Q3 2019 Earnings Call
Good morning, 19 is Jessica and I'll be your conference operator today at this time I would like to welcome everyone <unk> third quarter results release in conference calls.
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Good morning.
Thank you for joining Steve Summer fell 90 to discuss our Q3 results our business update and outlook [noise].
[noise] like to start by addressing the charge we took in the quarter.
This onetime charge related to product design issues that were discovered journey execution.
Oh projects and we determined that we needed to amend the design can add additional time in materials to ensure the projects were completed today expectation for customers.
A charge of this type is exceptionally rarity G.
Well commercial projects can be subject to changes additions and redesign.
We complete hundreds of projects annually without incurring a similar circumstances in our entire history.
We identified the root cause quarantine the issue and moved to ensure we limit this to a onetime event.
This event actually heights highlights a competitive advantage in the age I model.
We stand behind our work we are accountable responsive and we work to ensure a customer comes first.
We are confident we have the team the products and processes to ensure this type of event remains extremely rare or accountability creates the confidence that our customers need to entrust us with simplifying their critical business infrastructure.
Moving to the corridor.
Despite significant global headwinds and excluding acquisitions sales across age <unk> equal to our record results in 2018.
In both the third quarter end year to date.
Inclusive of acquisitions, we grew sales by 7% in Q3 and year to date as we brought on our platform in India expanded our food platform into beverages and grew our technology platform.
The contribution from these three areas further diversifies AIG <unk>, adding growth levers outside of our traditional base in North American grain.
[noise]. Our diversification is also gaining momentum in international markets was solid backlog heading into the ended the year in Brazil, EMEA, India and Southeast Asia.
Paul household their joined our team in June as Executive Vice President International.
Coming with extensive industrial products experienced that air products with a career spent growing businesses internationally.
Paul has restructured on an international sales and execution structures, putting key people in regional teams to continue our global growth.
During the quarter, we grew our capacity in EMEA with a new production line in Italy expanded our product lines in India achieve positive EBITDA in Brazil, and began to see growth in our fertilizer systems backlog in global markets.
We have made solid progress in building a regional teams internationally to put our expertise in production closer to our customers to be more responsive and deliver tailored solutions for each market. We expect to see continued growth in each of these key markets as the world response to changes in regional crop production and consumption driven by shifting trade regional dietary changes.
In food processing changes.
We're making excellent progress in our sensor and technology business.
During the quarter, we brought together and rebranded our technology technology products and services as AG I sure track.
On the farm and AG I sure track is now a leading pharma Green management system.
It extends from seat selection information right through to grain marketing eight right through to a green marketing tool.
Farmers are connecting with green buyers on our platform being paid premiums for using suretrack to provide green content crop trace ability and visibility to the green beans on the farm.
On the Green Fireside A.J. Suretrack allows the operators to monitor their facility in inventory levels, then utilize the platform to manage their supply chain from the green held at their sites that extend that to live monitoring the crop they have contracted to purchase as it sits in grain bins at farmers sites.
By applying technology to our equipment combined with sensors throat the farm our mobile data captured in the field and a green marketing platform. We are automatically automating the collection of over 10 liter Ism data.
We have automated population of our farm it facility management tools.
All this data is controlled by the farmers to use with their partners to better plan their crop grow their crop store in protect the crop and find the best market for that crop.
Now I imagine the global process. So that is buying from thousands of farms globally and can now watch the crops. They are buying go in the ground watch the application of nutrient in crop protection in season watch the crop being harvested and then see the crop and Vince around the world.
On top of that they can see what the continent. The green is the protein oil in starch content of the crop in every Ben.
They can see the precise volume of green in in the bins or if you're an egg retailer you can see the precise ball under the fertilizer chemical in seed.
You have in every been every container.
Every tank at every facility.
That is robust supply chain visibility and supply chain management and that is a g. I sure track.
Our focus with this platform as they expand our relationship with our customers to add more value and differentiate our entire product offering and we expect this deeper relationship to have the positive impact on sales across every division of AIG.
With that.
And those comments I'll turn the call over to Steve to discuss the quarter and then will soak up so go back for questions Hey, Thanks, Tim.
Trade sales in the third quarter of 2019 increased over the prior year due to higher sales of portable grain handling and drawing equipment sales growth in Brazil, and a strong performance from AIG. Its recent acquisition in India.
Sales growth in the quarter was tempered by challenging farm positions in both Canada, and the U.S. as well as by global economic uncertainties and their impact on the timing of customer commitments, most notably in offshore markets.
