Ag Growth International Inc. (AFN) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. I'm Bill Lambert, Chair of the Board, and it is my pleasure to welcome you to the Annual and Special Meeting of the Shareholders of Ag Growth International, Inc. As you know, we are holding our annual shareholders' meeting in a virtual format this year due to the ongoing COVID-19 pandemic. Our main objective is to ensure that all shareholders have the same opportunity to participate in the meeting and vote regardless of their geographic location and the challenges posed by COVID-19. I'd like to acknowledge all those affected, and I'd like to thank Ag Growth's employees, management team and Board for their part in protecting the health and safety of the public and our employees. The meeting will be conducted in 3 parts. First will be the formal business of the meeting, following which Tim Close, our President and CEO, will deliver remarks. And after such remarks, there will be a question-and-answer session. Before we begin with the formal business portion of the meeting, I will provide some comments on voting and questions at today's meeting. As a reminder, only registered shareholders and duly appointed proxy holders are able to vote or ask questions. Voting can only be done through our virtual voting platform on the webcast. If you are a registered shareholder or proxy holder and wish to vote, click the voting icon at the top of the webcast page. Voting can be completed at any time from now until the end of the formal business of the meeting. If you have already voted in advance of the meeting and do not wish to change your vote, you do not need to vote again during the meeting. For those who have not yet voted, we encourage you to vote now. [Operator Instructions] If your question relates to a specific motion, please start your question by identifying the motion, so we can address your question at the appropriate time of the meeting. We will save all questions that do not identify which motion they relate to for the general question-and-answer session at the end of the meeting. We will receive the questions and read them out in order for everyone to be aware of the question being addressed. If we have a number of questions that are the same or very similar, we will consolidate the questions. We will endeavor to address all general questions. However, please note that due to time constraints, we may not be able to do so. If you have questions, we encourage you to submit them now. Questions can also be submitted throughout the meeting. Finally, we would like to remind you that our answers to your questions and our CEO's remarks may contain forward-looking information. By its nature, this information contains forecast, assumptions and expectations about future outcomes, which are subject to the risks and uncertainties discussed more fully in our public disclosure filings. I will now call the meeting to order. Pursuant to the company's bylaws, I will act as Chair of this meeting. Ryan Kipp will act as secretary. And representatives of Computershare, our transfer agent, will act as scrutineers. In order that the meeting cover all of the business for which it was convened within a reasonable period of time, we have prearranged with a number of persons attending this afternoon to move and second certain resolutions. This procedure is not an attempt to discourage participation but merely a way to expedite proceedings. The notice of this meeting and related materials were mailed to shareholders and to all Board members and to the auditors in compliance with applicable securities and corporate requirements. The secretary will append the declaration to the minutes of this meeting. The scrutineers' report shows that a quorum is present. Notice having been mailed in accordance with the bylaws and a quorum being present, I declare that this meeting is duly constituted for the transaction of business. The first item of business is to receive the financial statements and the auditor's report thereon for the year ended December 31, 2019. As no vote is required to be conducted on the financial statements, we will respond to any questions on them during the question-and-answer session. We will now address the number of Board members to be elected at this meeting. May I have a motion to fix the number of directors?

I, Jim Vis, move that the number of directors to be elected at this meeting be fixed at 9.

I, Ryan Kipp, second the motion.

Thank you. Can the secretary please advise if any questions specific to this motion were submitted?

No questions specific to this motion were submitted.

Thank you. We will now proceed with the vote. Please record your vote now, remembering that if you have already voted in advance and do not wish to change your vote, no further action is required. [Voting]

We will now move to the election of directors. In accordance with AGI's advanced notice bylaw, the only individuals who may be nominated as directors at this meeting are the persons named as nominees in the company's management proxy circular for this meeting. Therefore, I will now entertain a motion nominating such individuals for election as directors of the company.

I, Ryan Kipp, move that the following individuals be elected as members of the Board of Directors: Gary Anderson, Tim Close, Anne De Greef-Safft, Janet Giesselman, Bill Lambert, Bill Maslechko, Malcolm Mac Moore, Claudia Roessler and David White.

