Q2 2023 Ag Growth International Inc Earnings Call
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Thank you for standing by this is the conference operator.
Welcome to the a G I second 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'll 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 as a courtesy to management and other participants on the call. Please limit yourself to two questions and rejoin the queue. If you have further follow ups I would now like to turn the conference over to Paul householder President and CEO of Agi. Please go ahead Sir.
Thank you operator, good morning, and welcome to Hei second quarter 2023 results call as usual I'm joined by our CFO , Jim Radick I'll start the call with a review of our results as well as on the upper.
Date on outlook for the remainder of the year, then turn the call to Jim for additional commentary on the quarter.
Following our prepared remarks, we'll open the call for questions.
The second quarter was again, a record for agi, making it seven record quarterly performance isn't a row there.
Second quarter results were marked by an exceptional gross margin performance. Many of the operational excellence initiatives set in motion late in 2022 and early 'twenty 'twenty. Three are ahead of plan pricing discipline manufacturing efficiencies input cost and supplier management and several other activities.
These initiatives came together in the second quarter to drive margins to the levels not seen in any quarter since 2016.
Combined with consistent overall demand for agi products across product lines and geographies, creating a balanced and resilient sales profile, we were able to generate an all time record quarter for adjusted EBITDA.
The second quarter capped a favorable first half for agi with each one sales and adjusted EBITDA growth of 8% and 27%, respectively and adjusted EBITDA margins of 18 didn't a half percent trending well above our initial goal of 17% for the full year.
Given our success in growing the business. We also continued to make notable strides in our efforts to reduce key balance sheet ratios.
Before expanding further on our results and providing additional business updates I would like to make some comments on safety at Agi.
We recently completed our third annual safety week, a global event that brings together team members from around the world to discuss and review safety protocols.
With our ongoing focus on safety awareness I am extremely proud to announce that 11 of our facilities have now gone more than one year without a lost time safety incident.
Our collective focus on safety is paying off and reaching these type of safety milestones clearly demonstrates the commitment of our employees who are unquestionably the heart of Agi.
Now turning to our second quarter results.
Sales of 319 million were consistent year over year and showed strong underlying volume growth when normalized for higher prior year steel costs adjusted.
Adjusted EBITDA margins of 22, 6% were up more than 550 basis points year over year and helped generate 33% growth in adjusted EBITDA up to 88 million.
Across our three corporate strategic priorities are high level Kpis are generally trending in a favorable direction for profitable organic growth sales growth of 8% across the first half of the year is encouraging once again, demonstrating the resiliency of our business.
For operational excellence, the extremely strong second quarter margins speaks to accelerated progress across many initiatives from centralized procurement strategies more sophisticated and segmented revenue management tactics manufacturing efficiencies reduced use of outsourcing and overtime digital reorganization among.
Others in several ways. The Q2 margin performance was the culmination of many efforts made across the company.
It is important to understand that these improvements are the result of structural changes to our processes teams and to the way we manage the business.
As these changes are steadily institutionalized we expect many of the benefits of our operational excellence approach to be sustained going forward.
For balance sheet discipline as expected our net debt leverage ratio continues to move lower by carefully managing cash flow, while also growing adjusted EBITDA.
Moving into a review of our segments and businesses. The farm segment was the anchor contributor to the quarter with Canada, leading the way.
Similar to the first quarter, Canada farm was a key growth region for Agi <unk>.
Sales were up 11% year over year and with excellent margins.
Strong volume for portable grain handling products. In addition to disciplined pricing strategies helped deliver this result.
Increased throughput and higher production levels at key manufacturing facilities ensured agi was positioned to meet strong demand.
Looking ahead to the second half of the year, Our Canada farm business maintains a positive outlook with an order book up 77% year over year supported by significant order intake in May and June .
Both months setting records in a typically slower part of the year.
The Canada Farm order book is exceptionally strong signaling solid fundamental demand for HVAC products and services to reinforce our confidence in a favorable performance this year as well as the years ahead.
Yeah.
The U S farm business continued to perform well in the quarter with sales stabilizing at levels significantly above what we would've expected just a few years ago, a signal that our efforts to grow market share in this strategically important region continued to pay off.
In addition, the second quarter was marked by a meaningful improvement in margins for our U S farm business with product mix SG&A discipline and manufacturing efficiencies all playing a role in the result.
The order book for U S farm is up 3% demonstrating growing demand for agi products we.
We have been carefully monitoring local weather conditions to assess potential impact on customer behavior and demand while the dry conditions have generally begun to subside in early Q3, we continue to carefully monitor overall market dynamics.
Contributions from international regions in the farm segment in the quarter were buried but overall supportive in Asia Pacific. We continue to have success in establishing the Agi brand in Australia, where our portable grain handling products are growing in popularity.
As a portable grain handling product transfer it to India is completed enabling local production with more competitive supply support and service, we anticipate a further uptick in demand into 'twenty 'twenty four.
In EMEA, our dealer engagement efforts in Continental Europe has supported pockets of permanent grain handling and storage solution domain.
In South America farm sales improved sequentially from Q1 to Q2.
The shift in sales mix from farm to commercial in Brazil, which we noted in the first quarter was reflected in the makeup of the order book entering Q2.
Steady improvement in market conditions, including expectations for another record setting crop have provided increased competence to Brazilian farmers.
As a result, we observed a significant increase in farm customer ordering as the quarter progressed.
