Q1 2024 Ag Growth International Inc Earnings Call
Thank you for standing by this is the conference operator welcome to the Hei first quarter results conference call and webcast. As a reminder, all participants are in listen only mode and the conference is being recorded.
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I would now like to turn the conference over to Paul householder President and CEO of Hei.
Go ahead Sir.
Thank you operator, good morning, and welcome to Agi's first quarter 'twenty 'twenty four results call I'm joined today by our CFO, Jim Roddick I'll start the call with a review of our results then turn the call to Jim for additional commentary on the quarter. Following our prepared remarks, the call will be opened for questions.
To start today's call I will begin with a few customary comments on safety at Agi now firmly established as an important tradition at Agi. Our annual safety week is held each year in April. This is the fourth year holding the event, which includes full representation from all of the agi facilities worldwide.
This year is safer acts and safer conditions, while we have made great progress and you keep your eyes, we use to track safety performance, we remain vigilant about enhancing safety and agi each and every day.
I would like to briefly transition and address an important topic. We are excited to share a G is purpose and mission.
At Agi, our purpose is to fundamentally support the elimination of food loss and hunger at.
At the end of the day. This is a G is contribution to the world, We all live in and share so.
To achieve this purpose, we must execute our mission.
We encapsulate our mission statement as to advanced storage handling and processing solutions that strengthen and secure the global food supply chain.
We believe this is a compelling and worthwhile call to action for all our employees customers and shareholders.
From a capital markets perspective, we believe our purpose and mission tying to a succinct statement to describe the Ajax current business key underlying drivers and our contribution to sustainability and societal objectives, a global food security pure play we.
We take our purpose and mission seriously and use it as one of several lenses, which guide our decision, making as an organization.
Prior to providing a recap of our key strategic priorities and to keep your eyes, we used to track progress and performance I'd like to make a few comments on the market conditions, we are observing across the globe.
We are increasingly seen challenging conditions within the foreign market, specifically in the U S, Brazil, and Australia, which will have a negative impact on second quarter performance. We are closely monitoring these conditions and are adjusting regional operations as appropriate there.
There will be better visibility to the global farm Cigna as we move into the second half of the year.
Offsetting the outlook and cautious view in our farm business, our commercial business is well positioned to outperform enable by key strategic growth initiatives, including the focus on emerging markets and progressing product transfers based on the composition of the order book the commercial segment performance is weighted to the second half of the year.
Our current outlook for the year remains positive as further detailed in our review of our corporate priorities, including profitable organic growth operational excellence and balance sheet discipline.
For profitable organic growth first quarter revenue dipped relative to the prior year, while EBITDA increased direction with expectations in terms of 2024 results being biased to the second half of the year.
Overall, our near record order book continues to reinforce the prospect of full year growth and achievement of our guidance.
Adjusted EBITDA growth will be weighted towards our commercial business and supported by continued operational excellence focus.
For operational excellence, the first quarter continued to solidify our sustained performance and heightened margins up over 200 basis points relative to prior year.
With the first quarter typically being our lowest margin quarter, we are committed to sustaining overall margin levels towards the 19% range on a full year basis.
For balance sheet discipline, we remain on track to achieve our target net debt leverage ratio in 2024.
Through Q1, the ratio remained below three times level and is a notable improvement over the 3.6 times level from the first quarter of last year.
Moving ahead with a review of our first quarter performance by segment.
Strengthen the farm segment within the quarter was offset by timing of our commercial segment, which is currently focused on upfront design engineering and manufacturing work to accommodate a sizable order book weighted towards second half delivery.
Our first quarter results show, the extent and consistency of the margin level that age I can't deliver.
With revenue lower than prior year, adjusted EBITDA improved 4% year over year through the support of over 200 basis points of margin expansion.
Improved gross margins from operational excellence initiatives implemented throughout 2023, and overall cost discipline supported this result.
Exiting the quarter, our order book was up approximately 12% and extremely encouraging position given the challenging market conditions across the farm segment and underscoring the resiliency of our business, we have and are continuing to adjust our farm business operations, leveraging our centralized demand planning and revenue management processes.
And integrated supply chain and manufacturing teams.
Within our commercial segment global demand remained strong order intake was favorable and our pipeline is robust.
This is indicative of a broad level of positive performance across our EMEA.
India Southeast Asia U S and Brazil commercial businesses, we continued to work closely with our valued commercial customers to partner on delivering projects flawlessly.
Turning to a review of revenue results and trends across our segments and geographies.
Overall first quarter farm segment revenue grew by 4% year over year.
In our Canada farm segment revenue declined 2% versus prior year.
This segment faced a very challenging comparable period from the first quarter of 2023 within the quarter strong demand for our portable grain handling equipment continued to drive results.