Our gross margin percentage in the quarter remained strong and was consistent with 2018, despite the impact of challenging market conditions on some product lines.
Adjusted EBITDA as a percentage of sales declined by 150 basis points compared to Q3 2018. However, this impact was due to age has continued investment in sales and marketing initiatives digital tools and technology platform that.
The benefit from these investments is expected to gain momentum in future quarters and to accelerate as our end user markets normalize in the transient items experienced in 2019.
Hey, guys businesses have performed well in 2019, despite significant headwinds in North America, and offshore and management anticipate adjusted EBITDA in the fourth quarter of 2019 to approximate 2018 levels.
EBITDA percentages in the fourth quarter of 2019 are expected to decrease compared to the prior year largely due to investments in marketing and technology the impact of harvest conditions I am certain product categories.
Due to commercial sales mix.
Several factors exists today that suggests we are positioned to enter 2020 on very solid footing first there was a growing expectation that U.S. farmers will plant a record amount of corn acres, and 20 point, which positively impacted massacre portable grain handling equipment and grain storage systems.
AI, Brazil continues to make progress both in manufacturing efficiency Downmarket development and management anticipate improved results in the country in 2020.
Internationally, our backlog related to 2020 has started to build and we currently expect to enter the year with a strong book of business.
Finally, we expect growth from our platform acquisition, India due to increased market development and synergies with other Asia divisions in summary, while we face certain headwinds in 2019, we look forward to increasing our pace of growth in fiscal 2020.
And with those comments I'll turn the call over to Jessica for acuity.
Thank you ladies and gentlemen, we will now begin the question and answer session.
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First question comes from Jacob.
Please go ahead.
<unk>.
Hi, good morning.
I had a question on the 2020 outlooks.
Saying things look a little better.
Talk a bit about what you think that ramp looks like.
You talked about higher U.S. acreage, it's just kind of a second half 2019, the U.S. in Canada.
Any indication that the the on.
Canada start.
Our on farm bids have been very strong really throughout 2018 Arthur throughout 2019.
When we're looking forward to 2020.
Really I think youve, beginning with the new planning season in in Q2.
Theres really nothing to differentiate Q1 of 20 from from the back half of 2019, but I believe once like every year when when the vehicles in the ground and as a new set of conditions in front of our farmer customer base, we expect that planted acreage and.
Similar drivers to what we experienced in 2019 on the portable grain handling equipment and lead to a very strong year on the farm.
Okay, and then as far as backlog.
Canada U.S. international.
And they mdna about that maybe can you provide it.
It sounds like international is up how did you must compared to Ken.
Yes backlog there are quite strong as they were in 2018, our record year. So looking at by geography, I mean, the farm backlogs that when we get into this time here. Jack you about you know where kind of winding up in a very late harvest.
Not quite as relevant as they will be as we enter 2020. However, the farm backlogs are higher than than they were at this time last year.
Our commercial backlogs are consistent and a strong they were in 2018, it's a bit of a mix in the U.S. regarding the platforms were stronger and fertilizer and food.
Currently than we were at the same time of last year and that.
It's a testament to our diversification in recent years into these separate platforms.
Internationally, our backlog is tracking along with a strong 18 were building a nice book of business for 2020.
The backlog is geographically diverse.
Brazil in particular as strong as is Europe , and eastern Europe , So where we're very comfortable with where our backlogs sit today and we believe will enter 2020 on on a good footing.
And the thanks <unk>.
Clients, we're talking about earlier on in the year.
As far as international trade is any about subside neutral.
Yeah, I think Jacob I think we're seeing signs of it.
Some citing a war.
Making.
Our customers, making adjustments to do what they perceive as new reality and Theres been changes in trade and where were the crops being consumed where it's being processed and.
So we are seeing.
A resumption of activity I guess, you you'd call it.
Pipeline is strong and.
It's.
Recently seen an uptick in the closing rates. So yes, I think there are positive signs internationally around.
There's the resumption or whether it's just.
But to a little bit of both I guess, it's our expansion into new markets both by product than we originally and then.
Resumption of of activity.
Last question.
Any any insurance recovery for that for the some of my church.
No there has not been and we don't expect to receive insurance on that charge chicken.
I'll leave it there thank you.
Your next question comes from Steve Hansen with Raymond James. Please go ahead.
Yeah, Good morning, guys.
First question is on India, just hoping you could give us sense for what's been transpiring their.
