Q3 2022 Ag Growth International Inc Earnings Call
[music].
Thank you for standing by this is the conference operator, welcome to the Agi third quarter 2022 results conference call.
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.
Should you need assistance during the conference call you May signal, an operator by pressing Star then zero.
I would now like to turn the conference over to Paul householder President and CEO of Hei.
Please go ahead Sir.
Good morning, Thank you operator, and welcome everyone to Agi's third quarter 2022 results call I'm joined today by our CFO Jim <unk>.
We will cover a number of topics, including some comments on the recent leadership change at Agi a note on a G I safety performance and culture and an overview of our quarterly results.
Ill share my outlook for the year and heading into 2023.
I'd like to first start by commenting on the incredible success and meaningful contributions they Tim close had on Agi.
It was his vision to create a resilient diversified business model and set up a G. I for a sustained period of growth despite fluctuations in regional economic conditions.
Agriculture industry is cyclical for many at Agi, we are now well positioned and proven to withstand regional disruption, while continuing to grow and expand this was tim's vision and his contributions across many areas of agi are deeply valued and appreciated we.
We wish him well and all the best in his future endeavors.
Taking over as CEO at such an exciting time for Agi is an honor and a huge opportunity to continue to advance our growth objectives.
I began my time with a giant 2019 as executive Vice President of our international businesses and in 'twenty 'twenty. One I took on an expanded role as C. O O, which included coverage of our North America business and related functional activity.
This time, we steadily implemented many initiatives around strategic planning organization structure up.
Alrighty excellent and growth objectives across all our businesses the key strategic priorities set in motion during my C. O O tenure will continue and in some cases accelerate.
As a result, we expect a smooth transition of CEO duties.
Brad has 26 year history, a J just achieved outstanding growth through acquisitions and experienced tremendous success we've.
We've assembled an incredible team and global capabilities with high quality products and attractive market positions around the world.
I am extremely optimistic about H as future as we sharpen our focus on three key areas operational excellence balance sheet discipline and profitable organic growth. This is an exciting and energizing time in Agi's history.
Our employees, our customers and our shareholders.
Before getting into our Q3 results in detail I'd like to first highlight a few areas, where we've made significant progress in recent years, which have been key contributors to our success safety and culture.
For Agi it all starts with safety.
It's a primary focus across the organization and the first agenda topic at internal town halls Board updates and senior leadership team meetings.
We have significantly increased our focus on safety over the past 24 to 36 months, adding resources training and tools.
I'm very proud to report that these efforts are paying off with the dramatic improvement in our safety performance. One example is our lost time injury or L. T I metric, which has reduced by 50% over the past two years safety is a cornerstone of our culture and an area, where we will sustain focus and make ongoing.
Improvements.
Another key element of our culture that we have significantly strengthened over the past two years is our effort to unite as one agi as.
As we deepen the level of integration across Agi, it's critical to set the foundation of collaboration and cooperation across businesses and regions.
The centralization of key functions for an organization wide view of our priorities challenges and opportunities has been necessary and helps to ensure that we bring the absolute best equipment services and solutions to our valued customers.
Now turning to our third quarter results.
Progress continued across all areas of hei, culminating in an all time record quarter for our company across both sales and adjusted EBITDA.
The bus market demand and our increased focus on operational excellence have come together to drive incredible results and set up continued momentum as we look forward.
I'd like to start by highlighting the tremendous progress of our North American commercial business.
This is an area that I've personally dedicated significant time to help restructure refocus and reposition for growth over the last year and a half.
Third quarter sales were up 27% and 30% year to date with a meaningful jump in EBIT contribution owing to enhancements in our sales capture quoting and project execution capabilities.
It is a dramatic turnaround versus a few years ago. When this business was underperforming.
We have since transformed the organization with centralized and dedicated sales sales execution.
Management customer service and revenue management teams among others.
Many of these groups have revamped or pioneered new internal processes to support the business going forward.
We will continue to refine this approach within North America commercial business, while expanding and leveraging it more broadly across agi.
North America commercial is a great example of what we can achieve with the United One Agi approach.
Among our other key contributors to the quarter was our global farm segment, as well as our Brazil, and India businesses.
Our U S farm business continued to exhibit great results through the third quarter with sales up 26%.
