Ag Growth International Inc. Q1 2023 Earnings Call
[music].
Thank you for standing by this is the conference operator welcome to the a G. I first quarter 2023 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 to join the question queue. You May Press Star then one on your telephone keypad should you need assistance during the conference call you May signal, an operator by pressing Star then zero.
Courtesy to management and other participants on the call. Please limit yourself to two questions and rejoin the queue. If you have further questions.
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 <unk> first quarter 2023 results call I'm joined by our CFO , Jim Radick on.
On today's call I'll provide an overview of our quarterly results and share my outlook for 2023 before passing the call over to Jim who will review, our financial results and key metrics in more detail.
We will then open the call for questions.
Our strong first quarter was not only a fantastic start to the year, but also continued our streak of outstanding results, making it six consecutive quarters of record results.
With broad based strength from our farm and commercial segments and across all geographies, we continue to see clear and consistent demand for agi equipment products and solutions.
Along with our increased focus on operational excellence initiatives, we have been able to maintain a robust pace of organic growth, which gives us good visibility to the rest of the year.
Before getting into more detail on our first quarter results I'd like to briefly make a few comments on employee safety are.
Our key safety metrics continued to trend in a positive direction and have you made significant progress in reducing safety incidents, we've turned our attention to recording and studying near Miss data.
This helps us become more proactive in identifying risks before they become incidents.
In addition, I'm pleased to announce that we recently launched our third annual safety week across Agi.
This year the theme is specifically targeted on hand safety.
Safety week as an excellent opportunity for our teams from around the world to collaborate on a critical aspect of our one agi culture.
<unk>.
Now turning to our first quarter results.
With sales and adjusted EBITDA of 347 million and 48 million growing 19% and 16% year over year, we are encouraged to see sustained momentum across agi.
We continued to demonstrate success against our three corporate strategic priorities profitable organic growth operational excellence and balance sheet discipline. The key kpis, we used to monitor progress of our strategic priorities are all generally trending in the right direction.
For profitable growth are growing sales and adjusted EBITDA are a positive indicator.
For balance sheet discipline, a downtick in our net debt leverage ratio is an important metric we closely monitor and Jim will discuss this in a bit more depth later on this call.
For operational excellence, our adjusted EBIT margin came off slightly about 30 basis points year over year, which is mostly due to a temporary increase in corporate costs that include several one time professional fees and expenses.
We expect this to normalize in the second quarter and going forward supported by a recent initiative focused on streamlining SG&A cost across the organization.
Several additional operational excellence initiatives gained traction across Q1 and will contribute favorably throughout the year. There is no change to our previously stated full year target of 100 basis points improvement in adjusted EBIT margin or approximately 17%.
Now turning to our results our Canada farm in India businesses led the way for the first quarter.
Canada Farm had a phenomenal first quarter and was a major contributor to the overall adjusted EBITDA growth.
First quarter sales were up 88% adjusted EBITDA was up 124%.
And the order book increased 66%, we are seeing a sustained rebound after 2021 drought, which weighed on our results through part of 2022.
Permanent handling equipment has been a major source of customer demand as growers prepare for future increases in crop volume.
It's also worth noting that within our Canada Farm order book portable equipment orders have grown significantly and are at a record level for this time of year.
This supports a favorable margin profile for Canada farm through Q2 and Q3.
Overall, the strong order book sets the stage for banner 2023 year for Canada farm with upside potential as we get further into the crop season.
Along with Canada farm, our business in India continues to be an important growth engine for Agi and was another key contributor to our first quarter results.
With broad based demand for rice milling products sales grew 19%.
This led to a significant 46% increase in adjusted EBITDA as gross margins expanded to productivity efforts and pricing leverage.
Exiting the quarter the order book for India was up 6% a solid base for continued momentum into 2023.
We expect the order book to expand further in coming quarters as rice milling order intake remains robust and activity increases on recent product transfers.
Favorable margins and continued market share growth are also expected as we further penetrate the premium segment of the rice milling market.
With regards to product transfer activity, we are pleased to announce that our operations in Bangalore are now capable of manufacturing, our portable grain augers and conveyors.
During the first quarter production of these units was initiated and we expect this new manufacturing capability in India to drive adoption of these products throughout the region.
Markets include both India and Australia.
Australia has been steadily expanding with plans to further accelerate by leveraging this new production capability in India as well as other planned initiatives.
Given the tremendous growth high caliber local management team and deep roster of product transfer opportunities. Our India operations are an area. We are closely evaluating for potential capacity expansion investment.