Months in conditions have improved push I think you noted should help miltec out, but I think you've also alluded to some internal product development efforts remark implement efforts more broadly just trying to get a sense for the status of that recent platform acquisition.
Yeah, we bought it seems there is got a phenomenal innovation product development team and so they've they've moved into expanded product lines. They've traditionally been building a product a robust product why and complete turnkey capability in well Oh, we would call sort of medium medium sized out processors and now were.
Extending to.
Launched a complete product line for large processors as well so we extend really across.
The market now in India, and then it expanding their efforts geographically within India, and then in the region and seeing good traction momentum in both of those efforts and and then.
Building out the additional product lines of parboiling.
Equipment.
Within India as two to sort of I'd say round out the turnkey offering.
Okay. That's helpful.
And just maybe a question on the technology side Youve compiled a number of assets.
Tells you portfolio you rebranded that now is Suretrack could you just perhaps describe how you are now going to go to market with this new offering is this something that's how the news wholesale different attached to it and you're going into new customers and that's happening soon or is it just sort of rebranding what you already have and continuing as isn't showing understanding how the customer said is changing if.
Oh.
Or if you're just you know what's new in this rebranding effort from a sales standpoint.
Yeah, it's a little bit of both we do have dealers that handle some of the hardware that we're talking about and then.
We have a direct sales team at church rock and not that sales teams talking both to to farmers end too on the commercial side to grain buyers and so we would.
Well going directly to grain buyers to to get them on on the system using it to management facilities in their supply chain.
So it's a combination of that do those things and those continue to evolve and as we as we build on the capabilities of the other platforms that exist today and that will be slightly different as we take that internationally as well.
And just follow up there if I may is how does that mix look on a relative basis.
Commercial versus on farm today, and then how you envision in the future is there going to be a shift towards larger commercial assets or is it stay on farm or is it a combination of both.
From a numbers perspective, it's very very weighted to farmers and and now we're.
Ramping up the efforts on the commercial side and so as you can imagine each green buyer.
Deals with hundreds or thousands of farmers and as we bring on commercial customers partner with them for their capabilities. They then.
They they then bring the surrounding those hundreds or thousands of farmers that need to be onboarded onto the suretrack system. So that you get that supply chain connection.
So it's.
Numbers wise, you will always be Oh, a lot more farmers on the system just just because that's the reality of.
Of the market, so, but the the disproportionate impact is as as commercial customers come on they bring.
Hundreds to thousands of farmers.
Okay very good thank you.
[noise] next question comes from Michael.
Thank you.
Hey, good morning to Steve I'm just.
Given the crop conditions in North America.
I thought the increase in sales in the portable handling equipment was quite impressive I mean are you seeing any is the main driver there still replacement demand and if not is there an element of share growth.
Yeah. Thanks, Thanks, Michael Yeah. This sales of portable are very strong as we expected. It's the product line as you know with is largely replacement driven when you get into a late harvest like we're experiencing in 2019.
Harvest conditions are very tough on our farmers.
Well the days are short and it's very tough on the on the grain augers and it drives in season demand.
It was a.
A surgeon demand that we expect it and it will leave us in a good place heading into 2020 as our dealers are doing very well here in Q4, and we'll enter 2020 with with lower inventory amounts.
Okay. That's helpful.
And maybe higher level question, obviously understanding that this year has been really challenging across a number of your geography is.
If we assume 2020 as a normal year.
That exist I guess and the X. pace, you know and I think you alluded to this already but but what businesses do you think you could see the most catch up potential on 2020 and from a geography standpoint is that am I right to think thats, mostly the U.S. and international.
I think I think that's right Michael if the businesses of ours that were most impacted by the conversions in 2019 were the grain storage systems business in the U.S.
Such a wet while the year in the U.S. is that business had or that that sector had difficulty gaining momentum in 2019, we did reasonably well through new customer acquisition.
As that market normalizes in 2020, we would expect to accelerate our growth in the U.S. grain storage systems.
Internationally also as you mentioned would be the secondary.
You know that the trade.
Noise, we will see if it dissipates or changes is certainly becoming more of the new normal then it was even six months ago. So we expect growth internationally also.
Okay, and then just on on Canada, I mean, obviously, you've had a number of strong consecutive years in the commercial business there.
With the Buildout in grain and fertilizer infrastructure I mean based on on the backlog and the discussions you're having with your customers I mean would you consider the ramp up in activity level somewhat mature at this point.