Market factors, including the combination of rising grain volumes and low dealer inventories provided strong demand for our products.
Our strong results were further supported by the benefits of our reorganized sales team implemented earlier this year, which has strengthened the connection and relationships with our valued dealer channel partners.
But the elevated crop prices, which generally pushes growers towards selling versus storing their grain after harvest a product mix within the business was weighted more towards our higher margin portable grain handling products versus permanent handling and storage systems.
A favorable mix led to strong margins and significant EBIT contribution in the quarter.
While sales in the Canada Farm segment were only up 6% in the quarter, a similar dynamic to the U S. In terms of a higher mix of portable grain handling equipment led to strong EBIT generation supporting very good overall Q3 results.
While the early drought led to a difficult start to the 2022 Canadian farm business. We are encouraged by the resilience of our results as they steadily recover and come back stronger.
Finally, our efforts to grow and expand our presence in Australia far market continues to gain traction.
EBITDA for this geography grew 24% year over year.
With backlogs up 22%, Australia is on pace to post a record year with strong double digit growth in sales and EBITDA, including an attractive margin profile with favorable mix of portable grain handling equipment.
Favorable conditions.
Strengthening channel partners and greater in region leadership underpinned the strong Q3 results as well as our optimism for Australia going forward.
Brazil continues to be a bright spot for agi sales were up 30% year over year building off of the Q3 2021 result, which itself was up 128% from Q3 2020.
Strong demand for our farm products was complemented by an increase in commercial project work and delivery of Agi, Brazil first ever food platform project in Brazil.
Margins in Brazil continued to be broadly in line with corporate averages and improved year over year as steel prices eased off of high levels.
This was Brazil second largest quarter in its history and with the backlog up 59% year over year. We anticipate continued momentum in this key agricultural market heading into Q4 and 2023.
Our India results were another key highlight from the quarter.
Sales were up 59% for an all time record quarter operating leverage favorable mix and improving gross margins helped drive a 101% increase in adjusted EBITDA for the quarter with margins well above our corporate average.
By yearend, India is expected to be close to doubling in size since agi acquired the business in 2019.
While the last few years have been a tremendous success. We believe there is significant room for additional growth going forward.
Near term growth is supported by a backlog up 43%.
And over the long term as we continue to increase India's manufacturing capability and product catalog through the successful technology transfer of several products from North America.
Finally, it is important to recognize the outstanding leadership and team. We are fortunate to have in India, which reaffirms our confidence in this business going forward.
A few additional comments on the other areas of our business to round out the recap of the quarter.
EMEA sales were up 32% despite currency pressure as the team continues to progress through large commercial projects EMEA has managed the impact of the regional conflict quite well.
While the backlog is lower than prior year, driven primarily by the removal of Russian and Ukrainian projects. The pipeline remained strong.
Further there are many opportunities in the middle Eastern Africa that the team is actively pursuing to build momentum as we head into the end of the year and 2023.
Our food platform sales were up 61% with an improved margin profile due to increasing focus on project controls and management.
Adjusted EBITDA contribution from food was up significantly in the quarter and is expected to be up significantly for the full year.
We are focused on broadening our geographic coverage for this platform and winning new business to keep pace with customer opportunities and our growth objectives.
Overall, our strong third quarter results demonstrate that Adi continues to perform as we worked through the process of more deeply integrating our businesses and positioning the company to sustain a high pace of organic growth our farm and commercial businesses. The anchors to Agi's results are both performing well with strong.
Customer demand favorable crop sizes and ongoing investment into critical food infrastructure, all supporting our outlook for the near term and into the future.
In closing I can't emphasize enough how excited I am about agi and our outlook for the future.
Assuming CEO responsibilities during an all time record quarter is an ideal backdrop to continue advancing our plans to focus on operational excellence profitable organic growth and balance sheet discipline.
Building on the momentum of North America commercial turnaround I see significant potential across a J to strengthen our businesses exceed customer expectations and accelerate growth. We have the people the products and positions around the world that serve as a solid base for us to continue to advance and grow.
I'll now hand, the call over to Jim for further commentary on our quarter.
Thank you Paul and Hello, everyone for today's call I'll cover three topics first I'll provide an overview of our third quarter results second I'll discuss our balance sheet and finally I'll provide an update on our outlook.