The overall, Brazil order book inclusive of commercial posted a phenomenal increase of over 160% from the first quarter and is now weighted towards farm.
With a strong order book and highly active pipeline, we have good visibility to an outstanding Q3 for Brazil.
Brazil is an important market for agi as well as global agriculture markets, especially in lieu of supply disruptions in eastern Europe , and we are optimistic that Brazil will continue to be a strong contributor to our results.
Overall, our farm segment continues to be a reliable growth engine for agi with an expanding margin profile and an order book up 27% year over year, we see a strong set up for further growth and success in the second half of 2023.
Moving onto some commentary on our commercial segments and international businesses.
Starting with the broader APAC region, which together with India makes up our Asia Pacific geography.
Overall sales were slightly down in the quarter strong sales from India. As this business builds on last year's exceptional results were slightly offset by commercial sales from the broader surrounding APAC region.
Sales were up 17% in India as demand for rice milling products continues.
This growth was supported by targeted promotional packages and new areas within India, where our rice milling business is underpenetrated.
India is a leading margin contributor across our mix of global businesses and a continued focus on effective cost management enabled and acceleration of profitability in the quarter.
The order book in India support a strong outlook in the second half of the year, it's up 10% and very close to record levels, including an exceptional month in June where order intake set an all time monthly record.
The outlook for additional growth is further supported by rice milling exports outside of India as activities now starting to ramp following a targeted effort our market trials and quoting across Southeast Asia Africa and Latam.
In terms of product transfers, India continues to make progress on grain storage and portable grain handling equipment.
On grain storage the coding pipeline continues to ramp and order intake is increasing with several wins in the quarter.
Further transfer of some additional grain storage accessories and components will help the India team reduced costs and lead times further increasing our competitiveness to win grain storage projects.
For portable grain handling equipment. The first trial units had been produced locally and shipped to Australia for further testing in anticipation of building future volume, we have secured expanded facility space to accommodate an increase in production.
Our South America region, encompassing both Brazil, and the broader Latam region delivered sales growth of 64% in the quarter.
Good results in Brazil, driven by mix complemented by a very strong quarter for the broader Latam region drove the favorable South America results.
Overall order book across South America is down 14%, primarily due to timing as the broader with Pam business resets from a strong second quarter and Brazil continues to deliver an attractive order pipeline.
The outlook for the commercial business across South America remains encouraging, particularly our strategic plans to penetrate food feed fertilizer and rice milling platforms continue to gain traction.
South America is an important contributor and a critical piece of our overall growth story.
Our EMEA business continues to generate stable results. Despite the unstable situation in the eastern European market.
It was in the quarter were down 10% largely due to timing on the shipment of a few projects that were pushed to the third quarter.
Similar to other areas of Agi gross margin expansion in tight SG&A control enabled the region to drive heightened profitability and increased EBIT contribution E. Mail order book is up year over year and now represents a complete recovery of the impact from the eastern European conflict as the shift to middle East and Africa gains consistency.
Overall order intake in June was significantly above prior year, providing optimism that the strategic investment in sales support resources across Africa, and middle East is paying dividends by accelerating sales growth.
The EMEA region remains highly competitive as industry capacity adjust to the reality that two large buyers of food infrastructure in Ukraine, and Russia are currently not coming to market with the same level of investments as they were pre conflict.
EMEA is teams ability to still deliver impressive results. Despite these challenges is yet another indication of strong demand for agi products the benefits from our strategic plans and the outstanding performance of our local teams.
The North America commercial business, which for reporting purposes. Now includes most of our global food platform was down 19% in the quarter with most of that result, being directly attributed to a decline in the food platform as well as softness in the fertilizer market.
While the overall North America commercial order book is down in both Canada and the US This is also largely weighted towards the food platform, which has previously discussed is in the middle of an extensive restructuring initiative, both the food and fertilizer teams have recently won a few nice size orders and are showing early signs of improvement, though we do not anticipate.
A sustained turnaround in these areas for a few more quarters.
The order book for core North America, commercial grain handling and storage products is up year over year and is serving to stabilize results. The.
The heightened focus on operational excellence initiatives have helped drive margin expansion and we expect our North America commercial business to continue to deliver positive EBITDA growth.
And finally, a few comments on our Agi digital business.
Early in the quarter, a second significant phase of restructuring was completed our leadership team is now fully in place.
And overhauled approach to business management, including improved pricing strategies and overall reduced cost structure has led to a dramatic improvement in financial results.
The second quarter was the first time, the digital business posted positive adjusted EBITDA.
This is well ahead of our internal target, where we aim to achieve this milestone by the end of the year.
An outstanding achievement from the team leading the turnaround efforts, who now turn their full attention from cost control and stabilization to accelerating growth.
Overall, the second quarter highlights the clear benefit of rally and our global team around common and consistent objectives.
Capital organic growth operational excellence and balance sheet discipline, we have achieved substantial progress across all three areas. During the first half of the year, our diversified and resilient business model continues to deliver stable and consistent growth and is now bolstered by operational excellence initiatives that are accelerating margin expansion.
But the strong first half in hand, we are clearly on our way to another banner year for Agi, we are confident in the outlook and have increased our full year guidance for both adjusted EBITDA as well as adjusted EBITDA margins, Jim will provide additional details on our updated full year guidance.