Yeah.
Theres still a lot of activity in Canada across the five platforms.
There's you're right there's there's been a.
Fairly sizable build.
You see that bill that port facilities, and then the knock on effect there was that you need to build in the inland.
The facilities to enable the that supply chain.
So you.
Great to have port access, but you have to get the crop gathered locally regionally in it to get into port. So on the grain side, we are still seeing momentum in the build.
Feed and seed likewise.
So and fertilizers sort of a consistent spend across across Canada, so well it moderate over the next three to five years probably.
But we're right now we're seeing good positive sides. Okay. That's helpful. Tim Thanks, and maybe just one last if I can squeeze it in.
Good quarter on free cash flow now understanding the second half as seasonally stronger for cash generation I mean, what do you expect for the for the full year in terms of free cash flow.
Well, we expect Q4 again will generate positive cash flow from working capital.
Which is consistent with our our historical seasonality, we as we always will [laughter] as we have done on the path will strategically acquire steel.
If and when we believe the times right to enter the market, which which would introduce the variable I guess where seasonality. However, excluding it we expect positive cash flow wins.
From working capital.
Perfect. Thanks, guys.
Your next question comes from David Neumann.
Please go ahead.
Good morning, guys.
Good morning.
Your confidence in India, and Brazil has grown and certainly it's great to see you turning turning to EBITDA positive on Brazil, maybe just an update on and on on how you how you're tracking there.
As far as where you're at versus potential and addition, India, maybe a comment on the banking liquidity issues that prevailed early in earlier in the years that beginning to subside set set a they can buy.
Yeah, well in Brazil in both places, where we have strong.
Strong backlogs and giving us good visibility into the coming quarter.
Thats a growing on the.
Brazil.
Good expansion of our farm sales and then with contribution from commercial sales so.
Seeing that right combination that right mix to get us to volumes, we wanted to see in Brazil. So we know as we look out.
Q4 Q1 into 2020.
We see the right.
Backlog going into the year and then the right momentum in.
Projects and in Brazil too.
To give us some competence in that region.
And likewise in India, I mean, that's that's a fairly.
We've got good backlogs Aaron and.
Pipeline could expectations for the coming year in India.
Steve you want to comment on banking the sure yeah. So last quarter, we talked about a couple of things.
One being the liquidity in India, the second being the timing of them on soon.
I will go through the timing of monetizing with far more important of the too.
Regarding bank liquidity I would say if moderating slightly it far from a crisis if.
A somewhat negative factor I suppose on the growth of our market you know AG, It's obviously able to provide any support our team in India requires.
On the financing side of things so it's not a significant factor in our in our growth.
It's still a slightly I guess, that's slightly negative factor that we believe is dissipating modestly.
Do you guys think their random walk on Brazil, I think you yet as said previously that one quarter could be down quarter can be up in.
He earlier on the area. It was a little weaker in Brazil, and and then now this quarter was it was pretty decent and your EBITDA positive do you think you're kind of getting firmer footing, there and getting traction in and are you seeing market share gains and things like that like what has been the surprise to you guys in India.
No I wouldn't characterize that as I am sorry, hi, sorry, yeah, right with Brazil, I wouldn't characterize it as a surprise, we're gaining momentum in the country without question.
Our backlogs are building further and advance than they had in previous quarters, which would leave to more consistency in your manufacturing flow and improves your margins. So we're looking you had the 2020, we were going to enter 2020 with though in the best backlog, we've ever had entering a fiscal year in Brazil, and our team and our.
Our market penetration and product awareness the increase in it.
We believe that momentum will continue throughout the year.
Awesome and then last one from me guys. Just overall as you're heading into 2020, I know that is more of a corn crop money in the U.S., but to get any sense when you're kicking the tires.
Thank you pensions at the farm level or commercial level overall.
Despite crop prices, where they are in the trade wars and ending Canada, obviously recently the Chinese lifted the ban import hopefully on canola. So maybe just a comment on just at the farm level and in commercial level, just given all the made a myriad of things that we've been challenging this year.
Yes, the demand drivers on the farm.
We remain very strong and that it hadn't changed and the weather conditions in Canada in the U.S. were by far the biggest Dr and tempering our growth in 2019, we had a very solid year. Despite despite the weather.
Anticipating a more normal year end 2020, you would expect those will demand drivers to become to to rise to the top and allow us to grow at the pace, we expect it to grow.
Excellent. Thanks, guys congrats on hanging in there despite that many challenges this year.