Our Q3 results were not only a record for the third quarter sales and adjusted EBITDA, but an all time record for Agi Consol.
Consolidated sales of $402 million was up 28% year over year and adjusted EBITDA of 76 million was up 65% year over year as broad based strength across all segments and geographies contributed to the result, including notable strength in our commercial platform farm segment as well as <unk>.
Growing momentum in the U S, Brazil and India.
Adjusted EBITDA margins of 19% were up 420 basis points and largely reflect the benefit of favorable product mix as well as the benefits of increased operating efficiency is higher volumes moved through our facilities.
Farm segment sales and adjusted EBITDA grew 20% and 52% respectively in the quarter.
Adjusted EBITDA margins increased from 21% to 26% strength in the U S and Brazil as well as a steady recovery in Canada from the 2021 drought all contributed to the result.
Strong customer demand for portable grain handling products critical to grow our operations remains robust.
Consistent with our messaging from the first half of the year, Canada continues to recover from the extreme drought from last year and we expect to see continued momentum in the farm segment overall as we move into Q4 with the Canadian farm backlog up 16%.
Commercial segment sales and adjusted EBITDA grew 40% and 97% respectively in the quarter adjusted.
Adjusted EBITDA margins moved from 13% to 18% year over year as product mix volume increases in SG&A scaling all contributed to the expansion, particularly within the commercial platform.
Finally, our digital business posted 9% growth on a record quarter for order intake supply chain issues, particularly for chips hampered production. However, the adjusted EBITDA loss in the quarter was primarily due to the increase of subscription sales relative to retail sales year over year as we introduced a new <unk>.
Subscription plan late in 2020 one.
Yeah.
Turning to key balance sheet metrics from the quarter.
From a working capital perspective, our noncash net working capital investment decreased from 274 million to 264 million quarter over quarter and declined as a percentage of sales moving from 18% to 16% on an annualized basis.
The overall reduction in net working capital was supported by a modest reduction in inventory.
As the strategic positions taken earlier in the year begin to release.
In addition, our.
Our days sales in inventory and organization wide priority to monitor and reduce also continues to tick downwards quarter over quarter.
This is an encouraging sign that as we renew our inward focus and deepen the level of integration and coordination across Agi, we are able to sustained progress on this key metric.
Our growing adjusted EBITDA continues to support our deleveraging objectives, our senior debt to EBITDA ratio sits at 2.2 times exiting the quarter.
This is down from 2.9 times in Q3, 2021 year over year and 2.7 times in Q2, 2022 sequentially.
On an all in net debt to adjusted EBITDA basis, our leverage ratio now sits at approximately four times, which was our target ratio for the end of 2022.
We are very pleased to have achieved this goal ahead of schedule through a combination of growing EBITDA and debt repayment.
Well, we are happy with this progress we will stay disciplined and seek to further reduce this ratio through the end of the year and into 2023.
We still have ample room to react to new opportunities with funds from operations growing 75% year over year to $56 million.
$42 million of cash on hand, and $220 million and credit facilities available how's.
However, it remains a priority to stay disciplined in managing our balance sheet and continuing to make progress and gradually reducing our leverage ratios further.
And finally, turning to our outlook for Q4.
The demand for Agi equipment systems, and solutions continues to grow across our segments and geographies.
Consolidated backlog was up 4% year over year, just above the record level from the prior year, which itself was up 19, 9% from Q3 2020 levels.
The moderation of backlog growth was expected as the backlog resets at higher levels relative to historic levels, given our increased mix of project based work.
In addition, the backlog in Q3 was impacted by timing of our permanent green handling equipment and storage projects in our firm segment.
As well as the removal of Russia, and Ukraine projects.
Our pipelines remain robust and we are continuing to see strong interest from customers across all segments and regions as they continue to invest in critical infrastructure equipment and solutions.
Our backlog gives us clear visibility into Q4, 2022 with over 100% of our internally forecasted Q4 sales covered by the backlog as well as line of sight into 'twenty 'twenty three.
We expect full year 2022 adjusted EBITDA of at least 228 million up from at least 215 million, which represents another very strong year, driven primarily by organic growth.