We are optimistic about the second half of the year and see further potential in late 2023, and early 'twenty 'twenty four as we progress across our businesses and transition such as food and fertilizer I'll now hand, the call over to Jim.
Thank you Paul and Hello, everyone for this call I'd like to address four areas, including an overview of our second quarter results and update on our balance sheet and related key metrics a few comments on our cash flow and a few notes on our outlook for the year.
On a consolidated basis second quarter sales of $390 million were stable year over year very strong gross margins helped drive over 550 basis points of adjusted EBITDA margin expansion and led to 33% growth in adjusted EBITDA for.
And 88 million dollar result, an all time record for adjusted EBITDA in any quarter for Agi.
In the second quarter, our farm segment delivered $233 million in sales growing 3% year over year.
Adjusted EBITDA of $70 million grew 37% year over year with margins expanding over 700 basis points to 30%.
Growth in Canada, the U S and Australia, coupled with the onset of many operational excellence initiatives designed to support margins drove the result.
In the commercial segment sales of $157 million declined 4% year over year adjust.
Adjusted EBITDA of $29 million grew 22% year over year with margins, increasing over 350 basis points.
Similar to farm and as Paul elaborated in his prepared remarks gross margin expansion due to operational excellence initiatives supported the strong results.
Our second quarter adjusted EBITDA included some one time items that are worth a quick comment to provide a bit of clarity.
The accrual related to the bin incident of $15 6 million was disclosed a few weeks ago in a standalone press release.
The $4 9 million for equipment rework relates to the completion of the remediation of the customer site in British Columbia and isn't directly related to the incident.
The $8.8 million in transactional and transitional costs includes a few items, including retention and legal costs in connection with digital reorganization, which underwent a second round of restructuring in the quarter.
Our broader workforce optimization initiative also completed in the second quarter.
Integration work for our recently consolidated facilities and a few other miscellaneous one time items and accruals.
Finally.
The $1.7 million in accounts receivable write down in the quarter reflects our conservative perspective on our last remaining balances from customers in the Russia, Ukraine region, we have no more receivables related to the region on our books with all amount still owing from this region now fully reserved.
If and when any amounts owed from this region are collected it will provide some incremental cash flow, but for now the timing and amount of any recoveries remain uncertain.
Overall, we expect fewer and smaller sized one time items as we progress through the back half of the year.
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, we're making to support the strategic priority.
Working capital investment is a key focus across the organization.
Our net investment of 212 million in the second quarter was down from $274 million year over year.
As a percentage of sales working capital investment fell from 17.6% to 13, 6% year over year on an annualized basis.
Given the stable sales in the second quarter, both the absolute dollar working capital investment and the ratio as a percentage of sales are clear indicators that our efforts to optimize how we use and manage our cash are steadily taking hold.
A key contributor to this result has been our focus on inventory and DSI metrics.
We are managing DSI closely and on a facility by facility basis. We are pleased to see DSI continue to make progress on both a year over year and sequential basis.
From a balance sheet perspective, our kpis continue to trend positively credit facility management is a focus item as we work to optimize how we manage cash flow and we are encouraged to report.
That our net draw on our facilities was very minor in the quarter more importantly over the first half of the year, our total drawn debt and credit facilities was $28 million versus $96 million last year.
We anticipate the usual trend of lighter credit facility needs towards the end of the year. In addition to strong cash flow to help us further drive down overall debt levels. Our net debt leverage ratio decreased to 3.3 times. In Q2. This is a significant improvement from 4.8 times year over year.
Air and 3.6 times sequentially.
We are well on track to reach our goal of approximately three times by the end of 'twenty to 'twenty three.
Longer term the steady state leverage ratio target remains at 2.5 times.
Turning to a few comments on cash flow funds from operations of $71 million were up from $49 million year over year, the step up and available cash flow mirrors, the increase in adjusted EBITDA and a dentist and demonstrates our ability to capture and convert our growing adjusted EBITDA into cash flow.
Looking ahead, our cash inflows are typically stronger in the second half of the year, enabling us more flexibility on how to redeploy and the pace at which we can make debt repayments.
The recently announced settlement of the bin incident will have an impact on cash flow and we expect approximately a $55 million net outflow in the third quarter in connection with resolution of the matter.
Given our strong results and growing adjusted EBITDA, we do not expect this to impact our goal of reaching approximately the three times level by the end of the year.
And finally, turning to our outlook.
We remain excited about our momentum heading into the second half of 'twenty twenty-three supported by our order book up 3% year over year. We are encouraged that the order book continues to grow despite a few pockets, where we are rebuilding the pipeline most notably our food platform. In addition to our fertilizer in EMEA platforms.
As Paul outlined in his remarks, we have increased our guidance to reflect the optimism and confidence we have in the business.
Our new outlook for full year adjusted EBITDA is now at least $290 million.
Up from at least $265 million.
And with adjusted EBITDA margins of at least 18% up from our prior outlook of at least 17%.
This updated guidance now indicates approximately a full 200 basis point increase over last year's result of 16%.
So thanks, everyone for your time, and we'll now open up the call for questions.
Thank you.
I'll 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 atone acknowledging your request. If you are using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two as a.
Minor please limit yourself to two questions and rejoin the queue. If you have further questions.
Pause for a moment as callers join the queue.
Our first question comes from Jacob bout of CIBC. Please go ahead.
Good morning.
Hey, Jacob.
Hi, great quarter from a margin perspective.