Continuing with our review of other regions and businesses once again, our U S farm business was a very meaningful contributor to Agi results.
First quarter sales grew 12% driven by portable equipment demand.
Pricing was relatively steady with growth coming largely from increasing volumes. The U S farm team continues to make progress on several key strategic initiatives, including strengthening our dealer network and channel partners with those relationship serving as one of the key drivers of growth within this large and strategically important market.
To further support growth across our U S and Canada farm businesses. We recently completed a product transfer of a farm duty permanent material handling system from Brazil.
After initial testing and market study of this product is now officially been rolled out to our dealer network in Q2.
Initial orders are already surfacing in line with our expectations.
This is an exciting new product offering with many innovative features that we expect a further energize our sales pipeline and the order book in the quarters ahead.
Our North America commercial business had a solid first quarter sales and EBITDA up mid single digit percentage.
The order book grew 13% versus last year and is up 58% versus two years ago reflective of the dramatic turnaround of the business.
While the success for this team has been fantastic, we're seeing some softness in fertilizer equipment markets and demand as.
As part of our one agi in operational excellence commitment we had been completed in an effort to consolidate our two U S based fertilizer equipment facilities.
This will enable us to improve our cost structure narrow the product catalog focused sales efforts and develop a more competitive edge in this attractive market for a G I.
While North America commercial has been a leader in adopting many key one agi principles. The journey is ongoing and we still have more room to grow.
Our Brazil operation posted growth of 9% in the first quarter as we steadily gained market share.
We are pleased with these results given challenging conditions in recent months.
Farm customers have showed some resistance to execute projects as they adjust to a new political climate in a rising interest rate environment.
Farm segment activity did accelerate throughout Q1, and we expect a sequential improvement in Q2 and across the remainder of the year.
As a result of some softness in farm, we saw a significant mix towards the commercial segment in the quarter.
These commercial projects had an unusually high percentage of third party pass through content in Q1, leading to a downward gross margin impact overall, the Brazil operation is firmly adjusted EBIT positive.
With an order book up 11% in Brazil, and 34% across the broader South America region. The outlook for 2023 remains bright and is further supported by the expectation of a record crop in Brazil.
In addition, the team in Brazil has recently finalized the development of new dryer in storage products with key specifications tailored to this market.
This will help develop the farm segment pipeline and drives our expectation for sequential strength in Brazil results throughout 2023.
On the commercial side the pipeline remains active and the team is working with many well established customers, who know and trust agi.
Finally, the team in Brazil has developed a new manufacturing layout planned to create additional capacity and operational efficiencies, which will be implemented in the second half of 2020 three.
This will help ensure we can accommodate the expected rise in volume throughout the rest of the year, while managing our capital expenditure budget near term as we continue our focus on balance sheet management.
Our EMEA region continues to produce solid results sales grew 6% in the first quarter overcoming both a challenging year on year comparable and a constrained operating environment from the ongoing conflict in eastern Europe , a decrease in the E. Mail order book is reflective of the completion of some large projects are.
Focus remains squarely on building the order book in regions outside of Eastern Europe . In addition to capitalizing on recent product transfers such as fertilizer equipment.
Encouragingly, we continue to see strength across the middle East supported by recent orders and new customer relationships.
As we strengthen our relationships with these customers and increase our market activity across the middle East, we see a broader investment cycle coming together do.
Through our recent moves we are well positioned to capture additional opportunities and accelerate pipeline activity in this key region.
Moving onto our food business, which as a reminder is now part of the commercial segment from a financial reporting perspective.
As expected results are retrenching as anchor customers paused their spending following a multi year phase of major investment.
Recently, our food platform began a deep integration and unification effort similar to the process at North America commercial successfully completed over recent years.
The new organizational structure developed for a global food platform includes key leaders from our North America commercial business, who bring valuable insights learnings and experiences from the prior transformation.
This will help accelerate the food transformation and make the path to success shorter.
While advancing the plan around food unification, the critical near term focus for 2023 is to strengthen our order book and diversify the customer base within this large and extremely exciting global platform.
We are pleased to announce that these efforts have yielded early project wins with new and large customers.
Consistent and supportive of our short to medium range plan for the food business.
While this unification effort will take a bit of time the processes underway to execute our performance turnaround similar to our North America commercial business.
And finally, a few comments on our digital business.