In our U S Farm segment revenue was flat versus prior year with an even mix of contributions from portable and permanent grain handling equipment sales.
Order intake was soft through the quarter as farmers monitor the outlook for the upcoming crop.
U S farm is a key market for us and as outlined earlier, we are carefully monitoring market conditions, making adjustments across the business as necessary.
Our International Farm segment posted an increase in revenue of 41% versus prior year.
Strong results in Brazil from key project deliveries helped support results and offset some weakness from other areas, notably Australia.
Based on market conditions, and our order book mix, we expect Brazil to be weighted more towards commercial as the year progresses. However, we've recently announced some key financing programs and options for farm segment customers in Brazil, a new sales tool, we plan to fully leverage across all channels to help combat overall difficult operating.
Conditions.
Now turning to commercial segment results are.
Our Canadian commercial segment faced difficult conditions throughout the first quarter customers are moving cautiously and timing of new projects is unclear in many instances. The team is focused on building our pipeline and continuing in depth discussions with customers about their plans, keeping agi well positioned to wind orders as projects eventually move forward.
Okay.
Our U S commercial segment fared better than Canada, though still down slightly year over year helped.
Healthy customer demand for grain handling and storage equipment and resurgent demand for fertilizer equipment was offset by a slower result in the food side of our commercial business.
Lower food performance was due to challenges faced during order execution overall demand for our food products and solutions remains strong.
The food order book is up approximately 35% outpacing overall order book growth, providing a solid set up for increasing momentum into the second quarter and second half as initiatives to improve order execution are implemented.
The International commercial segment result was driven largely by project timing.
The order book for International is extremely strong.
<unk> across EMEA, Brazil, and India.
All regions have directly benefited from our strategic growth initiatives.
<unk> has increased focus on achieving positive results across emerging markets, specifically middle East and Africa.
India, and Brazil have been a key focus for product transfers, gaining significant traction within fertilizer grain storage and material handling solutions.
Positive outlook for our second half remains as projects progress through execution and move into delivery.
As we enter the second quarter and look ahead for the rest of the year. We remain squarely focused on key near term objectives that will enable us to continue growing the business throughout 2024 and beyond.
Speaker Change: I'll provide a few comments on each and note. The island's included here are presented in no particular order.
Executing the commercial order book, we have an exciting mix of larger scale projects, particularly in our international regions, which we are focused on executing to plan successful commissioning of these projects will serve as a value reference site further supporting order pipeline development activity.
Completing initial set of product transfers, our first wave of product transfers continues to progress with several now transitioning into execution and order delivery, particularly in India and Brazil, We continue to focus on and support these product transfers to ensure they are fully ramped up in advance of moving onto other priorities.
Including potential net new product transfer initiatives.
Monitoring North America foreign market as noted above and in our disclosure we are carefully monitoring customer behavior. In this critical market anticipating a challenging Q2, while proactively working through scenarios to swiftly react to a range of market outcomes.
Cash flow focus we have steadily increased focus on our cash flow metrics to ensure we are fully capturing the benefits of our growing EBITDA.
We are reviewing potential kpis in this area to ensure we are transparent and accountable to all parties on how we are performing.
Achieving target balance sheet metrics as mentioned earlier, we are now under three times leverage and are confident that reaching two and a half or lower is achievable in 2024, most likely in the second half of the year.
Sustaining margin performance, we are confident that Adi has stepped up into a new bracket of margin performance through the benefit of our operational excellence capabilities.
The higher commercial segment mix and softening North America farm business is a headwind to overall consolidated margins. The overall, we expect full year margins to be relatively consistent with 2023.
Speaker Change: 2025, India expansion.
Finally, we continue preparations and detailed planning for an eventual India expansion investment.
Having secured land for future site, we are steadily progressing detailed plans for a new facility anticipating additional spending and groundbreaking in 2025.
Overall, we are encouraged with how we're currently positioned with the value of our diversified and resilient business model clearly on display in both our results and our outlook.
Against the backdrop of tightening conditions in certain foreign markets, our ability to deliver adjusted EBITDA growth and meaningful margin expansion in Q1, along with a strong order book and favorable full year outlook is exceptional.
Before handing the call over to Jim I'd like to reiterate our commitment to delivering a strong 2020 for successfully navigating both the challenges and opportunities in front of us.
We have an exceptional global team focused on providing value to our customer partners through an extensive product line rigorous project execution and increasingly streamlined operations.
Jay will continue to benefit from the growing importance of food security and building a highly functioning and efficient global food supply chain of critical trend that is important to each and every one of us.
I will now hand, the call over to Jim.
Thank you Paul and good morning, everyone.