Wanted to dive into the into the revenue growth.
Maybe just starting with with Canada. The U S. I guess for the on farm dry weather doesn't seem you're having much of an impact but on the commercial side.
Yeah.
What's the need for restructuring you know why are you doing this now.
And what do you view as kind of a normalized growth rate and in commercial.
In the U S and Ken.
Yeah, Jacob Thanks for the question.
Comments on the Canada, and the U S farm correct, we do see nice stable growth in both of those sectors very pleased with how our Canada farm business has performed in the first half and then when you look at the the order book and sets it up for up for a nice strong second half of the year.
But turning to the commercial and the need to restructure that business is really focused on our food segment Jacob and it is very consistent with the restructuring that we completed on core North America commercial business about two years ago, and it's really to fully leverage the.
Combined capabilities of of our foods business into a little bit more of a unified business in which we can take the full suite of capabilities out into the market and out into our customer base. That's objective number one to better leverage the capabilities that are inherent in our food business.
The second opportunity there Jacob that we're focused on with the restructuring is broadening our market reach and our customer reach our previous food business was outstanding and was focus on a few core large global customers. We feel it is important to diversify that customer base, because that will give us a more stabilizing.
And sustained ability to grow that business going forward significant effort restructuring we've got some more work to do which is why we're suggesting that the second half of the year will remain fairly stable for food and then we'll see and expect to see an increase into 2024.
Okay, and then maybe just turning to Brazil.
Record high interest rates, creating havoc there.
How is that impacting both your farm and commercial work there.
Yeah for sure Jacob we did see a softness in our Brazil business across the first half of the year, but as we noted in our opening comments a significant improvement across Q2 as our order intake in our order book increase substantially but you're right to note the interest rates that did.
That was one of the factors that impacted our first half results I think we might have started the year with interest rates as high as 15% are we have seen interest rates slowly improve particularly across Q2, I think they're sitting at about 13.25% right now that decrease in it.
Interest rates is one of the factors that we think is leading to an improvement in sentiment that combined with and in anticipation of record crops in Brazil. Just one other further comment on interest rates or the expectation is that they continue to fall across the second half of the year, we'll see how that turns out the guidance.
We're hearing is a is finishing the year at around 12% and you know certainly as interest rates come down that just adds to the confidence that we think will be reflected in the market and and the demand.
Well I can just sneak one more in what do you expect overall company.
Net revenue growth to be over the next two to three years.
Our next two to three years, while I'll start with the second half Jacob Oh in terms of revenue growth. We expect the second half of the year to be stronger than the first half of the year, particularly as we enter a part of the year, where we see an uptick in our international business in aggregate international performed quite well in in <unk>.
Each one but are in in the second half of the year is typically when you see both Brazil, and India as well as EMEA a pick up from a from a volume and a revenue standpoint going forward a profitable organic growth continues to be one of our major priorities, we're very optimistic about our abilities to be able to grow our business across our.
First find a platform one of the key areas of strategic areas that we're focusing on is product transfers. It's still early days in our efforts to transfer some of our core products into various markets that we have but we are seeing a nice early progress, which is leading to our confidence that that's going to be a key lever for us.
To sustain growth into the outer years.
Thank you Paul.
Thanks Jacob.
Our next question comes from Michael.
Scotiabank. Please go ahead.
Hey, good morning, guys.
Because it's such a big job I really wanted to see if we can dive into that 600 basis points of gross margin improvement.
You know Paul how much maybe you can give us a sense was price versus efficiencies.
And importantly, how much of that improvement should we consider to be permanent.
Obviously, a lot to digest I guess, when you're looking from outside the business I just want to make sure to to get a better handle on it.
Yeah, It's a great question, Michael and first and foremost we're very excited about the gross margin expansion that we've seen in the quarter and as it is directly attributed to the outstanding team that we have and the focus that we've been putting in this particular area say for the past six months or so.
There is a lot in that 600 basis points improvement I'll kind of try to break it down into a couple of buckets for you are still keeping it relatively high level, but but getting to the major point, we would suggest that about 200 basis points are structural improvements directly resulting from operational excellence that now.
<unk> reset our baseline for us and create an area for us to consistently grow margin from an operational excellence standpoint, so that 200 basis points, Michael is consistent with what Jim outlined in his comments on our full year guidance of at least 18% showing a 200% improvement over prior year, we would say that that.
That kind of fundamental improvement and margin expansion is directly attributed to.
Through our operational excellence activities. When you look at the additional margin expansion are you know what one area is certainly price we've been focusing on price, we've been enhancing our capabilities and level of sophistication on price, we have seen steel come down sequentially from prior year highs, where steel was up 30% or.
Goal all along was to take advantage of that decline in steel and keep and hold some of that as margin expansion. So when you look at that prior year steel costs about half of that we got as margin and about half of that is actually hidden as real volume growth in our in our Q2 results.
That's great color. Thanks.
Maybe to just kind of back it up and maybe ask a higher level question on the cost side.
A few years back you guys were very acquisitive.
Now, you're making adjustments operationally and consolidating several facility and centralizing functions.
Maybe putting aside the product transfers and the whole organic growth conversation just just for the just for this conversation some specific again on the cost structure and when do you guys think that youll settle out to the point, where you have the cost structure you want.
Because they're much more to go.
