Our ability to sustain a new and higher level of margin performance relative to historic results, is a clear indicator of our commitment and capabilities to consistently drive an attractive margin profile going forward. I appreciate your time this morning and will now hand the call over to Jim.

Jim Rudyk: Thank you, Paul, and good morning, everyone. For today's call, I will touch on four areas, including an overview of our third quarter results, an update on key balance sheet metrics, some comments on cashflow, and finally a quick recap of our outlook for the remainder of the year. On a consolidated basis, third quarter revenues of $357 million and adjusted EBITDA of $69 million, decreased 13% and 19%, respectively. On an adjusted EBITDA margin basis, our results of 19.2% is strong compared to our historic third quarter margin levels. This demonstrates the continued resilience of our margins in a variety of operating environments. The year-over-year margin change is primarily due to the mix impact from a softer US farm result, partially offset by ongoing efforts to streamline SG&A at the corporate level and other cost control initiatives implemented across the organization. Our adjusted EBITDA includes approximately $10 million in transaction and transitional costs that are largely related to legal matters, mostly from our digital business, as well as some trailing one-time costs associated with recently announced facility consolidations. Our farm segment delivered $185 million in revenue, adjusted EBITDA of $45 million, and margins of 24.6%. As discussed earlier, the soft US market, which persisted from the first half of the year, was the main driver of the results. In the commercial segment, Revenues of $173 million were down slightly year-over-year, as solid growth in EMEA and APAC was offset primarily by slower conditions in North America. Adjusted EBITDA of $31 million declined 10% year-over-year, with margins contracting roughly 90 basis points to 17.9%. The margin result was largely attributable to the impact of mix within India and the broader APAC region, Partially offset by success in implementing new manufacturing processes in Brazil and EMEA to capture additional gross margin. Moving on to our balance sheet, we remain disciplined with our credit facility usage, making notable repayments against our senior facilities in the quarter. Our net debt leverage ratio of 3.1X improved from 3.2X year-over-year. While we are focused on managing cash flow and adhering to a disciplined capital allocation approach, the combination of lower adjusted EBITDA expectations for the full year and some incremental fourth quarter working capital needs associated with our international commercial business, means that we will likely achieve our net debt leverage ratio target of 2.5X in 2025. Overall, we feel comfortable operating the business with leverage ratios where they are today, but we recognize the importance of achieving our improvement objectives, and we will continue to prioritize progress on managing this ratio into 2025. Turning to working capital investment, which continues to be a key focus across the organization, our net investment of $195 million in the third quarter was down from $243 million year-over-year. On an annualized percentage of revenue basis, Working capital intensity decreased from 15% to 14% year-over-year. Our teams are well established in new processes and procedures to better manage working capital at the facility level, and this is reflected in the long-term trend of improvement in our working capital usage. And now moving onto cashflow. Over the last 12 months, our free cashflow is approximately $111 million, roughly a 40% conversion against adjusted EBITDA, and a 53% improvement relative to the comparable LTM period from the third quarter of last year. The improvement is partially attributable to a significant cash outflow made in the comparable LTM period related to the resolution of large one-time warranty provisions. Overall, similar to working capital, we are encouraged to see a clear uptrend in our free cashflow metric over recent years, with progress accelerating. We also continue to closely monitor our capital allocation plans and strategies, balancing debt repayment, growth investments, and opportunities to create value for shareholders. Given our view as a management team that AGI share price does not reflect the intrinsic value of the company, we are preparing a share repurchase program subject to TSX approval, as an attractive option to prioritize within our capital allocation strategy. Finally, turning to our outlook. For 2024, our adjusted EBITDA guidance now calls for approximately $280 million. We have clear visibility into project delivery timing, particularly for our international commercial businesses, which will be a key driver for the fourth quarter. In terms of margin levels, we expect our full-year margin levels to stabilize at approximately 19%. We anticipate further incremental operational excellence gains to accrue to margins, offset by a shift in mix towards commercial, which is generally lower margin than farm. Overall, our ability to stabilize the step change in margins we realized in 2023, is a clear signal of the meaningful progress we have made as a company to consistently drive profitability and performance to a new level. I'll now hand the call back to the operator and open up the lines for questions.