Thank you.
Your next question comes from Greg.
National Bank. Please go ahead.
Hey, guys. Thanks for taking my questions I just wanted to start with your near term outlook and apologize in advance for the pedantic nature here, but I'm a little confused and it was looking for some clarity.
Hi. This is all just what did right out of your prepared.
Prepare a press release, you mentioned that adjusted EBITDA in the fourth quarter will approximate 2018 levels, which on the surface seems very clear and easy to understand but when we come into the details. There you mentioned that sales in both farming commercial should be flat year over year, but EBITDA percentages.
In aggregate should decline year over year, so I'm trying to reconcile how sales will be flat EBITDA percentages will decline, but EBITDA will somehow be flat.
The sales perhaps guidance exclude acquisitions.
If again with all of our guidance for providing general guidance, Greg and I think maybe your splitting hairs here a little bit our general guidance is that Q4, EBITDA will approximate Q4 of 2018.
Got it so that should trump any sort of nuances underneath that.
Pluses or minuses, yes.
Okay, and then does that Steve just about the charge and we've already talked about it a little bit, but I just want to be clear the onetime charges that entirely isolated to Q3 or should it trickle into Q4 and if it does trickle into Q4 does your comments about approximating year over year EBITDA incorporate that.
The 7 million dollar charge, we accrued in Q3 remains our best estimate of the total cost of risk.
I really have to those two projects.
We have no information that leads us to believe that number will change.
Good to hear.
Just and then on the backlog it is great to see the fertilizer and food components contributing there any meaningful way can you give us any idea how much of the backlog is in those sort of well, but all I guess I'll call emerging division is is it coming up on I don't know quarter of a third a half or is it still sort of a much smaller percentage of the of the overall backlog.
It's a smaller percentage of our overall business, you know feed and sorry fertilizer and food today would.
Depending on the quarter of course comprise 10% to 15% over total sales you know the backlogs bye bye platform can vary from quarter to quarter, but.
You know fertilizer and food are growing pieces of our business.
Got it.
And then just my last one here still on the backlog.
We talked a little bit of at the trade tensions and and and how things are normalizing a little bit, but I'd just be totally clear as things get a little bit better have there been projects I guess any meaningful probably could have been taken out of your backlog with with the changes in a in sort of the global picture there.
No not out of backlog, Greg Theres plenty of.
On the on.
On the pipeline projects that are on the sort of drawing board around the world now those changes and timing on those.
There are always is but maybe there has been more.
Road 19, then than previously, but the backlog is solid nothing no changes there.
Got it.
I'll leave it there then thanks a lot.
Okay. Thank you.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by the one.
Our next question comes from Steve.
Raymond James Please go ahead.
Yes, Hey, guys, just a follow up on Brazil manufacturing efficiencies, which you site and in the release.
I recognize it's still relatively early innings here, but can you give a sense for where your utilization levels might be at your any site. I know you size that for future growth. We're just trying to get a sense for what degree of scale benefits, we still have to realize as the sales ramp up here are you just rough magnitude, it's where you where utilization sits.
Well.
You've seen it Steve it's it's obviously it has a lot of capacity and were nowhere close to it I guess it to be a high level way to answer. Your question. So we have plenty of room to grow within that facility and plenty of room to improve on our manufacturing margins.
Okay Fair enough and then just on the on the sales cycle in Brazil.
And the ability to get third party credit to facilitate sales that that's been an obstacle historically I'm just wondering maybe describe some of the efforts that you're taking down there to allow.
That fluidity or that capital to be available for third parties just to get the sales cycle moving.
Right. So the government financing is as it has always been is slowed had to make its way to the farmers. So some of it doesn't make its way to the farmers.
However, what we've done that as we've discussed in recent quarters is provided alternative financing through what's called the CPR, where we will accept as collateral the crop of the farmer and is a very well recognized efficient legal instrument in Brazil, and it's a very favorable instrument for us in.
Obtaining new farm business in Brazil.
These you're recognizing traction on the on those efforts then.
Absolutely, it's a key piece of our sales strategy and.
As our sales team becomes more mature and more I guess familiar with the instrument, which they are now.
Relatively new in our space, we believe that will accelerate in future quarters.
Okay very good thank you.
And there are no further questions at this time. Please proceed.
Okay. Thank you will close it off there thanks very much for participating.
Ladies and gentlemen, this concludes your conference call for today, Thank you for participating.
Please disconnect your.