That there is more to go Michael I mean to some extent, it's still early days from our focus on operational excellence. It's been a it's been a key initiative for us for about 12 months. Obviously, we got started a little bit before that but you know we really just getting started on operational excellence. So we see opportunities.
Going forward to continue to improve the efficiency and effectiveness of that business I think our opportunities I can put in two buckets bucket one would just be ongoing incremental improvements on how we run the business on a day to day basis are there still opportunities for us to make progress there and the other one Michael is is strong.
Actual step change improvements in our business that might come from facility consolidations or other opportunities is such that you know those are initiatives that we're still looking at so net net yes, there is still opportunities for us to make improvements in our cost structure and then going forward. We'll look at how we are fully leverage those improvements whether we can.
After those as margin gains are levered leverage those to continue to support and drive growth.
Awesome Great work guys. Thank you.
Thanks, Michael.
Our next question comes from Steve Hansen of Raymond James. Please go ahead.
Yeah. Good morning, guys. Thanks Congrats.
Congrats on a strong performance margin wise.
Can you perhaps describe how the order book has evolved in Canada through July and August I'm, just struggling to square your comments on how the Canadian order book has been so strong while the U S sounds much more muted on dryness.
Just looking at the crop conditions across a few regions candidate far far worse from a driver perspective, and that's working through the summer period here or just maybe give us a sense for how that's actually evolving here more in the current quarter. It was a backward looking and then just maybe describe it but the mix issue is it perhaps the portable side, that's been stronger with the permanent.
Yeah.
Yeah. Thanks, Thanks, Steve and as we mentioned in our opening comments, we're certainly keeping very good visibility to the growing conditions both across Canada.
And the U S. But do you know what one of the reasons. We're so excited about our performance both where we are year to date as well as the second half is just the diversification that we have in the business. The strength that we have in all of our geographies across agi, just a much stronger business platform than we've had previously so focused.
Specific on Canada, our order book is great.
It's leading to optimism in the in the second half of the year, we have had strong order intake as you've noted.
So to kind of split that up into mixed to give an idea of the strength in portable the strengthen in permanent.
We have very strong demand for our portable product lines that has been very consistent throughout the year, it's been consistent in Canada, and it's been consistent in the U S. So our portable product lines, obviously, a key part of our product portfolio across both Canada farm as well as.
U S farm.
On the permanent side are we saw strong very strong order intake on a permanent side of our business for Canada farm late in 2022 and through the first half of 2023.
In both Canada farm in U S farm, we are seen farmers a be a bit more cautious on the permanent side than on the portable side as they evaluate how the how the crops are going to come in for the full year. So it's our order book is is biased more towards portable than permanent that said, we still see.
Opportunities on the permanent side, we've seen some improved weather conditions certainly in the U S as well as in pockets in Canada. So you know what we will see how the second half of the year unfold from a permanent standpoint.
Okay. That's very helpful. And then just wanted to circle back on the margin question. I think you described earlier in your attribution of the improvements you know steel in price and a few variables, but how big of an issue with mix in the quarter I think even in your remarks last quarter. You described the portable work had been near record it was likely going to benefit.
The margin profile, but I was just curious because if I'm looking back historically over the last three years you have had margin spikes in the past on mix you referenced 2016 for example, I'm just trying to get a sense for it we still should expect the normal volatility in the margin profile of the 200 I guess, we can bank on it the more permanent.
Yeah.
100%, Steve I think you summed it up pretty well there are they are the 200 basis points, we're seeing a structural that is forming the baseline of our margin expansion then when you look at that.
The additional margin performance that we had in Q2, there is a portion of that is directly related to pricing.
While it was very strong pricing performance in the quarter, we do see that as an opportunity for us going forward. It's an area that we're focused on we're going to continue to increase our level of sophistication from pricing customer segmentation market segmentation. So we do see continued opportunities going forward for us to drive margin from a pricing standpoint, and then Steve as you call them.
Rented mix is certainly part of our business. We've got we've got product lines, we have regions that have stronger margin performance than others. So you know in any given quarter. We have had well we will continue to see mix have a margin impact in Q2 is certainly with favorable strong performance across our global.
Mobile portable product lines is a is a good tailwind to margins. We are at our India business. It is also a very strong tailwind to margins India continues to perform well and is a very exciting second half outlook, so opportunities for mix to be of.
Ported going forward as well.
Okay very good thank you.
Yep Thanks, Steve.
Our next question comes from Gary Ho of Deutsche Bank Capital markets. Please go ahead.
Good day good morning.
Wanted to dig into the.
Just going back to the top line question because discussed earlier, so I think he identified the $2 billion revenue target in your Investor Day can you provide us a bit of an update on timing and when you think you can achieve that.
Well you know at 2 billion, where where do you think margins.
Could could be at that at those levels.
Yeah. Thanks, Thanks for the question, Gary and we continue to be very excited about our opportunities to grow our business globally commented on the lever that we have from a product transfer that that creates a very exciting opportunity for us and as well just.
The fact that we are in some very exciting agriculture markets globally are in Investor Day, We commented on our growth opportunities and and suggested that $2 billion was within our planning horizon and you can think of a planning horizon going out into that two to three year timeframe that remains.
Both our goal as well as our performance expectations. So we would still set out 2 billion as of as the our revenue target over the next few years.
In terms of margins are as long as were guiding for this year, we expect margins to be at least 18% EBIT margins are we have opportunities to continue to improve our cost structure going forward, where look we will look to balance the improvements that we make there from both a margin gain as well as our revenue.