Operator: [Operator Instructions] The first question comes from Jacob Bout with CIBC (TSX:CM). Please go ahead.

Jacob Bout: Good morning. So, maybe just a topical question here. Given the Trump win and looks like he's going to win both the house and the Senate, you're concerned about cross-border tariffs. How much product destined for the US market is produced in Canada?

Paul Householder: Yes, thanks for the question, Jacob, and yes, we're obviously paying close attention to the election results. If you look at our business in North America and our manufacturing capabilities and our supply strategies, right now from a farm standpoint, we manufacture our portable equipment as well as a portion of our permanent equipment in Canada and deliver that into the US market. That's complemented by a fairly comprehensive manufacturing network that we have established across the US. So, we have a pretty good balance of manufacturing capabilities across both Canada and the US that we think sets us up pretty well for whatever conditions or new implications may arise out of the election.

Jacob Bout: Okay. and maybe just a question on the US farm. When you strip out - well, maybe just look at it this way, from the dealer perspective, what was the in-season US portable demand like for the fall of this year?

Paul Householder: Yes, so great question, Jacob. And this is an area that we are obviously watching fairly closely. We have a fantastic portable business across the US, one that we're actually quite proud of, and it has been a tailwind for us from a results standpoint for the past several years. One of the challenges that we've had across 2024 is the level of inventory that exists across the channel. This is fairly high inventory across a good bit of Ag-related products, and that is consistent for AGI’S portable equipment. So, that has been a headwind for us across 2024 inventory levels of portable equipment. As we commented in Q3, Jacob, we started to see those inventory levels improve, our inventory level of portable equipment start to come down. That trend did continue across Q3 at a slow rate. So, we did see demand for portable equipment continue across Q3. It's not yet at historic levels and it's something that we are continuing to monitor quite closely. We would expect the inventory levels to continue to improve and get to a more normalized level at some point in 2025.

Jacob Bout: Okay, that's helpful. Maybe I can just squeeze one more and just on this capital allocation, paying down debt, share drawback and M&A, kind of where do things stand, what's the expectation for CapEx over the next 12 months in free cash flow conversion?

Jim Rudyk: Yes, so thank you, Jacob. Capital, our approach at managing capital has not changed. We still remain very excited about the growth opportunities. We'll continue to invest in India. We've got our normal level of CapEx that we'll spend in terms of maintenance. We always managed to also do a number of growth CapEx initiatives. So, that will not change. The only thing - and the other encouraging thing is, we have the capacity across the organization to continue to grow and meet the demands for some time. And so, all that we're doing now is acknowledging that we feel very confident about the strategy of our company, and think that the valuation right now in our stock price is not reflecting that. And so, we've decided to reallocate some of that capital. And as you saw, we announced an NCIB up to 10% of the value of the float. And so, we think that's being more opportunistic. We'll manage that accordingly over the next - and monitor that over the next few months. But nothing's really changed in terms of our confidence and our strategy and our outlook. And with our debt levels now where they are, the last year and a bit, we've proven we can get down the leverage ratio and pay down debt and we'll continue to do that. Our cashflow profile is quite strong going forward. And so, we're being more opportunistic now, given the value of our stock.

Jacob Bout: Okay, thank you.

Operator: The next question comes from Steve Hansen with Raymond (NS:RYMD) James. Please go ahead.

Steve Hansen: Yes, good morning and thanks for the time. Paul, do you have a sense for maybe a bit more granularity on how long it'll take to burn down the US portable inventories? We're late into the selling season this year, of course. So, I presume it’s spring at the earliest and maybe into summer if things go maybe a little bit slower. How do you feel about that sort of timeline?

Paul Householder: Yes, Steve, thanks for the question. And I think you're hunting in the right area from a timeline standpoint. We're going to continue to look at US farm quite carefully. Our focus will be on the portable inventory, as well our strong permanent business out there. We would remain cautious on the US farm and the portable inventory. We do expect that our inventory levels will continue to come down. We did see that across Q3. We're starting to see that now early in Q4. So, sometime in 2025, probably more bias towards the second half, as you're referencing, Steve, what we would expect to see that inventory level more normalized.