I, Jim Vis, second the motion.

Thank you. Can the secretary please advise if any questions specific to this motion were submitted?

No questions specific to this motion were submitted.

Thank you. We will now then proceed with the vote. Please record your vote now, remembering that if you've already voted in advance and do not wish to change your vote, no further action is required. [Voting]

May I now have a motion to appoint auditors?

I, Jim Vis, move that Ernst & Young LLP be appointed auditors for Ag Growth International to hold office until the next annual meeting or until their successors are duly appointed and that the Board of Directors of Ag Growth International Inc. be authorized to fix the auditor's remuneration.

I, Ryan Kipp, second the motion.

Thank you. Can the secretary please advise if any questions specific to this motion were submitted?

No questions specific to this motion were submitted.

Thank you. We will now then proceed with the vote. Please record your vote now, remembering that if you've already voted in advance and do not wish to change your vote, no further action is required. [Voting]

The next item of business is a resolution to approve an amendment to the company's equity incentive award plan to increase the number of shares that may be issued pursuant to the plan. As disclosed in Ag Growth's press release dated May 11, 2020, the size of the increase in the number of shares as set out in the company's proxy circular has since been reduced from 695,000 shares to 550,000 shares. The change was made in response to recommendations of a proxy advisory service. May I have a motion, please?

I, Ryan Kipp, move that it be resolved as an ordinary resolution of the holders of common shares of the company that: one, the amendment to the company's equity incentive award plan to delete the reference to 1,215,000 common shares in Section 5 thereof and replace the same with a reference to 1,765,000 common shares. Such that subject to adjustment in accordance with the terms thereof, the maximum number of common shares reserved for issuance from time to time pursuant to awards granted and outstanding under the equity incentive award plan at any time shall be increased by 550,000 common shares from 1,215,000 to 1,765,000 common shares be, and the same is hereby approved and authorized; and two, any officer or director of the company be and is hereby authorized for on behalf of and in the name of the company to take any and all action and to execute and deliver any and all documents and instruments as may be necessary or desirable to give full effect to this resolution.

I, Jim Vis, second the motion.

Thank you. Can the secretary please advise if any questions specific to this motion were submitted?

No questions specific to this motion were submitted.

Thank you. We will now then proceed with the vote. Please record your vote now, remembering that if you've already voted in advance and do not wish to change your vote, no further action is required. [Voting]

The next item of business is a resolution to reconfirm, reapprove and ratify the company's shareholders' rights plan. The shareholders' rights plan resolution must be passed for the shareholder rights plan to continue. Otherwise, it will terminate. May I have a motion, please?

I, Ryan Kipp, move that the resolution to reconfirm, reapprove and ratify the company's shareholder rights plan, the text of which is set forth on Page 16 of the company's management proxy circular for this meeting, be approved.

I, Jim Vis, second the motion.

Thank you. Can the secretary please advise if any questions specific to this motion were submitted?

No questions specific to this motion were submitted.

Thank you. We will now then proceed with the vote. Please record your vote now, remembering that if you've already voted in advance and do not wish to change your vote, no further action is required. [Voting]

The final item of formal business is a special resolution to ratify, confirm and approve a reduction in the stated capital account of the company's common shares to $1,000, the details and purpose of which is set out in the proxy circular. May I have a motion, please?

I, Jim Vis, move that the special resolution to ratify, confirm and approve the reduction in the stated capital account of the common shares, the text of which is set forth on Page 17 of the company's management proxy circular for this meeting, be approved.

I, Ryan Kipp, second the motion.

Thank you. Can the secretary please advise if any questions specific to this motion were submitted?

No questions specific to this motion were submitted.

Thank you. We will now then proceed with the vote. Please record your vote now, remembering that if you have already voted in advance and do not wish to change your vote, no further action is required. [Voting]

There being no further matters to vote upon, we will proceed with announcing the results of the meeting. Mr. Kipp, do you have the preliminary results of the voting?

Yes, Mr. Chair. I've received confirmation from the scrutineer that each of the motions passed, including the election of each of the nominees for director.