So at this point in time, Gary I would say that there's opportunities for us to improve our cost structure, we like the ability to perform from a margin standpoint in that 18, 18% to 19% range and then lever cost structure to support growth.
Okay. That's great color and then my second question I'm. Just wondering if you can give us an update on the digital side <unk> got three now it sounds like two two rounds of restructuring.
You're breaking even in terms of EBITDA and maybe provide a bit of an outlook for.
<unk>.
Yeah. Thanks, Gary we've had a number of initiatives across the company that are focused on just fundamental improvement and restructuring. We have ended the initiative going on in food as we noted earlier and then the one in digital as you pointed out we can't be happier with the performance of our digital business.
Through the first half of the year outstanding performance from our leadership team outstanding performance from those that are working and supporting that business day in and day out.
Significant improvements in aligning our cost structure with our revenue reality that ultimately led to Q2 being the first quarter in which we were EBIT positive, which is an outstanding accomplishment relative to where we were just a short time ago and it's ahead of our plan.
We're hoping to get to this point by the end of the year. We're now here at Q2.
And the acceleration that we've had and that type of performance enabled the team to shift from all that heavy work from our restructuring and cost structure standpoint to now look at and how we fundamentally grow that business, we remain excited and bullish on our digital platform.
How it complements our core product lines helps us differentiate ourselves in the marketplace provide enhanced capabilities to our customers. So we're very optimistic that going forward now are our focus and our opportunity is growing that business, while maintaining profitability.
Okay, great. Thanks for the comments there was a Matthew.
Alright, Thanks Terry.
Our next question comes from Andrew Wong of RBC capital markets. Please go ahead.
Hey, It's Harrison Reynolds on for Andrew Wong Hi, Thanks for taking the question I'm. Just wondering if you could talk a little bit about what's driving some of the slowdown in commercial.
How much of that is down to the macro environment and when do you think business will pick up again.
Yeah. Thanks, Thanks for the question on our commercial business that you know when you when you look at our commercial business in aggregate are what we're quite excited about our commercial business. If you look at our results and you kind of Peel the onion, a little bit very strong commercial performance down in South America.
We've seen very strong performance in our commercial business over in India, and we've made substantial progress in EMEA are particularly offsetting some of the challenges that we've had with that the Russia, Ukraine conflict in our shift to Africa, and Middle East So lots of pockets of great performance in our commercial business the softness.
<unk> is predominantly in North America, and then more specifically, it's in foods and fertilizer.
And to those two points from a from a market standpoint, we would suggest that fertilizer structurally is down from a market standpoint, and that's that's creating the softness that we're seeing there. So in other words as that market improves and rebounds, which we would expect to happen starting <unk>.
In the second half of the year, we certainly expect to see our fertilizer business improve right along with it as I made comments at the beginning we've won some nice projects recently in the fertilizer space, which we would suggest as a early leading indicator that market conditions are starting to improve fluids is a little.
A bit different they're I would say that our softness there is a combination of market softness as well as the restructuring that we're going through so we wouldn't we would anticipate seeing the market improve the second half of this year into 'twenty 'twenty four we still have some work to do from a restructuring standpoint.
What's kind of puts our outlook on the on that particular portion of our business improving more into 2024.
Great and maybe just as a follow up does the sales lumpiness in the commercial segment have an impact on business efficiencies and costs.
Or are there any ways you could smooth sales in the segment are just from a margin standpoint.
Yeah. Thanks, Thanks for the question and I I would suggest that this was one of the areas, where we've made great improvement as our ability to run our business at a higher level of efficiency and effectiveness. So you're absolutely right to note that our commercial business is lumpy as orders come in as well as orders are executed and shipped out.
So our opportunity to make sure that we are adjusting how we're running the business to align well with that variability is one of the reasons why even though in aggregate our commercial revenues were down our profitability was up clearly demonstrating that we are able to deliver a profit.
M, both or throughout that Barrett that variability.
Great. Thank you very much.
You got it thank you.
Our next question comes from Tim on the cello of ATB capital markets. Please go ahead.
Hey, good morning, everyone.
Tim.
I want to talk about the pharma segment margins in particular, you know very strong at 30% of that.
In my model at least that's the highest on record I'm not sure I'm sure later.
It's ever been higher, but we're talking around the margin.
It sounds like you had 200 basis points of structural improvement on a consolidated basis obviously.
It seems that far maybe higher than that of.
Next I imagine played a role.
But is there anything you know.
Specific to Q2, that's falling off in the back half of the year that Mike might make thus far emergence.
You know lower as you get into the back half of the errors or.
Potential with digital now.
Breaking even or are contributing positive EBITDA and probably that being one of the higher.
You know margin contributors.
Or at least on a potential basis.
Just help me understand.
We might see those margins in the back half the year.
Yeah, Great Great question, Tim and as you noted, but yeah, what were extremely pleased with our margin performance in our foreign business I mean looking at Oh.
700 basis points is outstanding performance and when you have margin expansion at that that level. There's obviously a number of contributors to the performance and I think you caught all of them to be candid you know, where we have the core operational excellence that is supporting margin expansion.
And we've commented on those.
Fully 200 basis point the improvement that we've made from a digital standpoint restructuring that business absolutely has contributed to the margin expansion that we see in farm as we've commented at the beginning of this year, we've rolled our digital results into our farm segment from a reporting standpoint, so that is contributing to our margin expansion.