Steve Hansen: Okay, that's helpful. And just for some broader context for us all, like how do you manage that process then? I think you described a number of cost actions and the taken - I'm presuming that means taking down production rates a little bit and perhaps maybe working down some of the excess staffing levels. I'm trying to understand how you actually manage that business to accommodate this kind of headwind. Thanks.

Paul Householder: Yes. Steve, that's a terrific question, and you heard a little bit in our prepared remarks, this is an area where we're quite proud. The internal teams have done just a fantastic job of making sure that we keep a very close eye on the market conditions and then adjust our operations to reflect that reality. So, you're absolutely right. We've made the appropriate adjustments at our manufacturing facilities to ensure that our production capabilities is in line with demand, and accompanying that, we have the right cost structure in place accordingly. That's been a key initiative for us, and exemplifies the agility that we have across our business to make those adjustments in such a quick timeframe and ultimately be able to achieve a fairly impressive margin profile as a result.

Steve Hansen: Okay, helpful. Thanks.

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

Gary Ho: Thanks. Good morning. Quick question, just on the commercial wins that you guys have achieved. Paul, maybe just curious to pick your brain here. What are maybe several factors you believe you're having success in winning contracts? Is it maybe lack of competition in these international areas? Is it significant commercial demand? Like, what's the secret sauce and what's the upside in commercial as you look at quoting activity later this year into 2025?

Paul Householder: Yes, thanks for that question, Gary. And again, this is an area that we're pretty excited about. I think it all starts with our strategy that we have in place, we put in place a couple of years ago. Our strategy really was supportive of growing our commercial business with a bias towards the international side. That is where we see quite a lot of opportunity for long-term and sustained growth. Supporting that broad strategy, we implemented the three strategic initiatives that we continue to reference, the product transfers, emerging markets, and our growth platforms. As the teams continue to be successful in implementing these, ultimately it is enhancing the capabilities that we have regionally, as well as broadening our market reach. Those two elements are very powerful, and they are a strong indicator of the type of results that we've seen. In addition to that, particularly down in Brazil, we're enhancing our capabilities to be able to successfully win and serve market opportunity to be more involved in large and complex projects, and managing those from a turnkey standpoint. We feel that this is a highly differentiated capability that we have in Brazil. We saw the market moving in this direction. We initiated activities to enhance these capabilities back in 2023. We actually won two good sized projects that were turnkey in 2023, and successfully executed those. That gave us the confident confidence to take the next step and is a key part of the recent wins that we've had in Q3. Just rounding that out, Gary, as you heard in the prepared remarks, the pipeline for these type of projects, not only in Brazil, but across our international and commercial segments, remains extremely robust. It’s underscoring the strength that we have in our order book exiting Q3, and gives us quite a lot of confidence and excitement that that type of momentum is not only going to support our Q4 results, but be supportive of 2025 as well.

Gary Ho: Perfect. Thanks for that. And then maybe as a related question, if you can dig a little bit further into the product transfers. Just wondering if you can share any update where you are in terms of that initiative year-to-date. And also, can you provide a bit more color in terms of the next round of product transfers and what you intend to implement next year and any associated significant growth CapEx related to product transfers in 2025?

Paul Householder: Yes, outstanding, Gary. We're highly active, obviously from a products transfer standpoint. The ones that we initiated back early part of 2023 are all very well progressed. So, if you start in India, our silos, our storage bins, as well as permanent material handling, that manufacturing, that engineering capability is very well established in India. The team has done an excellent job progressing the very large order that we've secured in this space back in the Q4 2023 timeframe. That's part of the commercial tailwind that we have supporting Q4. So, that product transfer very well progressed. Staying down in India, the transfer of our portable equipment continues to gain momentum as we head into 2025. We'll be shifting more of our manufacturing production for Australia into India. Previously, it was out of Canada. This is a great capability for us to streamline our supply chain, get closer to our markets and our customers, and overall enhance our capabilities to serve that Australia market. So, all of those are well progressed. Jumping down to Brazil, food feed and fertilizer are product transfers that are also well underway. Those transfers has been very supportive to the momentum that we are now establishing on the commercial side of the business down in Brazil. We talked about how strong our order book is overall. Down in Brazil, our order book is up approximately 200% versus prior year, supportive by both farming commercial, but certainly weighted more towards commercial and enhanced by that product transfer success. So, that, Gary, gives you a quick snapshot of where we are on the product transfers that we have previously initiated. In terms of the next round of product transfers, there's two in particular that we will be launching across 2025. The first one is related to our digital products and part of our digital growth platform. We've got a very nice market position for our digital products in the US. We see a very attractive market for these products down in Brazil, as well as EMEA. We'll be shifting our capabilities, including some manufacturing capabilities, into those markets across 2025, positioning ourselves to start accelerating our activity in those markets. The final one, Gary, that we will be implementing in 2025, is transferring part of our conveyor technology and capability from the US over to EMEA. These specifically are enclosed belt conveyors and are a very strong product for major port infrastructure and expansions. We see a strong market in the EMEA, throughout EMEA region for these products over the next coming years. Transferring this capability over to EMEA is going to position us extremely well to participate very actively in that market. From a CapEx standpoint, Gary, the final part of your question, it's one of the attractive parts of our product transfers, is really just incremental capital, very much consistent with the comments that you heard Jim make. It's not a step change investment in capital that is required to get these product transfers up and running.