Our updated guidance implies flattish adjusted EBITDA for Q4, 2022, However, we remind readers that Q4 2021 was a record fourth quarter for adjusted EBITDA, which was up 61% over Q4 2020.
Our updated guidance signals continued strength and momentum in our business heading into the end of the year end 'twenty twenty-three as we sustain our record results and continue to execute against our growth objectives.
Thank you very much for your time and with that we will turn it back to the operator to take any questions.
Thank you we will now.
The analyst question answer session.
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The first question comes from Jacob bout CIBC. Please go ahead.
Good morning, and congrats Paul on your new appointment as CEO .
Hey, Thanks Jacob.
Well first question is just on <unk>.
EBITDA margins in general so maybe just talk a bit about the sustainability of that a 19% EBITDA margin I mean I.
Standard there is some tailwind here from from lower steel prices and mix, but you know what what do you view as kind of a long term run rate I know you talked a bit about higher operating rates, but how should we be thinking about that.
Yeah, Jacob Thanks for the question and absolutely acknowledge that.
A great Q3 that we add are very excited about the EBIT performance and the EBITDA margin expansion that we saw I mean, as we look at total 2022.
The EBITDA margin growing sequentially from where we were in 2021.
So we are focused on EBITDA margin expansion is a key element of our business performance and Jacob looking forward. We expect that margin expansion can continue as we head into 'twenty two 'twenty three so we do see a lot of momentum with the business heading into 2023.
Great focus on profitable organic growth and highly confident that that's going to support margin expansion going forward.
Okay.
My second question here, just on on backlog up 4% U S down 8% I'm, just trying to get a read for that into 2023.
Maybe just walk us through how that project based work impacts our backlog goes.
Yeah, No. It's a great question Jacob Thanks for the comment on our backlog effort burst just noting the backlog in general Youre in your comment it's up 4%, we feel very confident about the backlog and as Jim noted in his commentary the backlog supports our Q4 expectations and provides.
Great momentum heading into 2023 and also as Jim commented you know when you look at that 4% up versus prior year. It's important to note that prior year backlog. It had to have a number of projects impacted by Russia, and Ukraine directly removed from our backlog and it didn't impact our 2020 to perform it.
So normalizing that out we actually sit in a backlog that's up double digits from prior year.
Now your specific question on.
Some some increases and decreases.
Specific region some of that could just be impacted by the type of business that we're seeing we've noted that our portable business is pretty strong.
First is our commercial business, particularly in the Canada and the U S bond segments, the portable business, our moves quicker through the backlog than our commercial business. So that can be part of the dynamic Jacob that youre seeing there, but again, we're really happy with where our backlog sits and how that supports momentum into 2023.
Excellent. Thank you.
Sure.
The next question comes from Michael <unk> with Scotiabank.
Please go ahead.
Hey, good morning, all.
Hey, good morning, Michael.
Good morning, you, probably even see O O for Awhile you know.
The business, while our CEO , what would you like to communicate to the street.
What do you think are some of the best opportunities.
For our growth on a go forward basis.
Yeah. Thanks for that question, Michael So first with the opportunity to comment on the outlook and our priority. Yeah, you heard it in the commentary and just important to reiterate our focus is on those three key parameters being operational excellence profitable organic growth and importantly.
Balance sheet discipline, and very happy with our ability this quarter.
A notable improvement in the balance sheet discipline paying down some debt and that's going to be a priority for us going forward you know in general.
Look across all the different regions and both our farm and commercial segment.
We're pretty excited about 2023, we see a lot of positive fundamentals in the AG industry across our key segments.
That are very supportive of continued growth as we head into 2023.
And you know that organic growth in the regions will be supported both by those strong AG fundamentals as well as our ability to increase the capabilities and specific regions by transferring new products and new technology down there that are a great fit for those respective markets. So I think there's a lot of the reason that we have.
Fit with confidence looking into 2023.
That's great and I guess as a segue to my next question here and I think look you've spoken about it already but specifically on 2023 on the one hand, there appears to be a ton of momentum on the other hand the.
And for Q4, EBITDA, you know implies flat year on year, and I'm standing that there could be some conservatism there.
No it's early but.
But just given how strong 22 has been you know.
How confident are you that you can comp positively for EBITDA next year in and maintain maybe even some some solid growth momentum as well.
