Q3 2020 Ag Growth International Inc Earnings Call
just a quick reminder that the cautionary language about forward-looking information and the use of non IRS measures contained in our Q3 release also applies to the discussion during today's goal.
As indicated over the prior 3/4 twenty-twenty has been setting up for a Q3 waited performance with our commercial production schedules waited to Q3. It relatively short an early Harvest of North America also contributed to the queue through waiting. However, the COVID-19 has acted to significantly offset these positive elements in the quarter with a material impact on Commercial projects globally.
Development a commercial projects load or projects were postponed due to the varying Regional conditions do to Covent. Our customers have been dealing with limited access to sites availability of resources and uncertainties in end markets, which all contributed to lower our commercial sales globally and in particular in North America that said our commercial sales remained at 94% of Q3 2019 and 92% Year-to-date versus 2019. All factors taken together and out of Consolidated level q320 was a record third-quarter for a GI in terms of sales and adjusted ebitda home was also a record quarter overall for adjusted ebitda. Just beating to 2 from 2019, which was our prior. I watermarked this strong performance in the quarter again highlights the benefits of our diversification Investments over the prior five years demonstrates the resiliency of our business and confirms our place in the global food infrastructure with demand fundamentally driven by global consumption.
No.
Before we get into the details of our results would like to address the incident that occurred during the quarter.
On September fifteen we reported that there was a collapse at the customers project of a commercial grain storage bin that was manufactured by a GI.
The cause and the responsibility for the incident has not been determined and there is an investigation underway as disclosed this morning. The company has taken a $40 cruel in the third quarter in accordance with accounting and other disclosure obligations on the basis of potential remediation to the equipment that was supplied by a GI to this commercial facility and one other facility. They're cruel represents a g eyes estimate on a consultation with our external advisers of the direct cost involved including clean up and Equipment remediation at the two sites.
Kgi's contracts contain exclusions for indirect or consequential damages while AGI is a crude forty million in this quarter. We believe that this amount will be partially offset by insurance coverage in reserve in a lower net impact. We are working with insurance providers and external advisers to determine the extent of this cost offset if the investigation determines that a g i contributed to or cause the wage Ichi, I will take responsibility for the action and related remediation. This incident accrual is in addition to the previously reported twenty million in cost and accruals taken over 2019 and 2028 was due to the network equipment supplied by a GI to the same commercial facility where the incident occurred. The rework was required to address issues with the equipment design and supplied only to this facility month. We wanted to stress that the incident that occurred in September and the rework are isolated and discreet they are also extremely rare AGI manufacturers thousands of bins each year, and we're involved in, Georgia.
The projects each year for different customers around the world. Our engineering team has significant experience designing and providing leading products in our industry quality control and Safety and Security of our customer will always be our top priority.
Over the past three years and in response to market demand. I developed a large Hopper storage product as an extension of our storage product line.
Haji I sold $35 of these Hoppers to two different customers constructing grain storage projects there are total of 15 hoppers on the side of the incident and twenty hours on the Second Sight after bin collapsed. I don't have been funded some caution AGI immediately issued a demand to reach customer to suspend the use of the hopper and we are supporting our customers to ensure that we mitigate the impact of the incident as noted above the cause of the incident has not been determined.
In the meantime has responded by conducting a thorough analysis of the company's relevant processes procedures systems and Engineering tools. We are committed to strengthening our businesses of result of this experience.
We welcome questions about the incident after the prepared remarks. However, please note that we will be able to provide more details on the cause of the incident potential required remediation and the accrual page the findings of the investigation. Let's return to our more detailed review of our Q3 results are fundamentals and our Outlook This Record quarter is a result of very strong results in North American Farm Bill, India and Mia and or Technology Group and offset by lower commercial results in North America.
As indicated throughout 20/20 the strong performance of our farm business North America continued in Q3 the sales climbing significantly year-over-year end up year-to-date. The robust Performance. Bike or demand was solid crop volumes across North America driven by an annual increase in planted acres and favorable weather conditions resulting in good crop yields and a sizeable crop.
Farmers continue to invest in mandatory equipment and systems required to handle these composition themselves with adequate storage capacity to effectively Market their Club.