Our overall near term objective remains to rightsize the cost structure, while also positioning for growth by narrowing the collective focus of the digital team on core products with the highest growth potential.
I'm pleased to share that the comprehensive reorganization initiated in January is having the intended impact first quarter sales grew 17% with notable gross margin improvement.
The extensive restructuring efforts have drastically reduced the negative adjusted EBIT drag.
Q1 was marked with great progress, though it is still early days and the effort.
Further actions were recently implemented in Q2 to help accelerate the path to breakeven EBITDA for this business and objective. We believe is achievable by early 'twenty 'twenty, four which will be a major accomplishment for the team.
We are excited to start off 2023, with an excellent first quarter and it's clear that the focus around our three key strategic priorities is helping drive progress and results.
Our kpis across the organization point to a strong set up for 2023 and as a result, we have increased our full year adjusted EBIT guidance, we look forward to another record year and I'd like to thank all our employees customers suppliers and partners for their contributions to the first quarter and going forward.
I'd like to now hand, the call over to Jim for further commentary on our Q1 performance.
Thank you Paul and Hello, everyone.
For this call I'd like to address four areas, including an overview of our first quarter results and update on our balance sheet and related key metrics a.
A few comments on our cash flow and finally, an update to outlook and guidance for the year.
In the first quarter, our farm segment delivered 182 million in sales growing 21% year over year.
Adjusted EBITDA of 38 million grew 34% year over year with margins, expanding 200 basis points to 21.1%.
Growth in Canada, and Australia, coupled with steady contributions from the U S drove the Q1 result.
In the commercial segment sales of $165 million grew 17% over prior year adjusted.
Adjusted EBITDA of $22 million grew 10% year over year with margins softening about 80 basis points.
Mostly honest shift in mix from commercial within Brazil, as Paul outlined in his earlier remarks.
The increase in other which represents general corporate costs was up about $5 million or 68% year on year and include several one time costs that we expect to normalize out over coming quarters.
The impact on several SG&A efficiency initiatives already underway will help us steadily lower SG&A as a percentage of sales as we move through 'twenty twenty-three as Paul mentioned, the digital restructuring and food platform unification are two key initiatives supportive of expected SG&A.
Movements. In addition, as the setup of our Chicago facility is well progressed, we are addressing redundant costs that were important for knowledge transfer from our facilities to the central office.
This process was initiated in Q1 and will continue through coming quarters.
One other housekeeping item. Many of you may have noticed the change in terminology from backlog to order book.
This is a straightforward update to how we reference are committed orders.
There is no difference to the calculation, but we believe that for Agi. The term order book is more easily understood than backlog.
Moving onto our balance sheet.
We continue to make meaningful progress in our leverage ratios and working capital metrics key indicators for the structural improvements across this strategic priority.
Working capital investment is a critical element of our operational efficiency and balance sheet improvement focus our net investment of $191 million in the first quarter was down from $226 million year over year. A strong result, considering this was achieved in tandem with growing sales.
<unk>.
As a percentage of sales working capital investment fell from 19% to 14% year over year on an annualized basis.
Significantly less incremental working capital investment was required sequentially from Q4 'twenty two to Q1 'twenty three relative to Q4 'twenty one to Q1 'twenty two last year, despite strong growth in sales.
This is a clear signal that our initiatives and commitment to operational excellence are taking hold.
A key contributor to this result has been our focus on inventory and DSI or day sales and inventory metrics, which we are managing closely on a facility by facility basis by leveraging our news centralized corporate resources, and Chicago promoting greater coordination and collaboration across facilities.
These.
While we are encouraged by our results we expect more progress on this front through the rest of 2020 three.
From a balance sheet perspective, our kpis continue to trend positively while we did make a relatively small draw on our revolving credit line in Q1.
We note that the sequential increase in senior facilities of 28 million is down significantly from an $86 million increase in Q1 last year.
Nevertheless, our net debt leverage ratio was 3.6 times in Q1.
This is a significant improvement from 5.2 times year over year, and 3.7 times sequentially.
We are on track to achieve our previously stated target of getting this metric towards the low threes by the end of 'twenty twenty-three.
Longer term the steady state leverage ratio target remains 2.5 times.
I'm, particularly proud of the progress made in these high impact areas, while achieving another record Q1 sales and adjusted EBITDA result.
From a cash flow perspective, Q1 delivered strong funds from operations of 21 million slightly offset by higher nonoperating costs, such as interest and taxes.
Our funds from operations calculation typically excludes changes in net working capital and if we were to include this the results from the first quarter shows significant improvement year over year.