Yeah, I think Michael and yet to give Greg comment there you know first and foremost a highly confident on our opportunities in 2023, and our ability to deliver year on year growth in EBITDA as well as continued expansion in EBITDA margins and then on top of that.
As mentioned are quite confident that we're going to be able to pay down debt in the process. So I'm very optimistic on 2023, you've heard our guidance for the full year also very confident in our ability to deliver that and you know I tend to look at 2022 Ana performance of E.
EBITDA expansion in that 30% year on year and above it's just excellent performance by our team.
That's great. Thanks, Paul.
Thank you Michael.
The next question comes from Steve Hansen with Raymond James.
Please go ahead.
Yeah.
Uh huh.
You could comment on.
Briefly on the.
T O.
Let's see.
Chemical results.
Isn't like you're.
You're a little bit more about the investment plans there are.
Going forward I understand that the organic growth is now going to be a key driver of the plan, but what kind of investment do you need to make down there if any at all do you feel like you're well positioned.
Capacity availabilities, just any comments around how well situated you are in those two markets in particular to handle organic growth. Thanks.
Yeah, Steven Thanks, so much for the question I'm, just going to clarify because youre a little broken up at the beginning I heard Brazil for sure and the investment that we needed there to sustain growth you mentioned another region I Didnt catch.
Sorry, India as well please.
India, Yeah, no I think that Steve I mean, first and foremost a yeah, we couldn't be more excited about that.
The positions that we have in Brazil, and India. The teams that we have down there and obviously the performance of both of those businesses just simply outstanding for the quarter and it's been outstanding for the year and yes with that continued.
So there is opportunity for us to make incremental improvements in our capacity. So that we've got the opportunity to sustain those growth projections going forward that is that is very typical part of our operating cadence to make those incremental investments in growth capital we've done.
So throughout 2022, and both of those regions to position us well for 2023, and we will continue to make those investments throughout 2023.
You got a pretty solid plan on being able to do that and support growth and that plan is well vetted against our targets and goals relative to the balance sheet discipline.
That's great. Thank you and then just just one follow up if I may around the technology platform. It sounds like order intake has been really strong but there still are some constraints in the supply chain you can what kind of strategic focus will the technology platform gets under union.
Leadership is that something that you still see as being a key focal point for differentiation or how do you feel about the platform. Thanks.
Yeah, Thanks, Steve Yeah.
No doubt our our technology business, our digital platform is going to continue to be a strategic focus for us.
You know it is a capability that is important.
Our product enhancement that is very valued by our customer base.
And it's a great enhancement to our core product line. So for a number of very compelling reasons will continue to look at digital as a strategic opportunity for us going forward.
Appreciate it.
Thank you Steve.
The next question comes from Andrew Wong with RBC capital markets.
Please go ahead.
Hey, good morning.
So I was just kind of curious on your backlog can you talk about the duration there and just you know how much visibility does the backlog give you into 2023 like does it give you line of sight into the first six months or does it kind of stretched through most of the year I'm just kind of curious about that because it sounds like you're very confident on the 2023 growth trajectory there.
Yeah. Thanks, Thanks, Andrew.
At the highest level our backlog turns they gave us visibility visibility out and say that four to five month timeframe. So extend our extend beyond a quarter.
Yeah, Theres a bit of variability in that as you look at our split between firearms segment activity and commercial segment activity of note.
The commercial segment backlog it has a much longer visibility so some of our large commercial projects that we're executing across our various region that does give us some visibility of our backlog out into like a six to eight plus month timeframe. So you know that theres a couple of dynamics within our backlog.
When we look at it and analyze it across our various businesses, we are able to garner some pretty good visibility into an outlook for 2023 and that really helps with our with our confidence level going into next year.
Okay, that's great.
And then maybe just like a broader question here for you, obviously agi has gone through a pretty significant period of no buying different pieces and adding.
The capabilities in different regions and different business segments, and then there's more of a focus now on on growing organically. So you know.
As you kind of take over in the CEO role would you say that Asia has all the right pieces now to grow our grow.
Ganic Lee and if you were to look at an acquisition.
Are there any parts of the business, where do you think maybe you could beef it up a little bit and I'm just kind of curious your thoughts there.
Yeah, I think thanks Andrew.