Thank you, Ryan. I declare each of the resolutions considered at today's meeting carried. The exact number of votes cast in respect of each matter will be filed on SEDAR and press released in due course. And as that concludes the formal business agenda of the meeting, I declare the meeting terminated. And thank you all for attending today's meeting and for your strong show of support, interest and continued loyalty. I will now call on Tim Close, your company's President and CEO, to provide his remarks, following which, he will be pleased to answer any questions submitted.

Good afternoon, and thank you for joining us for AGI's annual meeting. Even in the middle of the current crisis, it is my pleasure to spend some time talking about our business with the owners and stakeholders most invested in AGI in terms of money, time, interest and commitment. There is no one else on the line today more invested, more committed and more able to guarantee the growth and success of AGI than the many employees joining us or listening in to this call. A special welcome to our entire team, many of whom are also shareholders. Like all other parts of our lives, COVID has impacted our AGM format, turning today into yet another Zoom call. Across AGI, we are embracing the change and seizing this time to use the many available digital tools to increase our productivity, enhance our communication and explore new ways to work. Our AGMs in the past have generally been thinly attended yet fairly expensive as we fly in our Board, employees and provide hospitality service and space. Moving to a virtual format eliminates much of the cost, facilitates broader attendance, reduces our carbon footprint yet delivers much of the tangible benefit. We are taking the same opportunistic approach to our daily execution at AGI in a big way, using online tools for our marketing, training, selling and collaboration. I believe that much of this change will be permanent shifts in how we do business and how we achieve more productivity. That said, I'm also a big proponent of median person to develop the relationships that underpin our business. And on that note, I look forward to meeting many of you in person later in 2020. Briefly look at our standard safe harbor statement. Now let's jump in to review 2019 and look at where we are going as we begin a new phase in AGI's journey. Technology products have made us all accustomed to having progress symbolized by a version number, whether it's our phones or our software we use each day. An increase in version number denotes thoughtful customer-based improvements to enhance functionality, capabilities, service and ease of use while also addressing prior deficiencies. A higher number succinctly communicates that a lot of work has gone into producing a better product. We are deploying this concept in the recent launch of Version 2.0 of our AGI SureTrack platform and then extending this concept to apply to all of AGI as we advance on a continuous path to improve our business with an eye to growth, sustainability and increasing value for our customers, employees, shareholders and related stakeholders. AGI 2.0 signals the beginning of our next phase. However, our first phase built the foundation for AGI that will facilitate our growth and success going forward. 1.0 was defined by product and geographic growth. We added and built out our product lines to deliver complete solutions for our customers in our core grain markets. We entered and built businesses in every major grain producing market. We moved from selling single piece of equipment to partnering with our farm and commercial customers to design and provide the entire infrastructure of their businesses. We launched our 5-6-7 strategy to extend our objectives and to leverage the core capabilities AGI developed in grain markets to deliver complete solutions across the full food production complex. We successfully moved upstream in the food complex into equipment solutions for seed and fertilizer and also moved downstream into equipment solutions for feed and equipment design and project management solutions for food processors. At the same time, we rounded out our engineering and design capabilities, our service business and added controls and technology offerings, a solid foundation. In 2019, we made critical progress and closed out our 1.0 phase. We established our platform in India, automated and increased capacity at our Italian operations, continued to build our business in Brazil, established our technology business, completed the foundation for our U.S. systems business, built out selling tools, including dealer portals and automated product configuration, and completely rebuilt our corporate website. We added Milltec machinery to the AGI family in early 2019. In one transaction, we established a robust platform for our future in India and the broader Southeast Asian markets and also added complete turnkey capabilities in rice processing systems. Later in 2019, our team in India further expanded our product line, adding our prime series to offer premium equipment suited for large processors seeking high volume and highly accurate equipment. We had worked on a solution for this region and for rice equipment for many years, and this was the perfect addition from both the people and product line perspective. We are posed -- poised for steady growth in India and the broader region. In 2018 and 2019, our operation in Brazil worked through the start-up challenges you'd expect