For today's call I'll touch on four areas, including an overview of our first quarter results and update on key balance sheet metrics, a few comments on cash flow and finally, a recap of our outlook for the remainder of the year.
Jim: On a consolidated basis.
First quarter revenues of 315 million decreased 9% over last year's record first quarter results.
Jim: The trend in expanding gross margins continued from previous quarters.
And combined with ongoing SG&A cost containment improvements to drive approximately 200 basis points of adjusted EBITDA margin expansion.
Overall, adjusted EBITDA of 50 million grew 4% in the quarter and clearly demonstrates the resilience of our business.
Our pharma segment delivered $189 million in revenue growing 4% year over year.
Adjusted EBITDA of $45 million grew 17% year over year with margins expanding by approximately 275 basis points to 24%.
Similar to recent quarters. The margin result was a combination of operational excellence initiatives as well as the product mix tilted towards our portable grain handling equipment.
In the commercial segment revenues of 126 million were down 24% year over year adjusted.
Adjusted EBITDA of $13 million declined 40% year over year with margins contracting roughly 275 basis points to 10, 5%.
Project timing impacted the quarter and we are looking ahead to the remainder of the year, where we move into execution and delivery of our sizable commercial order book, particularly in international regions.
Moving onto our balance sheet, we continue to make consistent and meaningful progress on our working capital metrics and key leverage ratios clear indicators of the structural improvements we are making to how we manage the business.
Jim: From a balance sheet perspective, we remain disciplined with our credit facility usage, our net debt leverage ratio of 2.9 times in the quarter marked a significant improvement from 3.6 year over year and is our second consecutive quarter under the 3.0 level.
As noted in our last quarterly call the first quarter required some inventory investment in connection with our commercial order book.
We planned for this to normalize as we move into the second half of the year and execute on order deliveries. We are well on track to achieve our stated objective of two five times in 2024, most likely in the second half of the year.
Turning to working capital investment, which continues to be a key focus across the organization.
Jim: Our net investment of $223 million in the first quarter was up from $191 million year over year.
Jim: On an annualized percentage of sales basis, working capital intensity increased from 14% to 18% year over year.
However, this comparable period analysis includes the impact of the accruals related to large nonrecurring provisions, which have since been settled.
Normalizing for this would demonstrate a clear improvement in our total net working capital investment and a stable performance as a percentage of revenue.
Managing working capital is a priority and we continue to strive for further improvement to ensure we can grow the business without an excess working capital drag.
However, it is worth repeating that the makeup of our order book may require us to temporarily invest strategically in working capital in the first half of 2024.
The overall underlying trend still points to a clear and ongoing improvement.
Connected to our success in managing the balance sheet and optimizing business performance is our progress on managing cash flow.
Funds from operation of $31 million was up over 47% from $21 million in the first quarter of last year.
Driven primarily by a reduction in cash taxes.
<unk> from operations as a percentage of adjusted EBITDA continues to trend higher indicative of improving conversion of adjusted EBITDA into cash flow.
Finally, turning to our outlook. We are pleased to reaffirm our previously stated adjusted EBITDA guidance for 2024 of at least $310 million.
This is supported by a near record order book level, that's generally weighted towards commercial.
While our overall outlook for the full year has not changed we have observed a trend in commercial project timing, which is further shifted expected deliveries into the second half of the year.
As a result, we expect all of the full year 2024, adjusted EBITDA growth over 20 twenty-three to occur in the second half of 2024.
With first half 'twenty 'twenty four adjusted EBITA results generally expected to be down relative to first half 2023.
On balance yellow continues to remain bright for agi.
And with that I'll hand, the call back to the operator and open up the lines for questions.
Thank you.
We will now begin the analyst question and answer session.
She joined 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 Press Star then two.
Our first question is from Jacob bout CIBC. Please go ahead.
Good morning.
Hey, Jacob.
Jacob: So you're maintaining your annual EBITDA guidance, but yet it seems youre a bit more cautious about form.
Both U S and Brazil.
What's the offset.
Higher margins it sounds like you're basically maintaining your margin guidance or is it.
More commercial work.
Yes, Jacob Thanks for the question and.
We're absolutely remain confident on our ability to continue to grow this year with a lot of that focus as you rightfully point out.
Biased to the second half whats underscores there's really a couple of things that are underscoring our confidence in delivering that growth. The first one as we highlighted in our prepared remarks, our order book I mean sitting here today with our order book up 12%, we would be extremely excited about that in any condition.
As you know, we certainly view that as an exceptional position to be in this year.
The second one yeah, we're seeing very positive results relative to our strategy.
Our focus on growth and the specific levers that we had in place, namely the product transfers and emerging markets.