We see a big question and it's a great opportunity to note just a tremendous success that we've had over the past five to six years in building out those capabilities and our global position is very consistent with the 567 strategy that came close to outline because we've been so successful over the past.
Few years, we can look at our business currently and feel quite confident in the product and the positions that we have globally and based on those capabilities.
Gives us.
The right opportunity to focus on organic growth. So we feel confident that we've got the products. We've got the position and we've got the capabilities that we need globally to support the our organic growth objectives going forward and at this point do not see the need to.
To.
Enhance or any of our capabilities through acquisitions, so that solidifies our focus on organic growth over the near term future.
That's great. Thank you.
The next question comes from Gary Ho with Desjardins capital markets.
Please go ahead.
Hey, good morning, Paul Congrats on your new role so maybe along the same line of questions as others. What are some of the key kpis or metrics.
You're measuring your team against just given the three pillars that you talked about imagine margin or leverage and where would you like to take those two overtime.
Yeah. Thanks, Thanks, Gary I'm happy to comment.
On these and provide you some insights obviously I'm going to get to sharing my views on our balance sheet discipline and in that we'll turn it over to Jim to give you a little bit more specifics on the on the metric, but when we look at operational excellence profitable organic growth and balance sheet discipline, a if I start with the top the easiest way of measuring.
Operational excellence from my standpoint is margin expansion I mean, there's obviously quite a number of factors are quite a number of attribute.
There are within and define operating excellence, we've made a lot of key investments in resources over the past 12 to 18 months, we feel we're very well positioned to increase our focus in that area and drive a higher level of efficiency and effectiveness that will ultimately be measured in margin.
Expansion, so that would be the key kpis that we look to as a as an indicator of of <unk>.
Improvement and progress that we're making in that area, you know profitable organic growth.
Obviously be looking at top line.
Expansion as well as the EBIT dollar.
And year on year, though those will remain.
Key targets in key Kpis for us into 2023 balance sheet discipline, you've heard the comments are around our commitment to paying down debt we have.
A few kpis around leverage ratios that we will use the measure that I'll turn it over to Jim to give a little more color. There. Thanks, Paul Yeah. So just on the balance sheet.
You know all the obviously obvious metric is our overall leverage ratios. So I look at total debt total net debt versus our EBITDA, we've guided to four times by the end of this year. We're at that now we will continue to make progress on that in Q3, we were able to pay down some debt.
Paid down almost $50 million of debt offsetting that though was a little bit of FX, because we do have some U S dollar debt on our balance sheet. So that the overall progress we made from a payment perspective was about $30 million.
That will continue in Q4 with more debt repayments and were focused on targeting significant debt repayment next year all in when I look at our net debt leverage ratio will be below four this year, so probably being a 3736 times our ratio by the end of the year now and we'll March that day.
<unk> to the low threes now by the end of next year.
That's a comfortable operating level for us given the dynamics of our business the well diversified nature of our business.
And so we are comfortable with some debt and when we get down to the three times level, we'll reevaluate what our capital allocation.
Location priorities are there.
Perfect. Thanks for that and then Paul you know Theres been.
And a lot of chatter on food security globally, just given all the geopolitical concerns I'm just curious kind of your thoughts on this and how accurate can benefit from this and also opportunity on the commercial side.
Yeah, Thanks, Gary and I appreciate the comments on food security is one of the fundamentals.
That we see that is going to support our growth objectives going forward, obviously a G I.
Our vision and mission is to support the build out of the food infrastructure globally and some of the conflict that we have seen a rise. This year has only enhanced selling is kind of a global perspective on the importance of food security, we've absolutely seen that in our commercial activity.
And the customers that we are engaged with the folks that we're providing and some of the order intake that is occurring across our businesses. So you're absolutely right. We see the enhanced focus on food security globally being a strong driver to support growth in our commercial segment going forward.
Okay. That's great. That's it for me thank you.
Thanks, Gary as Gary.
The next question comes from Michael <unk> with TD Securities.
Please go ahead.
Thank you good morning.
My first question relates to the farm segment in the third quarter margins benefited from a higher proportion of higher margin portable grain handling equipment.
I'm just wondering if you expect that favorable mix to continue into the fourth quarter and into early next year or do you see that normalizing.