Gary Ho: Absolutely. Okay. No, thanks for the detailed response there, Paul.

Operator: The next question comes From Andrew Wong with RBC Capital Markets. Please go ahead.

Andrew Wong: Hey, good morning. Can you provide some guidance on the business transition-related costs, like transaction costs and ERP system costs? How much should we be modeling in for the next couple of years, and how many years do you expect these costs to continue?

Jim Rudyk: So, thanks, Andrew. Hey, good morning. So, there’s a couple of parts in there. So, first of all, I’ll take the ERP costs. You'll notice in our results, you'll see an amount going through the adjusted EBITDA tables. That project we talked about at the end of last year, it will continue through 2026, through the end of 2026. And the amounts to expect from a cashflow perspective will be approximately the same of what you saw this quarter on our - each quarter for the next two years. So, that's one item. In terms of other transitional costs that may run through our results, a big part of our strategy is operational excellence. We are through a lot of the innings, so to speak, of that journey, but there still are a number of opportunities as we look across our operational footprint across the world. And so, to the extent that we still see opportunities from a return perspective to make changes, there will be some other costs that will flow through there that we’ll identify and call out for you. I don't expect those to be as significant as they have been in the past few years. Past few years have been dominated, unfortunately, by some of the legacy incidents related to the bin. Those are behind us. A lot of the legal costs that we've called out are mostly behind us as well. So, going forward, what you should see from a transition or transformation perspective is really just the system cost for ERP and then some nominal amounts related to continued operational excellence enhancements.

Andrew Wong: Okay, that's great. Thank you. And then just on the buybacks, are these contingent on meeting your leverage targets or? Sounds like they might be more opportunistic. So, could those buybacks come even before you reach your leverage target?

Jim Rudyk: Yes, they will. So, we'll start those buybacks as soon as possible and manage accordingly. From a leverage perspective, it doesn't do a significant amount of impact to our overall leverage. And as we work through Q4 and as what we see going forward, we'll continue to generate cash flow. And with what we have on tap from a CapEx perspective and our working capital management initiatives, we'll be able to utilize some of that cash to opportunistically buy back our stock.

Andrew Wong: Okay, great. If I could just maybe ask one more, just maybe a little bit more strategic question. You've been pretty clear that your stock valuation flow, we saw a transaction earlier this year for one of your competitors to higher valuation. There were reports of a takeout offer back in May. You've executed well on your margins and growth, and obviously there've been some bumps recently more market-related, but like, if these shares stay at these levels, at what point would you want to consider a strategic option just to realize shareholder value if nothing really changes?

Paul Householder: Yes, Andrew, thanks for the question. From our standpoint, we are extremely excited about the future direction of the company. We feel quite strongly in the strategy that we have in place, the strategic direction that we're headed, and that is our focus. There's no interest to explore other options at this point in time. Our focus and our commitment is on our strategy, the execution of our strategy, delivering positive results and ultimately shareholder value.

Andrew Wong: Thank you. That's very clear.

Operator: [Operator instructions]. The next question comes from Tim Monachello with ATB Capital Markets. Please go ahead.