from a greenfield launch. It has been a long build in Brazil. However, the business is getting an inflection point in terms of volumes and momentum and is also displaying resilience in a tough operating environment. Despite the COVID crisis, our backlogs are at record levels. And although Brazil had a temporary suspension of production in April, we were able to quickly and safely bring our production back online. We expect a record sales quarter in Q3. And as a reflection of the intense work from our entire team in Brazil, led by Paul Householder, our Executive Vice President of International. A greenfield launch is difficult in any business. And while we are still in launch mode in Brazil, we are excited to see the momentum in this important region. In Italy, we completed our automation and capacity expansion project. This was a complete replacement of our grain bin production line with a highly-automated, flexible and high-throughput equipment line that doubles our capacity, enables quick product changes and extend -- and extends our product line while also increasing the quality and consistency of our products and the productivity of our entire operation. All these aspects of the project have improved our competitive position by lowering cost, increasing capacity, preparing us for the next stage of growth in EMEA. Our team has made significant progress in the U.S. through 2019 as we look to build on the solid market position we have in portable farm equipment and commercial conveyance equipment. We moved into U.S. farm systems in 2017 with our acquisition of Global Industries and worked through high-level integration in 2018. In 2019, we focused on consolidation and development of our sales teams in grain and fertilizer, and we rebuilt our sales and project execution processes to become more efficient, consistent and accurate. We also built product configuration tools to remove cost and focus on improving our customer experience. Based on the work completed in 2019, we are seeing good success in U.S. farm sales with volumes up significantly, even in this difficult environment. We built a technology business in 2019. AGI SureTrack brings together our investments in IntelliFarms, Affinity Compass, CMC as well as our investment in Farmobile. This technology business serves to tie together all of our products by forming the means for us to gather data from across the equipment we provide and bring that data together in a place to turn data to information to informed decisions. Informed decisions drive value. And by connecting our products, we transform our individual pieces of equipment into a true system. This differentiates our products and leads to expanded and deeper relationships with our customers. Now let's jump to the numbers. We faced substantial headwinds in 2019, including severe weather in North America and trade tension that resulted in the largest buyer of U.S. soybeans essentially withdrawing from the market. The China-U.S. trade dispute resulted in the U.S. cutting soya exports by half in 2019, significantly changing world grain trade. Real and potential tariffs escalated steadily from 2017, peaked in early '19 and created an environment of uncertainty that lasted throughout much of the year. The environment in 2019 impacted many industries and North America farms were stuck in the middle of the political sparring. Global grain flows were interrupted with more grain remaining on the farm in North America and more grain flowing from Brazil and Russia to fill the gap. Understandably, mid to large capital projects were largely put on hold in this environment as our customers paused to assess what facilities they needed by geography to account for the changes in trade flows. This pause in spending started to impact our sales intake in the first half -- our first quarter of 2019 and persisted until the fourth quarter, substantially impacting our commercial business globally in 2019. Project activity also impacted the timing of our backlog once it did pick up, pushing project deliveries out to the back half of 2020. On the farm, our customers largely continued their core operations, resulting in a relatively stable year in that segment. Despite the trade and weather issues, our overall results in 2019 were resilient, with revenue increasing 7%, coming very close to the $1 billion threshold and adjusted EBITDA essentially flat to the prior year at 97% of 2018. From a revenue perspective, our results represented resilient performance, aided by our acquisitions in the year. Turning to look at margins. We also have resilience in our gross margin numbers, which have remained steady and solid despite a product mix that is tilted to commercial and a higher contribution from grain bins, which are typically our lowest margin product. The stability of these gross margins demonstrates that we can maintain our core margins as we expand from our original markets into new products and new regions. Our adjusted EBITDA margin has been impacted by increased spending in strategic areas. These projects include increased marketing to build our market position, investment into our regional engineering and design teams to support our expansion and into selling complete systems as well as the change in our IoT business to a subscription model. We also built our corporate software team to bring focused execution on internal and customer-facing initiatives to improve processes and productivity for us and our dealers. These project teams