Yeah, I mean, there's no doubt, Michael where we had a great quarter and we've had a great year, so far with our portable business really happy how are the team there.
That's up a lot of our manufacturing and our capability to meet a fairly robust demand across a number of geographies in Florida, but you heard the commentary that that was favorable across Canada across the U S.
And into Australia.
We do anticipate that our permanent side of the farm business is going to start to pick up coming off of some of the some of the softness that we saw in 2022 that was particularly in Canada. As we noted the drought early in 2022 as well as in the U S.
Back we've actually seen some of our order intake in the Canada permanent pick up as we head into Q4. So it actually gives us confidence that that aren't that side of our business on a farm is going to pick up and support our growth expectations for 2023.
So that that does introduce a dynamic from the mix standpoint that will continue to evaluate that and obviously there's opportunities for that for us too.
To work on our margins through operational excellence and what we can do from a manufacturing efficiency standpoint.
Okay. Thanks for that Paul and then second question for for Jim just regarding changes in noncash working capital.
There was a suggestion last quarter that you expected to see much of the first half's investments in working capital to reverse in the second half and I think there was a little bit of progress in the third quarter, but.
Is that still your expectation to see that full amount reversed in the second half.
Yeah. Thank.
Thank you Michael and first of all welcome to to the group of covering I'd appreciate your support and coverage of us.
Yeah, you're right. So we made some improvements, particularly in our inventory balance we talked about earlier. This year. We we took positions in inventory based on the strength.
And some of the concerns on supply chain that are now starting to reverse a little bit more slowly than I would've hoped, but we continue to see progress on our inventory balances and we expect a large reversal of that incremental by happening through the rest of this year.
Okay. Thank you I'll turn it over.
Thanks, Michael.
The next question comes from Tien Monticello with <unk> capital markets.
Please go ahead.
Hey, good morning, everyone.
Good morning, Tim.
If you can't hear me just let me know.
A weak connection this morning, so but thanks very much for the comments on the balance sheet look good that was my first question I had a little bit of a cough.
On the on the backlog up 4% year over year I'm curious how much the comp last year was positively impacted from steel price inflation.
Steel prices are down.
Over 60% in some cases I'm just wondering if like on a per unit basis Youre seeing stronger.
M D.
Demand in the backlog didn't perhaps the 4% number suggests.
Yeah, Tim and thanks for the questions I mean, you're you're you're looking at it from the REIT perspective, the same perspective that we look at it and it's why we're more optimistic going forward and then say a 4% backlog would indicate I commented that one of the dynamics is obviously the impact of Russia, and Ukraine, and there's some of that.
Our prior year backlogs some of those projects came out but you're absolutely right. You know there's the other dynamic just on.
The cost of materials and the supply chain that we've seen in the in the softness that has now occurred over the course of 2022 also has a dynamic there that we absolutely look at relative to the backlog.
Supporting our optimism going forward. It's also important to note Tim is just that improvement in the supply chain that Jim was referencing we've seen steel prices the ease with which is favorable. We've also seen that lead times not just for steel but across a number.
All of our other commodities start to go back towards norms are and and that's another element that helps in our working capital discipline is that supply chain improving in those lead times are getting back to a more normal level.
Okay. That's that's helpful for sure and second question I had was just around U S farm food backlog down.
Down.
I guess, most meaningfully year over year, how should we think about that.
And what gives you confidence that you're going to grow that food business in the U S. As we go forward here.
And are there any concerns if you see a broad based recession that you can see demand in the food platform in particular.
<unk> start to decrease.
Yeah, I think thanks, Tim and Yeah. We we note and all are obviously closely looking at that food our backlog relative to prior year. I mean, it was it was incredibly strong prior year in is one element to note, but we think this is more of just a temporary.
The impact in the food segment, a lot of the projects that we've been getting involved in now and in the food area with some of our most important customers are more of those commercial projects and sometimes the order intake of those projects can be a bit lumpy. So we look at that food backlog.
I'll, let a bit with the lens.
Timing and I have confidence that as we progress into Q4 and into Q1, we're going to see that that backlog start to improve and get closer to prior year levels, but which were quite strong.
So if you look at I guess, the bid pipeline isn't that business, how would that compare year over year.
Yeah. The pipeline is strong, but that's it that's exactly the point and the pipeline is strong our quoting activity is pretty strong and our customer engaged engagement.