This was a key focus for us across 2023, and we made a number of moves to prepare ourselves to support growth and now we're seeing those play out very favorably and that's reflected in our commercial order book with a bias to international and it's specifically around the initiatives that we put in place in India and Brazil.
And the projects that we won at the end of 2023.
So those items are certainly given us the confidence that we're going to be able to deliver to our current guidance and I'd say the third one Jacob it's just the team and the talent and the capabilities that we have in place globally, we're very well set up to not only deliver on these exciting projects that we have within our commercial order book, but also manage through.
Through the situations that we're seeing in the in some of the farm segment.
Okay. That's helpful and maybe just my second question here on U S farm.
This cautiousness that you're seeing is this across all product lines, you know permanent versus portable.
Yeah, Great Great question, Jacob and we keep in very close contact with that market with our farmers and with our outstanding dealer partners. Our team spent a lot of time over Q1 traveling out visiting with our farmers visiting with our dealer partners to really get a V.
Sorry.
Insightful and close read on the market yet we are seeing that that pressure in both the permanent and the affordable side, particularly in the U S.
Jacob one exception I would say to that is our portable product line in Canada continues to be quite resilient the outlook for affordable and Canada remains positive.
It's really a close attention on the U S. Both portable and permanent that we're watching obviously as we noted we'll get better clarity.
On that in the second half.
We further progressed through Q2, we start to get early signs on how the upcoming crop is going to come in as well keeping a close eye on commodity prices.
And what is the U S. As a percentage of farm and maybe just if you can comment on how things are going as far as U S dealer conversions and adding new dealers.
Yeah, well you U S farming is an important market for us.
I'd, probably say it's.
And I'd say that 20% to 25% of our total business.
And then.
In terms of dealer conversions, that's obviously been a key strategic lever for us to drive growth.
Within our farm segment, where we're building an exceptional relationships.
Jacob: With those with those dealers and our upcoming dealer partners.
Jacob: Yeah, I would say is progressing to plan and we continue to make progress and we continue to make headway and expect to even across 2024.
The next question is from Michael <unk> with Scotiabank. Please go ahead.
Hey, good morning, guys.
How are you doing Michael.
Doing well thank you Paul.
Thanks first question on the commercial delays is can you could you maybe expand.
On the why as those projects were delayed.
And maybe.
Yes explain a little bit of confidence as to why do you think they reaccelerate in Q3.
Yeah, sure, Michael and I would categorize the delay in those commercial projects as really minimal.
To be candid I mean, when we where.
Jacob: We're exiting 2023, we had pretty good visibility at that time that our commercial order book was strongly weighted to the second half of the year. So yeah. We just saw a little bit of the normal movement.
From quarter to quarter that you often see in commercial we saw a little bit of that in Q1.
Which put some pressure on our results in the commercial segment in Q1, some of that shifted to Q2.
That was a that's a.
Pretty early in the year shift Theres plenty of time for those projects to get executed and delivered that's why we were confident it's not going to have any material impact on our full year performance for commercial our order book in commercial is extremely strong our where we're progressing to plan on the execution.
All of those projects a lot of those are already entering manufacturing big progressed through engineering.
Jacob: And they're entering manufacturing so we're literally manufacturing the products now and we will continue to do so across Q Q2 that we will be delivering in Q3 and Q4, so that type of visibility.
It gives us confidence in delivering.
Our expectations for commercial.
Super helpful and I guess going back to the North American environment I'm, a little curious as to what drove the negative revision versus your expectation just a couple of months ago.
If I look at crop prices are weak for I guess, the last several months or is it more of it and you're seeing the weakness on the end user demand or is there more destocking at the dealer level, that's impacting some of the near term.
Yeah for sure Mike and as you pointed out.
We're keeping a very close eye on that U S spending a lot of time with what with our with our customers and our dealer partners and the change that we observed in Q1 was really at the at the farmer side and the farmers moving forward with purchases that didn't that was that slow down a bit in Q1.
That led to slightly higher inventory levels across our dealers, which ultimately culminated in softer order intake across Q1.
In fact than we expected so in Q2, one of the things that we're watching closely is that dealer inventory, we expect that dealer inventory to start to move across.
Across Q2, so that as we enter Q3, we're in a net net better inventory position at our dealers.
And then again with that visibility on how the crop comes in.
Any movement in commodity prices, we're noting that they kind of inched up a little bit recently, we'll keep a close eye on that.
This type of indicators will ultimately influenced farmer sentiment in the second half of the year August further comment that you know some of the feedback that we're getting from farmers right now is certainly biased towards the cautious optimism.
So you know that that sentiment resonates right now through the market and will look to lead to continue to keep a a good read on it.
Perfect. Thanks very much.
You got it Michael.
Yeah.
The next question is from Steve Hansen with Raymond James. Please go ahead.