And finally, turning to our outlook, we remain excited about 2023 performance supported by our order book up 7% year over year and up more than 25% versus two years ago.
We are encouraged the order book continues to grow despite a few pockets, where we are rebuilding the pipeline such as in EMEA and our food segment.
Given the strong Q1 result, and our favorable outlook for the year, we are raising our full year 'twenty twenty-three adjusted EBITDA guidance to be at least $265 million.
Up from at least $260 million.
Thank you for your time, and we'll now open up the call for questions.
Thank you we will now begin the analyst question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.
As a reminder, please limit yourself to two questions and rejoin the queue. If you have further questions. We.
We will pause for a moment that's college, China Q.
Okay.
The first question is from Jacob bout from CIBC. Please go ahead.
Good morning.
Okay.
Sounds like you're still comfortable in achieving the 17% EBITDA margins in 2023.
Maybe just talk through how mix impacts this outlook I know you're talking about U S permanent being a little stronger in second half of this year, but that would be lower margin.
You know.
For our seasonally.
Strong quarter at least in the third quarter anyway, So maybe just talk us through that.
Yeah sure Jacob Thanks, Thanks for the question and absolutely we're still confident in the guidance of 17% EBIT margin for the full year. You are correct, we're expecting an uptick in the permanent business are related to farm, particularly in U S farm, that's actually quite encouraging.
We've seen the pipeline and the order book increase on the permanent side across Q1, what we have as a tailwind helping our margin projections as we expect our portable margins to continue to improve in the second half of the year, which is supported by efforts to increase through.
Put.
At our portable manufacturing facility part of our operational excellence focus get more throughput.
Out of that facility, while still maintaining a a consistent cost basis. So we do see some tailwind on a margin perspective, both in portable and permanent that will work to offset that mix shift to the lower margin permanent business, while still providing us some margin gains.
And then maybe my second question here.
These third party sales in Brazil have any impact from commercial margins in the quarter.
Does that continue into the second quarter.
And then you know what percentage of your product line can you produce in Brazil and.
How has that changed over time.
What does that look like going forward.
Yeah, I know perfect question Jacob.
The first part of the question. The third party sales that were a part of that mix shifting commercial putting some pressure on our margins. We do see this normalizing quite quickly in Q2, and then beyond so that pressure that we saw on margins down in Brazil, we see that trending in a pause.
At a direction are going forward in.
In terms of the amount of the product that we produce in Brazil for the commercial side of the business. It is typically a quite high percentage it might be in a 70% range or higher on a typical project there are projects, where the customer wants us to take on a broader scope.
<unk> and serve as that overall project manager, providing a full solutions to their requirements are in those cases, we do bring a little bit more third party scope a into the projects that we're managing the entire thing for the customer. So it's a little bit project by project, but on a normal basis the majority of.
The equipment for these commercial projects, we do manufacture ourselves locally in Brazil.
Could you get that to something close to 100%.
Ah Theres, probably are always going to be the opportunity, where we provide some third party services to the customer it could be some construction related services are we don't have an intention of getting into the broad construction business within Brazil in Brazil.
Jacob.
Another thing to keep in mind is just the geographic coverage that exists in Brazil, and we're fortunate to be covering customers across a very wide region. So there's always going to be cases, where the customer would like us to pick up some third party costs related to construction that didn't a region. That's just not practical for agi <unk> to do that ourselves.
<unk>.
Okay. Okay. Thank you.
You got to take them.
The next question is from Steve Hansen from Raymond James. Please go ahead.
Oh, Yeah. Good morning, guys. Thanks for the time.
Maybe just staying on the Brazil topic, you referenced I believe some challenges in the pharma segment.
Had to do with higher interest rates.
And I guess unexpected shift towards more commercial work down there or is that a trend that you think last through the balance of the year is it relatively short term integration. How are you sort of seeing that split between the two end markets kind of Brazil demand.
Yeah. Thanks, Steve.
We continue to be excited about the business in Brazil, and obviously operating in Brazil. It is a there is a lot of variability in that environment and so we did see a little bit of a shift more towards commercial and farm in the first quarter as you point out we see that normalizing actually pretty quickly already started in Q2 there was.
Some softness are in the farmer sentiment in Q1, they were a little bit hesitant to make some decisions are some purchasing decisions on farm related equipment that reverse that that that trend improved.
Towards the tail end of Q1 and continues in a favorable direction in Q2, so we see farms strengthening sequentially throughout the year, putting that makes a farm commercial back.