It is positive you made a comment on a recession and recessionary impacts, we're really not seeing anything across the food or really our broad geographical platforms food anchor or a farm.
Farm and commercial at this point.
Okay, and then last one for me just around margins.
Paul you mentioned that you're expecting margins to increase again.
We go forward and it sounds like that has a lot to do with operational efficiencies in the business but.
But perhaps you can give us a little bit of you know the guideposts on what do you think margins might go and what the major levers there they're not just operational.
Efficiency are you seeing any pricing improvements.
As well.
Yeah I mean.
Thanks for the question, Tim I'm not sure specific guidance on where we expect margins to go beyond our focus on continued margin expansion. My my comments earlier were really focused on our EBITDA margins and expansion in EBITDA margins, we anticipate that we're going to end the year fairly favorable from a.
Year on year increase in EBITDA margin expansion and that will be our focus going forward. So operating excellence you know just continuing to look at and across our entire supply chain of our engagement with suppliers are manufacturing practices as we continue to enhance those sharpen those and make improvements.
That supports our margin expansion.
Our expectation as well as growth and just further leverage across our so our our P&L as we get that favorable topline growth just getting good operating leverage down to a increase in profitability.
Okay I appreciate all the details I'll turn it back thank you.
Yep Thanks, Tim.
Our next question comes from Michael Robertson with National Bank financial.
Please go ahead.
Hey, good morning, Paul and Jim Congrats on a stellar quarter and thanks for taking my question.
Thanks, Michael.
I've noted some of your peers highlighting.
The raw material input prices driving up cost in 2022, and potentially deterring some producers from making larger purchases and expectations for sort of a second wave of demand as those raw material input prices come down and flow through the equipment cost was wondering how you see that dynamic.
Do you foresee some potential pent up demand as a result looking out to next year.
Yeah, I think thanks for that question, Michael I actually got very insightful question and I think that plays very well to some of the parameters that we're seeing particularly in our North America Farm segment I commented earlier as we entered 2022, we had the drought in Canada.
You know that that we think had an impact on the permanent side of our business and then specifically the elements that you mentioned Ah. We believe had an impact in the permanent side of our business for U S. Farm are those dynamics have now shifted our M based on.
That gives us a lot of confidence that we will see a bit of a pent up demand released scene in the permanent segments of our foreign businesses in both Canada and in the U S and in fact, we're actually seeing that play out now already in our Canada business across <unk>.
Q4, so it's kind of supporting that theory.
We actually see it in in order intake and backlog.
That's a great color I appreciate it and I'll turn it back.
Thanks, Michael Thanks, Michael.
The next question comes from Steve Hansen with Raymond James.
Please go ahead.
Yeah. Thank you just one quick follow up if I may relates to you know.
Capital allocation what are your thoughts on a buyback program at some point here.
Recognize the debt pay down is the central pillar of the plan at this point, but if you're going to be.
Low threes by mid to late next year I presume it has to be contemplated at some point doors and ask as you continue to trade at such a discount relative to.
Well history, and even relative to your peers, so just any thoughts around.
Buyback, even if it is maybe an extra thing, but just any comments around how you think about that opportunity set.
Yeah. Thanks, Steve for that follow up our focus is 100% on paying down debt and continuing to grow organically.
And so we have not contemplated any share buybacks.
Once we get down to that three times level, well, we'll reconvene in and assess our options and at that point it may be something to consider but at this point. It is the focus is entirely on debt pay down.
Okay. Thank you appreciate it.
Yep Thanks, Steve.
This concludes the question answer session.
Like to turn the conference back over to Paul householder for any closing remarks.
Thank you operator, and just wanted to say thanks for everybody that dialed into our Q3 results call really appreciate the engagement through the Q&A session, providing Jim and I and opportunity for further clarity on our Q3 results as we started out with it yeah, we just couldn't be more excited.
About the performance that we've seen in Q3, it underscores just a tremendous team that we have across our AG either the ones that are delivering these fantastic results. So congratulations to the agi team and we really look forward to continuing our strong performance going forward.
Thanks, very much and I look forward to catching up with everybody soon.
This concludes today's conference call you may disconnect your lines.
Thank you for participating and have a pleasant day.
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