Our pricing and mix or other elements that were favorable contributors to that 700 basis points. Our margin margin expansion, you know pricing a bit of that as I commented a steel was up 30% comparable to prior year as we've.
We've seen now steel come down sequentially are this year that provides us an opportunity to try to capture margin on the opposite end of that cost curve.
And then in addition to that just are our level of pricing capabilities now and then mix, but very strong performance in portable <unk> that said, our permanent side of our business and particularly in Canada Farm was outstanding in the first half of the year, but you know a number of areas.
Contributing to that margin expansion and a several of those we expect we expect to be a sustainable or at least opportunities for continued margin performance going forward.
Okay. That's helpful.
And then the Brazilian business it was.
Remarkably.
Resilience I thought and some of your competitors had come out in the Brazilian market with worse results. So.
How little understand your market position, how its changed in Brazil, and Uh Huh.
You know I guess market share with them.
The commercial saving the firms.
Yeah, I mean, Greg Great question, Tim and I Echo your comments were very pleased with our performance down in Brazil, both on an absolute and a relative basis. There is softness throughout the first half of the year. The team performed extremely well are in face of those market conditions, we feel confident that we've gained.
And we further gained market share.
Across Q2, certainly across the first half of this year.
Our market share I would say is and and the resiliency of our business is a direct factor of the diversity that we have down in Brazil, We've got a great balance between farm and commercial so when we saw softness in the barn on the first half of the year, we saw unbelievable.
Strength from the commercial standpoint, and those work to net out and provide a overall favorable business results.
We remain optimistic that that diversification of our business is going to be a key lever to help Brazil. Further grow we are now looking to enter a food fertilizer feed and rice milling segments down in Brazil. Those are attractive markets. We haven't been very active in those in the past, we're getting more and more active in those in.
The future that's just going to add both to our total available total addressable market opportunity in Brazil, as well as our continued to provide excellent diversification in our business all of which contributing to our optimism on Brazil performance going forward.
Okay.
That's really helpful. And then maybe I'll just follow up on some other questions were asked but.
Just around you.
No you're right.
I guess progress in operational excellence it wasn't that long ago that you had your investor day, and sort of rolled this out and.
The margin expansion has been pretty swift.
And then pairing that against your comment that your early days.
Yeah.
Where would you think.
Realistically you could see margin expansion go over the next year or so.
Yeah. Thanks for that comment and question Tim When you. We have made the team has made a tremendous progress from the operational excellence standpoint, and you know we just couldn't be happier with the team's performance they've embraced it are a lot of outstanding work achievements and results Oh.
I've already been realized.
We do think it's early days, we do see opportunities going forward.
Well I'll, maybe I'll take this in a different direction and turn it over to Jim on some of our ongoing opportunity for for operational excellence, we continue to make investments in processes and systems to enhance our capabilities in that area. That's investments that we're making today that are going to contribute to our operational.
Improvements going forward, yeah, and Tim just to build on that a bit as we look forward, where we can go I think we've got opportunity to continually improve our margins quite significantly, but as mentioned a couple of times earlier as well.
It's a balancing act you got to make sure that you are or are not just focused on just driving improved margins, it's you'll be able to leverage some of that improvement to continue to drive sales growth and that's something that we're getting a lot more sophisticated in as we continue to adopt a better processes better systems, we have.
Better visibility to our customers to our our pricing capabilities to our costs by customer by by specific job that allows us to better manage the balance between increased margin and sales growth.
So what do we think we think that definitely when we guided to 18% this year up from 17%.
Feel very good about that we do feel opportunities to go well beyond 18%, but how that pans out will be a decision that we'll make by quarter based on opportunities that we see to continue our sales growth.
Okay. That's helpful I'll turn it back thanks.
Thanks, Tim Thanks, Tim.
Our next question comes from Michael <unk> of TD Securities. Please go ahead.
Thanks, Good morning.
Hi, Michael.
Hi, first question is is maybe touches on some of the things you've already talked about a little bit but just on the on the margin performance, obviously very strong in the quarter and just as it relates to the higher margin guidance can you talk a little bit more about what's changed since you put out your initial 2023 margin guidance of 17%.
I think he touched on the digital reorganization.
A couple of minutes ago, and how that's progressed.
But wondering is this really driven by.
Operational excellence initiatives coming through more quickly than you expected sort of that acceleration you touched on it in terms of digital or have there been other areas in terms of efficiencies that have also contributed that weren't really contemplated at this stage of the <unk> of the margin evolution.
Yeah. Thanks for the question Michael Yeah, when we look at our margin performance at a high level. The fact that we're raising guidance is largely attributed that were just ahead of plan. We are ahead of where we expect it to be and as you noted are certainly a portion of that.
That is the outstanding performance that we've had in restructuring our digital business, but we're ahead and in other areas as well. So I wouldn't suggest that it is areas that we werent expecting it's more we were expecting it is just coming even faster than we were expecting so other areas is certainly on the manufacturing.
[noise] side, as we look to drive manufacturing efficiency improvements.
There's a number of buckets are within manufacturing such as enhanced in sourcing improving our cost structure and driving higher manufacturing throughput.
On the supply chain and our supplier base of team continues to do an outstanding job of working and partnering with our suppliers to understand how we can drive our input costs lower and then has the team makes progress with both of those they're directly partnered up with our pricing team to ensure that as we make those cost improvements we have the opportunity.