Yeah. Good morning, guys. Thanks, Okay, Paul on the margin front it sounds like your order book is skewed towards commercial.
Predominantly in the back half so from a margin perspective should we expect first half to sort of show a little bit similar to the first quarter or we get some margin improvement and then we have a bit more of a headwind in the back half, but the way to think about it.
Yeah, It's a great question, Steve because you're absolutely right. When you when you look at our our portfolio of products in our different segments. You know, we do see different margin performance across farm and commercial farm typically being higher commercial being a slightly lower so with the with the increase in the in our commercial activities.
D, which we're extremely excited about that does translate to margin pressure.
If we look back at 2023, and the outstanding margin performance that we achieved a 300 basis points of always categorize that 200 basis points of that was fundamental moving us from 16 to 18 and about 100 basis points was.
Tailwind on margins. So now looking at it at the full year that tailwind has shifted to a headwind a bias to commercial trading a little bit of pressure on margins, we look to offset that with continued progress in operational excellence standpoint, so from a full year Steve.
Kind of where what we're looking at is.
Maintaining consistent margins to prior year.
Maybe moving in that 18 to 19 ish percent range are guiding closer to the 19 when you look at Q2.
Yeah, I think that's where you're going to see a little bit of softness in our farm segment that we're forecasting.
Impact margins. If you if you look back to Q2 of 2023. It was extremely strong from a farm basis and specifically from a portable basis that was one of our higher margin quarters due to due to extremely favorable margin mix in prior year, we will not have that that margin.
Mix in Q2 of this year.
Okay. That's helpful. And then just taking a step back on the organic capex.
Laurie.
Secured overseas I mean, what what is the urgency to move on that I know your long lead projects, but do we need to then maybe you just walk us through the capital outlays that we should be expecting.
Over the next year or two it sounds like the start from next year really but what are the plans that we should start to think about the model going forward.
Yeah. Thanks.
Steve and it is an area that we're extremely excited about we've commented for a while the tremendous performance that we've had across our India business.
It's just been fantastic growth really since we acquired our mill tech over the past four plus years.
Speaker Change: And so that that's ultimately the drivers for us looking to make that investment.
I would say that where we have instilled and we'll continue to instill a high level a high level of Capex discipline.
So our decision to move forward with the investment in India came with a fair amount of business scrutiny.
Business evaluation and financial measures the ultimate drivers on that are twofold.
First is expanding our capacity set.
Centric to our rice milling business, we've grown that business substantially we've largely doubled it or even more so over the past three to four years, we anticipate a continued strong market in the rice milling going forward. So.
Portion of that justification is manufacturing capacity expansion within rice milling. The second one that we are equally excited about adding the additional capabilities in India to even better support the product transfers that we've moved down there.
Then the permanent material handling in the form of <unk>.
Portable material handling as well as future product transfers that we have planned, but we'll add the right manufacturing capability built out over time, so that we can successfully.
Executing to those product transfers and net net the reason that's so exciting is because it is fundamentally increasing our total addressable market. That's the premise on product transfers. That's what we're seeing playing out in 2024 on the commercial side is what's going to be a strong growth driver for us in 2025 and beyond.
Capex spend in India is going to be more weighted to 2025, it will be a multi year build out.
Okay.
Yeah.
The next question is from Gary Ho with Chardan capital markets. Please go ahead.
Thanks, Good morning.
The first question on the top line.
Soft commercial that drove the 9% down year over year, and I guess indirectly youre at 310 million EBITDA guidance of flat margins implies top line growing by roughly 555% Paul.
You're monitoring the farm segment for Q2 are you still kind of expecting full year revenue growth. This year, maybe you can talk about the puts and takes in achieving that.
Yeah, Thanks, Gary and and you got it exactly right. Thanks for the question we are continuing to watch that farm segment our.
Our order book being up 12% is a fantastic position to be in if you look at our farm.
A portion of that order, but we typically get visibility out say three to four months.
Arm and then commercial gives us visibility out say six to nine months. Our order book is is pretty weighted to the commercial side that gives us it gives us decent visibility out into the second half of the year and it supports our guidance for both as you noted revenue growth and EBITDA growth with stable margins and on <unk>.
<unk> to 310 and the growth behind that we would expect to see a similar growth at the top line as well.
Okay Perfect and then my second question and I, just wanted to get an update on the product transfer initiatives.
Taken early February you provided the street with a $55 million order book number I'm. Just wondering if you know where that stands today, if not like Directionally, where it is on perhaps where you're seeing some of the those orders are coming from and I think in your prepared remarks, you talked about net new cloud transfer this year, maybe shed some later on that too.
Yeah, 100% Gary Thanks, So much for the question is as we've commented. We're you know we're really excited about product transfers.