Demand has been broad-based across North American regions and products with inventories across our dealers with this acquisition a g. I gained a small regional market positioning grain systems we have been
Integrating our products sales and dealer development since the acquisition. We are seeing positive Traction in this market and believe our combination of market-leading Design Services storage handling conditioning and Technology products hold with additional dealer tools and service will lead to steady continuing into the fall in both Canada and the US
Q3 was a record result in Brazil in both sales and eat.
Sales, increased 55% sequentially and 52% year-over-year. We narrowly beat our previous best sales figure even increased substantially in a quarter as margins grew to double digit number closer to our Consolidated results as we grew sales achieved favorable product mix and saw the benefits of recent lean initiatives. We continue to have a very positive environment in Brazil. They whether increased acreage better see the nutrients usage strong fundamental crop demand low interest rates and low inflation are all leading to a steady increase of farm level investments in the infrastructure of grain and to maximize profitability from sophisticated grain marketing.
We expect these conditions to continue into Q4 2021 and beyond our Pipeline and backlog remains strong and Brazil leading to good visibility on continued momentum on our sales.
We do expect more volatility margins as we optimize product mix balance farm and Commercial projects and optimize manufacturing efficiencies. Overall. We are very pleased with our progress in Brazil.
India deliver record Q3 number despite the significant impact sales grew 44% year-over-year off of solid Q3 2019 and ebitda margins expanded significant year-over-year as we continue to work on manufacturing and sg&a efficiencies. We also achieve favourable products in the corporate in India. Our teams continue to successfully execute on our mom expansion strategies in India taking us from our traditional focus on mid-sized rice processors into both the markets for smaller and larger processors while growing are integrated system sales, we achieved this expansion through product and service developments designed to address the nuances at both ends of the market. We also stop positive Traction in larger projects in the quarter our export sales return to previous levels, which served to augment our sales growth in what is traditionally a slower quarter in India.
Overall conditions remain favorable in India with a good monsoon season leading to growth in rice production and facilitating a substantial increase in rice exports from India. Despite coded the earlier Monson Louise and a strong Q3 our Pipeline and backlog remain equal to this point last year setting up for continued performance into Q4. We are also positive in the environment heading into twenty Twenty-One wage to maintain a romantic in the Strategic Market.
We also have strong results in Italy with solid growth in your over your sales and substantial margin growth as we continue to see the impact of a recent investment in our automated production facility and product development efforts over the past eighteen months.
Commercial project man is now returning as we move through the Cobra crisis and we are seeing broad-based strength across the region that activity levels picking up in Eastern Europe Russia Africa and the Middle East off this increasing activity puts our Pipeline and backlog in a strong position and current intake levels to an increase in profile for Italy backlog going to the end of 2020 and into twenty twenty-five.
over the past
Years, we've been moving our sales engineering design teams as well as our products and ultimately our manufacturing into each of our strategic regions Brazil Italy southeast Asia and India this deliberate and strategic wage. In addition to the challenges from coded have a combined to lower our commercial sales into International markets from North America. This does naturally served offset the sales growth from the regions. However, the exact to make us more competitive in need to reach positions us to better serve our customers and build closer relationships that lead to a more sustainable defensible business with improving margins and products best configured for the new age of each market.
Our technology business continues to grow sure Trac is a market-leading monitoring and automated conditioning platform that extends to a grain marketing and overall farm management part of the foundation of this business is a robust. We do buy OT sensors integrated into our system providing live monitoring and data feeds to our farm and Commercial customers. This platform is having a positive impact across our equipment and playing a strategic role in our Market expansion that goes beyond the technology platform. We currently have been selling short track equipment to customers using it as a subscription model which spreads out the red for several years. However to look at the underlying performance of the short-track business we look at how the business performs on a retail equivalent basis, which would show what sales and earnings would be if we recognized the sale up front page over a number of years the challenge with a subscription model is that it can make the early reporting results look weak as the cost get recognized upfront at the revenue is spread over many years if we look at the short drive home.
This on a retail equivalent basis. Sure, Trac sales increased 45% year-to-date over the very strong organic growth numbers posted in 2019 on this same basis for track would have contributed significant positive or even year-to-date instead of a significant drag in the year-to-date.