You understand how we can lever that through price to drive margins as well as price to drive revenues.
You know, there's a number of areas in which we've outlined opportunities from the beginning and we've just made faster progress than we expected.
Okay. That's helpful. Thank you and then just a follow on to that as we think about the back half of this year. Obviously, there is still a seasonality in the business. So when we look at the margins can you talk at all about how to think about sort of a distribution between Q3 and Q4.
Now that we have this higher guidance.
Yeah.
Great question Q2 outstanding our EBITDA margin performance, obviously, a significant increase sequentially from Q1, and it's one of the things that's important to understand about our Agi business is as you know there you know.
It does vary throughout the year with Q1 being a softer quarter stepping up substantially for Q2.
And then we typically see a Q3 similar to Q2 to Q2 and Q4 are slightly lower are the reason I make that note is to some extent that's how we see our margin profile moving throughout the year as well. So we stepped up margins significantly sequentially from Q1.
You know as you look at Q3 and Q4, we would expect margins to be slightly lower.
Then Q2 sequentially, but in aggregate second half margins are very very comparable to first half margins and Michael just one add on to build on that as you think about the rest of this year no. If you look back historically I think what what we're noticing now with with the diversification.
<unk> across the globe.
Particularly the international businesses that are very that are very strong in the back half of the year. What we're noticing is at what historically was a lower Q1 strong Q2 Q3, and then a lower Q4, we're starting to see Q4 balance out Q4 will be more in line with Q3 now is what we're seeing and so.
As you think through so that would mean that you know our business now has evolved where instead of just two quarters of very strong we're now being able to balance it out where there's there's Q2 Q3 Q4 seemed to be more similar in nature. The margins will be a little lighter in the back half of the year than Q2, primarily because of <unk>.
Mix.
But but the operational excellence initiatives that we've driven through will be sustained and then we'll manage the pricing appropriately determine how much of that pricing benefit will keep or not based on the sales opportunities.
Alright, I appreciate all the detail and I'll leave it there. Thank you.
Yeah. Thanks, Michael.
Our next question comes from Maxim <unk> of National Bank Financial. Please go ahead.
Alright, good luck gentlemen.
Thank you Mac.
They'd get lots of questions, obviously answered, but maybe just one last one.
In terms of kind of working capital efficiency.
Do you mind, maybe providing a bit more color in terms of what exactly that entails in terms of subtle change processes I believe it was.
A change in sort of.
That's our working capital efficiency as part of the compensation packages and so forth, but demand, maybe just talk a little bit into that.
Thanks.
Yeah, Hi, IMAX and thanks for thanks for the question.
Yeah. So as we are one of the things that we've talked about for the past several quarters now is our ability to more effectively manage our working capital, which specifically the focus has been on accounts receivable management and inventory management and to a lesser extent payables management.
We've made great progress the metric that we use as an efficiency metric is working capital as a percentage of sales and as you saw in the quarter, we dropped to two of about 14% of annualized sales historically its been as high as 25% and it's consistently trended downward quite significantly we see.
A number of specific things that are sustainable.
Specifically in an inventory areas, that's our biggest opportunity still.
Where are we use a metric called DSI days sales and inventory and its still hovers at its come down from last year, but it still has much more significant room for improvement.
The things that we've done from a.
A supply chain perspective has given us confident that we're able to identify specific ways to reduce the need for inventory to really move it more to not adjust in time, but closer to that.
Based on various lead times and supplier conditions around the world.
The enhancement of our systems and our processes allows us to get the data more quickly to enable us to effectively manage that.
So inventory will continue to be a focus of ours will be able to sustain the working capital levels and actually continue to improve them throughout the rest of this year.
Okay excellent. Thank you so much and yeah excellent quarter. Thank you.
Yeah, Thanks, Matt Thanks Max.
Our next question comes from Michael <unk> of Scotiabank. Please go ahead.
Yeah.
Hey, guys I know, we're getting long here. So I appreciate you taking the follow up so for Jim.
Just on the net debt target for the end of the year.
You know to get to the three turns of net debt using the adjusted EBITDA of 290 effectively implies no debt repayments in the second half you know I understand is the been settlement that will come out in Q3, but you talked about favorable seasonality for working cap in the second half. So I'm just wondering if it's conservatism or if there's something else that we should consider.
No you're right. So the three times would have us being relatively flat from a total debt perspective, we do still expect some small amount of debt repayments net of the AR. The bin incident that will that we will fund in Q3.
The the reasoning here the logic here is as we think through our business and as I mentioned earlier about.
The seasonality the cyclicality of our business changing a bit where Q4 will be strong.
That pushes a little bit more need for a little higher working capital investment in Q4 than what <unk> traditionally may have happened and so.
Our planning now so it would suggest that improvement in working capital, but because of the growth in Q4 less so than we may have in the previous years. So so maybe you'd argue a little bit more on the conservative side still are working towards improving that but based on how we're seeing the sales trend out now and in earnings.
And out just being a little bit more cautious on that but I'm very comfortable with that three times level by the end of the year.
Thanks, John .
Thanks, Michael.
This concludes the question and answer session I would like to turn the conference back over to Paul householder for any closing remarks.
Okay. Thanks to everyone for joining Agi's Q2 results call and just Wanna comment congratulations and thanks to the global Agi team outstanding work outstanding performance.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Okay.