The key element there that its organic growth it falls squarely within our current level of capability and fundamentally we're growing we're growing our Tam globally and that's going to that's not only supports our growth in 2024, but it will support our growth for years to come $55 million that we outlined in our order book directly.
To product transfers, yeah that that's in India. That's in Brazil predominantly it is in other areas across the company, where we've successfully executed product transfers it has trended up.
From when we made that announcement that that is the trend we expect that trend to continue we've got a pretty robust pipeline of quoting activity supporting those areas of product transfers.
That kind of leads us.
Two the optimism a lot of our activity right now are tangible commercial activity is in India, and our bins and procurement and permanent material handling as well as down in Brazil in our with our fertilizer product line, that's kind of driving right now a lot of our activity what we expect.
Is closely behind those initiatives.
Is activity in our feed segment. Our recently launched Finn segment, we've got a lot of exciting projects that we're quoting and customers that we're working with predominantly in Brazil, and South Africa.
In feed.
And then portable in India.
Not only look to support the Australia market, but grow a portable business in India, which we're pretty excited about if you look at India, we're making progress in beans, and that product line is starting to move out in the market, we expect <unk> to be a pull through for portable.
As portable becomes a means.
It means in which you load and offload.
So I would say that's kind of tier two of product transfers that we suspect will continue to support the growth and increase our order book.
Speaker Change: And then the next one that we've just recently launched and we're getting more and more excited about we're moving our digital product line down to Brazil.
We've installed a trial systems at a few of our key customer location. We received extremely positive feedback from those customers that that that motivated us to accelerate that that effort.
Speaker Change: And you know that would be an activity that we progressed in the second half of this year.
Positioning us really well entering 2025.
Okay, Great. That's that's great color. Thanks.
Speaker Change: You got it Gary.
Yes.
Our next question is from Michael <unk> with TD Securities. Please go ahead.
Thank you good morning.
I know Michael.
You may.
Maybe Paul just to try to circle back on one of the earlier questions. I know you said that on the whole the commercial segment timing shift it wasn't overly material but.
Just trying to again better understand some of the drivers theyre not sure. If there's a if you can talk a little bit about.
Whether this was a small number of projects or if it was sort of a broader shift if there are any sort of supply issues at play or any factors to just help us better understand.
What what kind of pushed things back to the second quarter.
Yeah.
Thanks for the question, Michael and I'll start by saying that there wasn't anything fundamental or structural or or anything that has us concerned no issues with the supply chain.
No issues with materials that we have on hand engineering capacity manufacturing capacity, we remain in very good shape on all of those categories.
Speaker Change: It's a great place to be and you know we've invested in our capabilities over the past two years to three years, we built out very robust functional capabilities and they're all.
Working hard supporting our commercial activity. It's just the typical movement that you see in this commercial space, whereas the timing in which customers take the product a lot of times, we get forecast from customers. They expect to take the product at a certain quarter.
And then as they start to progress all of the site preparation that is needed.
For the equipment, sometimes our customers run a little bit behind their schedules and their expectations when they ask us to just.
Hold on deliveries that that's largely what is impacting our timing now with that said.
We recognize that is not the ideal position to be in but we are making some modifications to say terms and conditions in our contracts are that fundamentally will help even some of that is timing out so that we don't at.
Or at least the intention is we don't see as much movement from one quarter to next.
Okay. No. That's really helpful. Thank you and then it doesn't sound like it based on what you just described in terms of the drivers to the timing shift to the second half of the year on commercial but.
How would you assess the risk of potential further shifting or delays and potentially some of the stuff you expect to deliver and have to somehow not getting delivered in the second half and pushing out into the early part of next year.
Yeah, Thanks, Michael and you know as you correctly point out that that's a key element of successfully running a business is to understand what risks are out there get good visibility to them and then make sure that that in our planning our execution in our activities were focused on managing.
Speaker Change: <unk> and mitigating those so yeah, we certainly understand what's in front of us and we have a such a significant order book in that second half of the year for commercial.
So you know, we're very mindful and plan full of understanding the risks and making sure that we stay on top of that we don't fall behind from an execution standpoint, a manufacturing standpoint.
The supply chain is very is very closely tied to our activities. So as the material is there when we need it in a very efficient way and then we're also maintaining that close conversation in partnership with our customers.
Speaker Change: So that we can.
Mitigating anything on that side of it and then again I'll I'll take note that we have made some adjustments in our contracts and our terms are largely towards the tail end of Q4 and continued across Q1, which is also squarely aimed at mitigating some of that timing risk.
Okay. That's all very helpful. Thank you.
If we maybe just in terms of the full year guidance, our adjusted EBITDA guidance being maintained but talking about all of the expected growth coming in the second half of the year, whereas half one.