The production of short-track equipment was relocated to the new facility in the quarter substantially increasing our capacity and driving key manufacturing efficiencies from a sales perspective. We are we are introducing additional financing options for a customer and revisiting our subscription model which we expect will result in stronger recognize sales the short-track platform continues to grow we are very excited about the positive contribution this business going forward.
I will turn the call over to Jim for a more detailed review the corner.
Thank you Tim. I'm very excited to be part of the AGI team and I am looking forward to helping us execute our strategy as we continue to grow the company to start off as Tim mentioned. We had very strong results as sales and adjusted D. But in the third quarter of 2020 were 282.5 million and 51.8 million respectively compared to 2 a.m. And 61.1 million and 39.1 million in the prior-year looking at sales. Robust Farm demand in North America and solid results in Brazil and Mia and Indian contributed to a strong performance in Q3 2020 despite the headwinds presented by the emergence of COVID-19. Our results reflect the resilience of our business in the face of COVID-19 challenges as well as the benefits of diversification across geographies and product lines from a product platform perspective. Our farm business was very strong due to high
customer demand from
Solid crop volumes across North America demand has been broad-based across North American regions and products and inventories across our dealers are currently at low levels off which will lead to sales and key for that are consistent with the prior-year our Commercial Business continued to be lower than prior year as customers cautiously manage their large capital projects as a result of the COVID-19 challenges from a geographical perspective. The US international business has showed strong double-digit sales growth while Canada was slack up year-on-year our international business results led by the strong performance in a Mia Brazil and India was due to the previous focus and investment in those areas and continue to represent strong growth opportunities.
Our overall sales backlog remains consistent with the prior year. We expect to see continued strength in our farm business through the first half of 2021 due to the depleted our inventory levels and strong crop volumes in North America as well as some Rebound in our Commercial Business as those customers start to make decisions on pent-up capital projects. I'm turning now to our gross margins and adjusted ebitda our results in Q3 2020 reflect a very strong operational performance across our businesses and geographies as our gross margin in the quarter increased to 34% in 2020 from 31% in 2019. It is significant that the gross margin percentage was achieved despite COVID-19 related operational protocols at all of our facilities are gross margin growth was a result of a continued strong Farm performance as well as sustainable increases in our International
business margins that resulted largely from strategic capital projects and Amiya and strong momentum in Brazil
as a percentage of sales are adjusted ebitda margin of 18.3% increased 336 basis points from prior-year.
The strong results were driven by the large Improvement and gross margin and our steady management of sg&a costs with respect to our earnings Outlook overall expect adjusted ebitda for 2020 to be in line with our 2019 results and we are looking forward to an encouraging first half of 2021 my final commentary relates a 180 position as you may recall, we amended our credit facilities in April given the substantial and sordi caused by the emergence of COVID-19. The amendment enabled us to suspend our covenant tests until October 31st and also provided us with increased liquidity Although. Our covenant tests were suspended at the end of Q3 Arnett senior debt to adjusted ebitda ratio of 2.89 times is consistent with the prior-year ratio and remains well below the pre suspension requirement of 3.75 times.
We do not have any.
Going to concerns now or going forward in April 2020. We also expanded our credit facility to add flexibility and additional liquidity and as at September 30th 2012, we have a hundred sixty four million of undrawn revolver capacity Plus a $100 million-dollar untapped accordion are strong results reduced growth capex needs brakes are modified dividend payout will give us Higher free cash flow and a much stronger balance sheet. So with that we will turn it back to the operator to take any questions.
Thank you. Ladies and gentlemen. If you do have a question at this time, please press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging you request change you wish to withdraw your question. Simply, press star followed by 2, and we do ask that if you're using a speakerphone to please lift the handset before pressing any keys, please go ahead and press star one now. If you have your question, and your first question will be from Jake about CIBC, please go ahead.
Good morning morning, Jacob Jacob. I'd like to get a few more details on the Forty million accrual trying to understand what what the probability waited estimate actually mean could the cost actually be higher than than forty million.
I get Jacob. I appreciate the the question the you know, as we we stated we're still going through that investigation. So we you know, this is a good estimate of some of the cars that we think are are involved here. So we always we get through that involves providing more clarity will we're comfortable with with that approval at this point. I just understand this correctly said that's your estimate, but that wouldn't be necessarily the total cost.
I think that's our estimate of the total cost Jacob. Okay?