Tim Monachello: Hey, good morning, everyone. So, just looking at the Q4 guidance, it’s pretty specific, or I guess the 2024 guidance implies a pretty specific number for Q4. And in the context of farm headwinds, I'm just trying to understand how you guys have that much confidence in the outlook. And if you could provide any data points or granularity on your expectations for revenue mix between commercial and farm and your expectations for farm in particular in Q4 on either year-over-year or quarter-over-quarter basis, that'd be helpful.

Paul Householder: Yes, thanks, Tim. We remain very excited about the outlook of Q4. I can give you a little bit of color on how we see that unfolding on farm versus commercial. As commented earlier, we'll continue to remain cautious, at least from a US farm standpoint. So, that has been factored into our Q4 outlook. On the Canada farm basis, Canada farm has performed well in Q3, has performed well year-to-date, and has a positive outlook for Q4. So, we would expect Canada farm to contribute to our favorable Q4 outlook. Down in Brazil, the farm conditions continue to improve. We saw a bit of that in Q3. We expect more of that into Q4. So, we also expect good conditions from our farm business down in Brazil. But unquestionably, the key to our Q4 performance is going to be on the commercial side. It all starts, Tim, back to those significant projects that we won at the end of 2023, a number of large projects across Brazil, EMEA, and India. All three of those regions have been active in executing those projects across the year. We're now in a position where those projects will hit in Q4 as we wrap those projects up and ship them off to our customers. So, we expect to see a fairly sizable uptick in our commercial results in Q4, complemented by more steady results in farm, ultimately leading to our positive outlook for Q4 overall.

Tim Monachello: Okay. And then I guess most of the projects that you're going to process in the commercial side of the business, it sounds like those were anchored maybe late in 2023 or early 2024, and you've had some nice commercial wins in the back half of this year that you spoke about earlier on the call. So, I guess, can you provide any guidance on how we should expect the commercial business in 2025 to perform perhaps on a year-over-year basis? And also, like what - do we see a pretty large step-down into Q1 from Q4 levels?

Paul Householder: Yes, thanks for that question, Tim. So, maybe I'll start with just overall outlook for 2025 on the commercial segment. Obviously, it's still a bit early days of us pulling together our budget and our more detailed outlook for 2025, but if you just look currently at the strength of our order book, it's up 36% over prior year. It's sitting at a record level for Q3. It is strongly supported on the commercial side, the commercial segment, that's up about 75% over prior year. On the international side, the order book is up around 100% over prior year. So, all of that is indications that at least it's the early part of 2025. As we continue to execute and deliver those projects, we would expect favorable results on the commercial side. And then as we commented earlier, the pipeline also looks quite attractive. We continue to quote and work with customers on winning new projects. To the extent we continue to be successful in securing these large complex projects across our commercial platform, that would be supportive to an overall favorable outlook for 2025. But as you know, our order book on the commercial side gives us visibility typically in that say six to nine months. So, it’s mostly in the first half of the year right now that we've got good visibility on the commercial side.

Tim Monachello: Okay, got it. And then I guess one follow-up if I might just on US Farm. Do you think that the operational efficiency initiatives that you've implemented over the last 20, 18, 24 months, I suppose, have negatively impacted top line?

Paul Householder: Yes, thanks for that question, Tim, again, an area of strength really for us is the operational excellence initiative. The direct answer is no, we don't think they've had any impact at all on our top line performance. I mean, if anything, Tim, we would expect the opposite. A lot of these operational excellence initiatives have been aimed at improving our cost structure, taking costs out of our product lines, that will ultimately put us in a more competitive position going forward. You've heard Jim and I talk about the potential that remains from an operational excellence standpoint and how we would look to manage that across our business going forward. Our expectation is to kind of maintain our EBITDA margins in that 19%. And as we continue to execute against operational excellence initiatives, improve our cost structure, that will put us in a more competitive position that we think is going to be a tailwind to growth going forward.

Tim Monachello: Okay, got it. I appreciate the details.

Operator: The next question comes from Michael Tupholme with TD Cowen. Please go ahead.

Michael Tupholme: Thank you. I know we're late in the year here, so there's not a lot of a lot of time left to try to forecast to get to your new full-year guidance. But I guess the question is really just, can you speak about your level of confidence in delivering the new full-year guidance and what that implies for the fourth quarter? And I guess, is there anything we should be aware of that could present a risk in terms of any projects slipping out of the fourth quarter and putting that guidance at risk? If you can just talk about your confidence and any risks.