To more historical levels. That's all supported by unexpected very strong crop in Brazil conditions continue to be good. The harvest is going to be high from a volume standpoint. So there's there's a compelling a motivation for farmers to invest in agi equipment and to put more storage capacity on their farms.
Okay. That's helpful. Thank you and then.
In your opening remarks, Paul you referenced the number of I'll call them projects efficiency project optimization.
And product transfer underway, it and particularly on the product transfer side. It sounds like you've had some good success in India in particular, and you're now about adding some capacity investment would you describe the India.
Product transfer is the most.
Thus far the most exciting.
Interestingly you referenced one moving almost reversed into North America, as well I'm trying to get a sense for where that you've had the best success with its product transfer.
Contract. Thanks.
Yeah for sure Steve I mean, historically, we were very excited about the product transfers that we completed a actually a couple of years ago. When we transferred in close belt technology down to Brazil that proved to be extremely successful, but more near term you highlighted two important ones for agi, establishing portable manufacturing capacity in it.
India is going to be key to us growing India outside of our traditional rice milling business as well as supporting a portable opportunities across the greater Asia Pacific region, but we are very excited about the capability that we've added in North America supporting our U S and Canada farm business transferring up that.
Farm duty permanent material hand handling product line from Brazil. This was a product gap for us, adding this to our portfolio.
A lot of opportunity for us to continue to grow these two important businesses for Agi and in concert works to strengthen our channel partners as we're able to offer that full portfolio of Adi products to you'll give them the products that they need to serve their ultimate customers are the C line is.
The product that we referred to that that permanent farm duty permanent handling product that is out in front of the portable equipment down in India. So we're already seeing that C line activity inner into our order book and commercial activity increase and we're optimistic that that's going to.
New through the through the second half of 2023.
Appreciate that thanks, guys.
The next question is from Michael <unk> from Scotiabank. Please go ahead.
Hey, good morning, guys.
Good morning, Michael.
There's not much you can control in this world, except maybe your SG&A. So I wanted to dig in a little bit about that I'm. Just wondering if you can breakout first what you would qualify some of the temporary costs in Q1.
And then also wanted to get a sense for you know whether you believe the 70 $374 million of SG&A in Q4, and Q1 represents potentially a high watermark.
For the year.
And given the the one time items.
What I'm trying to get at and presumably others is trying to triangulate what's embedded in the 'twenty three EBITDA guide in terms of just revenue and gross margin expectations.
Yeah. Thanks, Michael I appreciate the question.
So for <unk>. So the first question.
Ill give you some context of some of these costs.
And there's really two two buckets to talk about first of all and most most significantly as is the cost is I would call redundant costs that we've been incurring due to some of the initiatives we've been.
Managing in terms of the food unification project the digital restructuring in some of our centralization efforts now while we've consciously done is made sure that we take our time.
As we transfer the knowledge to to a centralized groups. We just don't want to make sure. We foolishly cut some of the other areas that we're doing some other work and so theres going to be a brief period of overlap of of those costs a little colors redundant costs. That's.
That's the bulk of the the the reason for the increase but in addition to that there were also some smaller one time costs saw some minor amounts are mostly related to some some legal and insurance areas.
But not overly that not the majority of those costs in the quarter.
Secondly, I think your second part was on thoughts for the rest of the year can you take Q1 and just.
Run it through the rest of the year no you cannot so are our initiatives as we as we focus on centralization efforts and operational excellence.
It will mean that our our SG&A costs will come down through the year. So you can't just take the <unk> the number we reported and multiply it by four.
So.
You know if you look at overall, our guidance that we've given from an EBITDA margin perspective.
That's going to come from two areas. One is from our improvements in SG&A. So we expect SG&A as a percentage of sales to be lower than the prior year, but also some gross margin improvement as well so overall.
Yeah.
I know it looks in Q1 higher in terms of SG&A, but it's it's right on track what we expected as a matter of fact better than what we expected and that's why we raised guidance.
Got it Okay, and then just thinking about the cadence of the declines potentially in SG&A and again I think if I look at your guidance implies plus 25 million of EBITDA growth from Q to Q4, just trying to think about the cadence and had.
I had a better model I guess the upcoming quarters.
Well. So traditionally Q1 is always our lowest quarter in terms of sales here.
Q2, and Q3 are our strongest and then Q4 is is in between Q1 and Q2 type thing.