But that being down year over year, just to help with modeling.
Is there anything you can sort of offer up in terms of.
Helping us understand the degree to which you would expect half one adjusted EBITDA to be down year over year.
Yeah.
Oh, yes, so I think.
It's a.
<unk> in the U S is a bit of the thing that we're monitoring closely.
Speaker Change: From our perspective, though if you look at last year last year, we had about 54% of our earnings in the back half.
H to this should we expect it to be slightly more.
As a result of the weighting towards commercial.
And so.
When you put all that into perspective, while we think it may be down in the first half it won't be significantly.
Significantly down, but we do expect it to be slightly down really just to that shift.
Speaker Change: Okay.
The next question is from Tim Montella with a T D capital markets. Please go ahead.
Hey, good morning.
Thank you Tim.
Yourself.
Speaker Change: Good thing.
Great just wanted to follow up on some of on the guidance.
Center, saying that farm demand, obviously, you complain a lot about let's call that youre monitoring that but what are the assumptions.
But you have baked into guidance round farm it sounds like that's kind of all of.
Speaker Change: Of course, we cornwell commercial remains strong.
Speaker Change: Proving so like what type of downside.
Baked into Florida for for the year.
Speaker Change: Yeah, I mean, it's a great question Tammy and it is it is the process that we always go through when we're looking at providing the guidance. Its the process that we've gone through the past two years is the same that we go through this year and ahead of every quarter and what that process is.
As we you know we take a measure of where we're at from our order book, we understand what's going on in all of our markets globally, and we've obviously focused a lot on what's going on in the U S farm for the right reasons, and then quite frankly, we model out the different scenarios.
Speaker Change: So we look at how the year could play out and we will typically look at a you know a three at least three different scenarios and then based on that we positioned our guidance appropriately. So that that's the exact same scenario that we went through and coming up with our with the guidance that we have.
And gave us the confidence to reaffirm our full year outlook.
So would your base scenario before growth in Florida on a year over year basis.
Yeah, well when we look at our growth expectations for the year, our growth is going to be heavily weighted towards commercial when you look at our performance typically Tim you'd go back over the past few years, we've been fairly balanced around 50% boss.
Arm, 50% commercial sometimes it's 50 248.
We expect that as we end this year it will be further bias towards commercial with the majority of our growth. This year delivered from our commercial segment. We we can't predict exactly the farm, we've got visibility out three to four months a lot is going to be dependent on some of those drivers that were.
Watching how the crop comes in what happens to commodity prices. Those are some of the scenarios that we played out to get a pretty good read on it.
But fundamentally as we've noted that the growth is going to be more weighted to commercial this year than we've seen in previous years.
Okay. That's helpful and then on the commercial side.
Speaker Change: Nine months commercial visibility and order books did you get a new commercial orders today can you still get them.
Total revenue in 2040 of them.
Yeah, It's a fantastic question, Tim and it's one of the things that are.
Again underscores a bit of our enthusiasm we had nice order intake across our our commercial regions. In Q1, we have a fairly robust pipeline of projects that we're quoting we expect order intake to be good as well across Q.
To and you know what we would say our team is we are definitely still within the window of being able to win commercial projects execute and deliver those within the calendar year. So we are still in play of continuing to add a prop.
<unk> into the commercial order book that will tangibly impact our 2024 results.
Next question is from Maxime suggest with National Bank financial. Please go ahead.
I got him on Germany.
Maxime: Maybe a magazine.
Maxime: Our pulp maybe first question for you I'm talking about kind of commercial as you move to the building.
Your order book throughout 2023 demand, maybe talking a little bit.
Around sort of the commercial terms on how competitive it was Super Bowl the backlog just so that we can you know.
Frame sort of the risk profile of what you're going to be delivering.
And so forth so yeah any color would be great. Thank you.
Yeah great.
Speaker Change: Great question, Matt because you're one of the things we like to talk about quite a lot on agi why we think we are a bit unique is just the diversification that we have in the business. You know we talk a lot about diversification across farm and commercial as well as geographic diversification.
Even within our commercial.
<unk> business, we have extensive product project customer and market diversification. So if I look into and start peeling the onion on our on our terms and conditions and the mix and the makeup of that commercial order book.
Without getting into a lot of specifics Max I would say its very indicative it's very consistent.
On the type of mix that we would see in commercial order book in prior years, nothing substantially jumps out.
We've got a lot of new projects, new customers from the product transfer standpoint, that's getting quite a lot of our attention. We've also won some extremely large some of the largest projects. We've ever won we won those are right in our sweet spot of product lines capabilities customer base regions. So we've got a pretty good mix.
Of projects within our commercial I would say in aggregate very consistent terms conditions profile.