Paul Householder: Yes, thanks, Michael. At this point in time, we feel confident in the Q4 guidance. We've obviously taken a very close look across all of our geographies, all of our markets and segments, keeping an extremely close eye on US farm in particular. So, I think we're very balanced and we have a degree of confidence overall in our Q4 forecast. There's always risks in the forecast. If we had an unexpected delay in a commercial project, that could be a risk. However, we've taken a number of steps to mitigate that as a risk. We've referenced those in prior calls. A lot of what we've done in terms of our contractual situation, and moving more to a percent of complete payment structure, helps to mitigate that risk. So, there are risks that are out there, but we feel that as a team, we've taken the appropriate steps to position us to well mitigate those risks.

Michael Tupholme: Okay, appreciate that. A lot of talk about your confidence in the commercial segment and part of that, or a big part of that being driven by the order book. I guess when I look at the order book, like you no longer provide a breakdown of this. So, clearly it's up a lot year-over-year, up 36% year-over-year. But the prior year comps looks a little bit easier than some of the other order book numbers you'd reported over the last several quarters, which are quite a bit higher than again, that Q3 2023 number. So, I guess, is there any way to sort of unpack the order book for us and help us understand what's happening with the commercial, which, again, is where a lot of the confidence in the outlook there was really driven by this order book?

Paul Householder: Yes, thanks for the question, Michael. And when we look at the order book, we always think it's relevant to mostly focus on year-on-year comparisons because you naturally have variations in our business activity as you progress through the year. So, sitting up 36%, we feel is a pretty exciting result. That is on the strength of our commercial segment. It is largely on the strength of our international business. That doesn't surprise us at all. It is directly in line with our long-term strategy, as well as our strategic initiatives that have been biased towards the commercial and towards the international. It's in these areas where we see a lot of exciting short, medium, and long-term growth potential. So, we've made the right strategic moves to position us very well to capture a lot of that opportunity. So, if you start to unpack our order book, it’s up 36% in total. On the commercial side, that's up over 75%. We do have some softness in our order book from the farm side. A lot of that is specific to the US Farm and the conditions that we’ll reference, but it's more than offset by the activity and the success that we're having, both on the commercial side as well as international. If you explore international a little bit more, Michael, just to give you some insights, our Brazil order book is up 200%. Our EMEA order book is up 100%. Our Asia Pacific order book is also up close to 100%. So, a lot of the strength is international. A lot of the strength is in our commercial part of the business.

Michael Tupholme: Okay, that's all very helpful. Thank you. And then just squeeze one last one in here, just on the NCIB, you've had a few questions here. So, doesn't sound like the usage of that is contingent on bringing leverage down before you can use it or anything like that. But given the fact that you're talking about an automated or an automatic share purchase plan with your broker partner, can you give us some insights into the parameters you're thinking about? Like, would you expect to be active at current share price levels, or do you need to see something happen with the share price before you're within the bands that you're looking at? Just any color to help us understand how active you're likely to be sort of now and in the very near-term.

Jim Rudyk: Yes, I think, I think you can expect us to be active near-term at current share price levels. We've been talking about this for a while now. Frustration with our current share price levels is no surprise. We think the company’s, from a valuation perspective, does not properly reflect the growth as you looked forward, and then the results that we've achieved in the last few years. So, we'll be fairly active fairly quickly.

Michael Tupholme: Okay, that's great to hear. Thank you.

Operator: And we have a follow up from Steve Hansen with Raymond James. Please go ahead.

Steve Hansen: Yes, thanks, guys. Just wanted to follow up on the margin profile here bit. So, historically, your auger and conveyor business has been your highest margin segment or product set, if you will. That's obviously got a few short-term challenges ahead of it. I think you described, Paul, in your opening remarks, you're expecting to see some improvements in your commercial margin profile. Maybe just focus on the latter, if you will, like, how should we expect that you continue to target 19% if your highest margin business is suffering a bit? It sounds like you've got some things in flight here on the margin profile side for commercial. Maybe just give us some color there and the confidence around that. Thanks.