So so you will see a notable upticks in terms of our EBITDA margins through Q2, and Q3 as well as even Q4. This year Q1 is always a struggle because it is the lowest in terms of sales and of course in a growing business as we continue to make investments you'll feel the impact mostly in Q1.
But it doesn't work thanks guys.
Thanks, Michael.
The next question is from Gary Ho from Desjardin. Please go ahead.
Thanks Bill.
Good morning, just maybe at a high level question first just on the plus 5 million guidance change versus two months ago.
You can highlight maybe two or three areas that drove that guidance higher whether that's Canada farm or better efficiencies from your ongoing centralization initiatives or or or whatnot.
Yeah, I think thanks for the question, Gary and as Jim highlighted we continue to gain visibility on the remainder of the year order book strong up 7%. So it put us in a good condition good position coming off a strong Q1 to raise the guidance.
There's a number of pockets of strength in the business that supported that guidance. We're encouraged around our North America business just in general that represents a significant part of our total EBIT contribution Canada farm was really strong out of the gate and the outlook continues to be favorable both across.
Ross are permanent and portable we're noting that it is a little bit of a slow start to the growing season as the soil conditions were still a bit cold.
Outlook remains positive as we start to get a look at the crop in Canada, we're optimistic that there could be a even an upside to our Canada farm business going forward and the sentiment in the U S continues to improve are good indications of the crop are permanent side of the business.
It has improved through Q1 and now into Q2, which is coupled up with very strong portable business. So were optimistic about the U S Farm and then North America commercial our continued strong performance off the turnaround that we completed a couple of years ago. So yeah, I think strength across North America commercial.
Combined with continued growth on the international supports our our increased guidance and our excitement about 2020 three.
Okay and then my second question, hopefully maybe elaborate on where you stand in your centralization efforts, particularly on purchasing or procurement or supply chain management are you seeing the expense benefits for more consolidated purchasing decisions bulks steel buying et cetera.
Yeah, Yeah. Thanks, Gary we're very encouraged with the functional capabilities that were established across 2022 as we step through that centralization effort now obviously as Jim highlighted we on purpose carried some redundancy in our cost structure. So that we could complete that important.
I'll have to transfer and reach a business stabilization, which we feel we achieved at the end of 2022 our efforts to.
Have that organization lead our operational excellence focus.
<unk> continues to prove out our quite well, we're encouraged with the initiatives that we have both within the supply chain as well as in manufacturing and I can highlight just a couple on the manufacturing side you heard me comment earlier, one of our areas of focus is to drive a higher throughput in our portable manufacturing facility.
This increased production combined with managing our cost leads to a net net improvement on a productivity basis at and that area is particularly important just given the strong demand that we have for portable equipment globally are we're quite confident that as many units as we can produce out of that plant is going to quickly translate Uh huh.
Into sales.
And then from the supply chain standpoint are absolutely we've made strong improvements Ah and streamlining our supply base strengthening our partnership with key suppliers and then net net lowering our input cost into our business. Now is this isn't the front end of this activity is at the front.
And of our supply chain it takes a little bit of time for that benefit to kind of work its way all the way through manufacturing into finished goods and out to our customers. So we expect the benefit from that excellent supply chain work in a partnership with our suppliers to be more visible in the P&L in the second half of the year.
Okay. That's helpful. Thank you very much.
Yeah.
Sure thing Gary.
The next question is from Ken Monarch, Hello from <unk> capital markets. Please go ahead.
Yes.
Good morning, everyone.
Tim just a few follow ups just questions on Brazil there.
So it sounds like the back half is expected to be very strong like you mentioned that the manufacturing is.
Is being changed.
To be able to absorb.
The demand that youre expecting in the second half.
Yeah, there is some sentiment weakness in the first half.
When do you expect to start to see positive year over year comps in Brazil.
Our positive year over year year over year comps in Brazil.
Yeah.
Yeah. So you can look at Q1, and we were up a 9% sales versus prior year. So you know we are in that aspect. We did have a positive comp obviously, we had some pressure on our margins as Jim outlined from a mixed shift on a commercial basis, but we see that improving.
Towards the second half of the year were encouraged to see our the farm.
Our sentiment improve and the order intake improve so we expect pharm will improve sequentially. So you are right. Tim we are expecting a strong second half to the year in Brazil, and we're confident that net net we're going to maintain positive comps, particularly by the end of the year in Brazil.
L. A with 2023 are being improved performance over 2022.
Hey, sorry, a ship owner specific.