Okay. That's helpful.
In terms of kind of drilling down on sort of exposure there in terms of food how big of a market is it will you in commercial like is it less than 2% or how should we think about this.
Yeah, So right now our food business, which we're extremely excited about obviously, it's a growth platform for us one or two we highlight both food and digital right.
Right now food for us within our commercial say I'd, probably say, it's in the 10 to 10% to 12%.
Speaker Change: Roughly a max.
Speaker Change: And we think that that's about how 2024 is going to play out what within food. So you can gives you an order of magnitude how large it is relative to commercial as well as the total size of the company that said, we anticipate that the food will continue to grow the growth in food will outpace grow.
In other areas and we see that 10% to 12% increasing as a makeup.
For the company going forward a lot of that will be.
As you've heard our strategic premise.
Growing within our very strong existing customer base, but just expanding that out into new regions are bringing and following our customers down in Brazil over to India, and then as well our broadening our customer base across core geographies, such as North America and Western Europe.
Speaker Change: Okay Super helpful. Thank you.
And then one quick last question for Jim If I may so when we're looking at working capital.
Some investments there how should we think about the free cash flow generation in 2020.
Yes, so thanks Max for that.
So we're still very very confident in our ability to delever continue to delever and get below the two five times.
Well this year in 2024, and Theres a number of reasons of our confidence to that one is you know our working capital management and discipline remains very high.
We've been focusing on those three key metrics to managing receivables inventory and payables.
For quite some time now and continue to make very strong progress.
That that continues to happen even with our belief that through the next few months anyway.
Inventory levels may grow, particularly for us to satisfy our demand in our FERC.
For our commercial business and so even though we will have a slightly higher inventory levels for the first for the next few months.
Cause our underlying core metrics and working capital and continue to improve at Caf working capital intensity will get better through the year, which will free up cash to be able to apply to debt repayment.
The other aspect of our confidence is in our our our capital needs. We're very disciplined in what we will spend our money on Paul outlined our focus on our Asia expansion, which will continue we also have our investments and our ERP systems that will happen this year, but outside of those two we were very disciplined in terms of what.
We need to spend for maintenance capital perspective, other growth initiatives and then intangibles all in our capital expenditures for the year, we've talked about in the range of between 70 and $90 million before that continues to hold and so when you combine our.
Put all of the aspects of our growth.
Our our working capital management discipline and and that.
Speaker Change: That will result in us freeing up a significant amount of money to be able to pay down debt and so that combined with our growth in our EBITDA will allow us to to get below that two and a half times starting end of the year.
Once again and the analyst with a question should press Star then one.
The next question is from Steve Hansen with Raymond James. Please go ahead.
Yeah, just a quick follow up guys just wanted to.
Wire, both the services business, where you're at in that rollout I know, it's only a year and since you really talked about it but that's been an important strategy for one of your larger competitors down south.
Pretty good sense for where you're at with a regional focus in North America Award.
Thanks.
Yeah, that's perfect Steve It and it is an area that you.
Kind of following behind our focus on product transfer as emerging markets and our growth platforms in terms of what's going to drive our growth.
Parts and service is directly following that and one that we'll probably talk more and more about you obviously have an outstanding parts and service business in India supporting our rice milling business that is in many ways, serving as our benchmark as we look to extend and expand that capability globally currently.
Our focus is on North America, and it's across both our commercial and our farms statement. We've set up a dedicated team there across 2023 that team is now up and running and.
And we're making good early progress in our parts and service business in North America.
Probably we'll we'll gain greater traction towards the end of this year and that will be a more significant talking point for us in 2025.
Well, we'll probably expand that initiative outside of North America and then the next area that we'll focus on Steve as you rightly point out is down in Brazil, you know we've been very successful in the Brazil market.
Speaker Change: Over the past five years, a significant growth down there and from a timing standpoint, it gets to a good point, where there is going to be an increased demand for replacement parts and service as our equipment has been operating at our customer facilities for a couple of years now.
Speaker Change: Helpful. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Paul householder for any closing remarks.
Paul David Householder: Yeah. Thanks, very much really appreciate all the great questions here. This morning, but would just like to conclude by congratulating our global team on a very successful safety week.
Paul David Householder: We just wrapped up last week, but always excited to see the progress that we're making there.
Speaker Change: And then just in general.
Paul Householder: The culture that we now have in place and the collaboration that we see across all of our one Adi focus is.
Paul Householder: Is outstanding so thanks very much.
Speaker Change: I appreciate the discussion this morning.
Speaker Change: This brings to a close today's conference call. You may disconnect. Your lines. Thank you for participating and have a pleasant day.
Speaker Change: Yeah.
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Speaker Change: Right.
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