Paul Householder: Yes, thanks a lot, Steve. And our margin performance, as we've commented, we're excited about. We've got a very strong commitment and confidence we're going to be able to continue to deliver and operate in that 19% EBITDA margin standpoint. A number of our operational excellence initiatives that we've been implementing globally are now starting to take hold. Our margins in EMEA, in Brazil, of note, which are biased towards the commercial segment, have been improving. And then, Steve, just in general as we see this volume uptick and the activity uptick that we're expecting on the commercial side, and we'll start to see in Q4, you just get a very nice tailwind from an overall volume and leverage standpoint. We're delivering more volume relative to a fixed cost position, and that helps our margins as well. So, operational excellence initiatives, volume and P&L leverage, and then as well actions that we've taken from an SG&A standpoint to make sure that our cost structure is right-sized in general, are all favorable indications of margin performance going forward.

Steve Hansen: Okay, that's helpful. And just, I'll squeeze one last one and I apologize, but just wanted to ask about the broader LatAm market. Your largest competitor down south spends a fair bit of time marketing its products into the adjacent LatAm countries, Argentina, Uruguay, et cetera. As I recall, you're not spending a lot of time doing that as yet. It's very focused on Brazil in particular. Have you got plans to start to target that broader LatAm market? I know you're focused globally in the rest of the sense. So, just curious the way the strategy is there. Thanks.

Paul Householder: Yes, thanks, Steve. Obviously, we're quite bullish on Brazil, as you noted, but we have a presence and we continue to focus on broader LatAm as well. And it's really a lot of the countries and areas across LatAm, Bolivia, Paraguay, Argentina, absolutely, Chile, Mexico. These are all areas where we have a good customer base. We have a strong agent support. We have salespeople in these countries throughout South America that are supporting this business. So, we have been, and we will continue to be active in South America. That's a market that we largely see as stable, Steve, with some slight growth opportunities. And it's why we will continue to support it. Where we see a significant amount of growth down in South America is in Brazil.

Steve Hansen: Okay, very helpful.

Operator: Thank you. And I know we're getting close to the top of the hour. Is there time for one more follow up?

Paul Householder: Sure.

Operator: Okay. We have a follow up from Tim Monachello with ATB. Please go ahead.

Tim Monachello: Thanks. Yes, just a quick follow-up on permanent farm. It sounds like the Canadian business is seeing some growth, and the US businesses, I guess on a consolidated farm basis, continue to struggle, but that sounds like it's mostly on the portable side. Are you seeing similar tailwinds that you're seeing in Canada and the US permanent side, or is that also hitting lower?

Paul Householder: Yes, thanks for the question, Tim. Overall, our Canada farm business, as you've noted, has performed well really throughout 2024 into Q3. We'd expect it to continue in Q4. We've got a terrific business in Canada, a fantastic team, very strong brands in Canada. We've got the number one market position on the permanent side that has absolutely been supportive of our result in Canada. In the US farm, I mean, the story really is on the portable side, the inventory levels that exist in the channel. If you go a level lower, you look at our permanent business, for the full year, we actually expect our permanent business from a profitability standpoint to be up over prior year. So, that just underscores really where the focus and the opportunity is from the US farm standpoint. Heading into 2025, just sticking, Tim, on the permanent side, we would expect our US farm permanent business to continue to improve and be out in front of portable. We do not have an inventory challenge, a channel challenge on our permanent side. So, we would expect that in US farm in 2025 to look even more favorable.

Tim Monachello: Got it. And then also in the US commercial side, you mentioned some labor shortages that are impacting throughput on the commercial order book. Have those been resolved or do you expect that to continue?

Paul Householder: No, those have been resolved, Tim. We feel very good about where our manufacturing capabilities are. We feel we've right-sized our labor positions, making sure that we've got enough labor in the area where activity is high and the right amount of labor where we're seeing some challenging market conditions. We've got a fantastic team that is looking at the labor, both manufacturing and our HR teams, to make sure that we've got the capabilities where and when we need them. So, no issues or concerns going forward.

Tim Monachello: Okay, fantastic. Thanks.

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

Paul Householder: Okay, thanks very much for joining us today. We appreciate all the questions and interest, and we look forward to our Q4 call. Thanks very much.

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

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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