Brazil farm, Brazil, foreign was down pretty significantly year over year.
And you mentioned some sentiment headwinds I don't know if that was you know interest rates are.
The election I'm not sure it matters all that much it sounds like it's reversing.
So do you expect to see that that demand inflect.
Inflexion in the farm segment as well as the commercial segment or are you expecting for them to me.
No.
And I guess for a little while you're on a year over year basis.
Good clarification, Tim So yeah, we we expect farm is going to improve through Q2.
And you know we have we've got just a little bit of visibility at this point into the second half of the year, but with the very strong anticipated crops are our expectation is that the farm will be strong in the second half of the year and specifically to your question we expect farm.
To have a favorable comp in 2023 to 2020 to Q.
Q2 will represent sequential improvement and then we're anticipating further strength in Q3 and Q4 in the farm segment.
Okay, so assuming at that.
The blip in Q1 and farm is just sort of a speed bump.
And then alluding to the fact that you're increasing capacity and manufacturing facility.
Can you speak to how much capacity you have for growth in Brazil.
Hum.
The potential capital outlay isn't too.
Fulfill demand over the next several years in Brazil.
Yeah for sure Tim and this is an exciting part of our business in that we've had such significant growth over the past three or four years, not only in Brazil, but as well as India and across North America commercial so as we get into the tail end of 2023 and into 'twenty 'twenty four we have some exciting.
Opportunities to evaluate for more step change investments are to support growth from both our manufacturing capacity as well as a capability standpoint specific to your question in Brazil, we have the capacity that we need to support 20 twenty-three, particularly given some of the efficiency improvements that we are.
<unk> from the manufacturing standpoint that we highlighted in the call as we get into 'twenty 'twenty four and we've got greater visibility to the ongoing growth in Brazil that would put us in a position, where we would evaluate a making a more meaningful investment in capacity to support further growth.
All of that planning fits very well with our current focus on our balance sheet and driving down the debt levels as a as Jim mentioned all of that will position us quite well to make some strategic investments in capacity more into 'twenty 'twenty four we have the capacity that we need for 2023.
Okay, and then if I might just sneak one more in I just wanted to ask a little bit more on the product transfers.
Moving to that strategy, a little bit I'm wondering if there's any learnings that you brought.
Into them with the broadcasters youre working on and if you have them.
Incremental visibility to new product transfers and listen to that strategy longer term now.
Yeah. Thanks for the question, Tim and I'll hit this one pretty quickly in terms of learnings absolutely Oh, we have learnings each time that we go through a product transfer. So the important part is that we formerly capture these learnings we feed them back to the team we're honing our process.
Our longer term expectation is that this would be a a core competency for us and a key strength as our product transfer strategy and expectations are fairly robust robust and will be a multi year plan. So yes, absolutely we're learning and in terms of you know kind of.
Where we are where we're really are right in line with our expectations are as you know. This is this is going to be a lengthy process. There's a significant opportunity where we're excited where we're at at this point in time.
Okay. Thanks, Paul.
You got it Tim.
The next question is from Andrew Wong from RBC capital markets. Please go ahead.
Hey, good morning.
So just looking at the order book.
Farm is up 25% year over year commercial is down a little bit I guess first do you expect that divergence to normalize through the year or is that a trend that we expect to see continue and then just secondly, how much does that help lift your margins.
I alluded to it a little bit previously I was wondering if you can help quantify that.
Yeah. Thanks, Thanks, Andrew a N.
Obviously, I noted correctly arc, our commercial order book is slightly down while while farm is a is extremely strong we expect our farm order book to continue to remain strong throughout the year as conditions are are actually quite favorable as you look around our various are busy.
Mrs and geography.
The commercial order book is down it's predominantly down based on foods. As we noted foods is now part of our commercial segment that is a big driver for the downward trajectory on commercial.
As well as a little bit in EMEA, we expect food order book to remain down for at least the first half of this year and then starting to improve into the second half of the year. So we do expect a steady improvement in our commercial order book, but it will continue to be weighted down slightly.
From the from the foods business overall the outlook for commercial is quite strong its important to note that our India business falls into the commercial side, a great start to the year for India, the outlook looks favorable and and we continue to see plenty of.
<unk> to grow our business in India, So India as well as improvements in in Brazil are will help that a commercial order book improve going forward.
And in terms of margin lift from from that mix shift.
Yeah. So Oh farm is obviously higher margins than commercial so the fact that pharma is favorable supports our margin projections going forward and then on on commercial we see our margins improving and that improvement will really be driven by two factors one the normalization of the.
E. A mix that we saw down in Brazil from the third party equipment that will provide some uplift to our commercial segment margins and then as well the SG&A improvement that Jim noted that those will have a favorable impact on our commercial margin. So a couple of tailwind in the commercial side.
From a margin perspective going forward.
Oh, okay.
And then just a question for Jim on the working cap.
Okay.
On track for the job on that.
I was wondering when you expect to achieve your 10% to 12% target.
Working capital as a percentage of sales and can you just talked about any expectations on the absolute number for your working capital cash flow needs. Okay. Thanks.
Thanks.
Yeah. So so the 10% to 12% you know as you saw in the first quarter dramatic improvement from 19% to 14%, which will help us.
To get to that 10% to 12% much sooner than we expected.
10% to 12% is more of an annualized number you will have some variability in some of the quarters, particularly Q1, and Q2, where theres a lot of pressure to to to grow our working capital. However, despite the growth that we've had we've been able to manage that quite nicely in terms of an absolute number.
I think a couple of <unk>.
Data points.
Last year in H, two we were able to pay down $110 million senior debt.
This year, we got off to a great start where our borrowing needs with significantly lower than last year 26 million versus $86 million.
And so if you think about those two factors we were fairly feel very good to continue the momentum in improving our working capital needs, meaning that it will not grow as quickly as our sales.
Which will just add more favorably to our ability to pay down debt, giving us a ton of confidence in our ability to get to our stated leverage ratios.
Okay. Thanks.
The next question is from Matthew Weekes from <unk> capital markets. Please go ahead.
Good morning, Thanks for taking my question, just wondering how youre thinking about the macro economic outlook at this point and maybe if there's any kind of risk.
Risk to the business Theyre thinking about a tighter credit markets higher interest rates for farmers and you also grain prices and kind of benchmarks globally have come off a little bit just thinking about how you see that maybe impacting demand in different areas of the business.
Yeah. Thanks, Thanks, Matthew and for sure you're pointing out some very important macro conditions that we watch you know credit interest rates. We commented how that had an impact on our foreign business down in Brazil, a grain prices. We continue to monitor are we.
<unk> seen fluctuations in some of the grain prices across our different regions. So there are quite a lot of macroeconomic conditions that we watch closely.
Some of these could have short term impacts on our business are what we're encouraged by is the overall strength of agi. The diversification that we have both from a geographic standpoint, as well as our market market segment standpoint, and we continue to see this diversification provide us on that.
Opportunity to overcome and ride through any.
And any pressure from a macro economic standpoint are supported by strong fundamentals are in the farm farm segment globally. So yes, we keep a very close eye on these macroeconomic conditions are they could have impacts are in various parts of our business on our short term basis, but our balance.
And our diversification are across the company leads to a very exciting and favorable outlook.
Okay. Thanks, I appreciate the commentary I'll turn it back.
Thanks Matthew.
Next question is from Steve Hansen from Raymond James. Please go ahead.
Okay.
So yes, thanks for the follow up.
Paul I think in your optimization efforts you referenced earlier, a consolidation of your fertilizer equipment plants.
And the narrowing even I think of the product set is that is that something we should expect more broadly I mean as you look at the platform.
That you've got here you know across multiple continents across multiple spaces. You know is there an ability to further optimize your beef plant footprint and narrow the product set to improve velocity and margin.
Yeah, I think Steve and taking a look at our business from that standpoint, you know where are there opportunities for us to improve our facility footprint our manufacturing our capabilities has been an ongoing effort for us to drive our say our operational.
<unk>, we are can stepping through a consolidation of the two fertilizer plants that effort is nearly done. So we expect benefits from that to to be visible in the second half of the year, we've actually been doing this for quite some time. This consolidation represents I think the <unk>.
<unk>.
Our AR facility consolidation that we have completed over the past two to three years and we do see opportunities for further facility consolidation going forward. So yeah that that is part of our strategic planning and it is part of our multi year view on optimizing our manufacturing footprint.
Helpful. Thank you.
Dorothy.
This concludes the question answer session I'd like to turn the conference back over to Paul householder for any closing remarks.
Thanks, very much and just wanted to close by saying congratulations to the Agi team on another great quarter and thanks, everyone for calling in this morning appreciate the the clarifying questions.
Thanks very much.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Okay.
Hum.
Okay.
Yeah.
Okay.
Yeah.