delivered enhanced dealer portals, automated product configuration for quoting and production, automated warranty tools and advanced equipment control products. As mentioned, we also completely rebuilt our corporate website in 2019, which has gone on to accumulate 4 awards for design and functionality. We are confident that these investments will make us more competitive, more productive, resulting in improved and more sustainable margins going forward. The COVID crisis interrupted our plans for 2020 in many ways. However, in the early days of COVID, we implemented our preparation with Progress initiative to immediately address the safety of our employees, account for the massive uncertainties the crisis created while still keeping an eye to the future with continued focus on advancing strategic projects. Our businesses in Northern Italy were in the middle of an intensely hit region and we moved immediately to learn how to operate through the crisis. We quickly implemented these procedures across AGI, with the health and safety of our team as our top priority. Essential service declarations throughout North America granted us the right to work. However, our actions to create a safe environment and maintain the confidence of all of our team members has allowed us to operate. Implementation of our extensive policies and procedures early in this crisis enabled us to continue to operate the vast majority of AGI throughout the crisis. We have had temporary production suspensions in Italy, India, Brazil, France, and we've also had brief suspensions at a number of locations in the U.S. These suspensions impacted the tail end of Q1 and will impact Q2. However, our actions over the past months mitigated the impact. And as it stands today, we believe we've contained the impact. From a cash preservation perspective, we have prudently scaled back CapEx and limited new hires. We also moved early and aggressively to work with our banking partners to prepare for the worst. We had started a review of our banking facilities at the end of 2019, given our plans for growth in a very favorable credit environment. That review led to favorable amendments. We also extended the majority of our bank facility to March 2025. Upon the onset of COVID, we immediately reopened discussions with our banks to put in place another amendment to directly address the possible implications of this crisis. That review resulted in amendments, which suspended our senior debt covenants, added $100 million in direct liquidity and provided a stepped approach to covenant resumption that includes adjustments to COVID-related impacts on our EBITDA for Q1 and Q2 2020. In line with our preparation for Progress initiative, we also reduced our dividend by 75% in order to provide additional liquidity and resources and further account for the significant uncertainties. Turning to our business fundamentals during COVID. As mentioned, we've had temporary suspensions in production. However, as it stands today, we have all facilities operating. Selling and design and engineering work has continued without interruption at all facilities. Our North American farm business remained solid, with backlogs up slightly over last year and stable order intake. Our North American commercial business remains stable in terms of both backlogs and order intake. Our international businesses continued to grow, with backlogs up 23% over this time last year. And excluding Milltec, these backlogs were up 42%. Our food business is rapidly growing, albeit from a relatively small base, with backlogs up substantially year-over-year. Our technology business continues to grow rapidly with retail equivalent sales up over 80% year-over-year. Overall, our backlogs were up 9% year-over-year. We have stabilized production and we are safely and responsibly operating through the COVID crisis. Coming through this environment, our Q1 results reflect the theme of continued growth over the past 5 years and resilience over the last 2 difficult years. Sales were up in the quarter to $229 million and adjusted EBITDA held to $26 million despite the impact from COVID, the negative drag of moving our technology business to a subscription model and the ongoing investment in strategic areas, as noted earlier. Q1 margins have declined over the last number of years, along with our substantial changes in product mix, our greenfield build in Brazil, expansion into the U.S. and our subscription model having a particular impact on our already low or seasonally low Q1. EBITDA margins in Q1 2020 were further impacted by COVID. We expect to increase margins given the growth we are now experiencing in Brazil, the U.S. and our technology business. Moving through 2020, we are also moving to AGI 2.0. Whereas our first stage was defined by an urgency to gain scale and diversification, AGI 2.0 will be focused on the deep integration of the products and services we acquired and built as well as the integration of the projects we have been working on for the last 18 months. We are moving to robust product management, encompassing our focus on comprehensive product competitiveness, our product standardization and product development to better align our offerings to customer expectations. We will leverage our growing product and project design capabilities to lead with technical excellence in our sales. AGI 2.0 will require deeper integration of our systems and data management to better link our product management and sales to our production facilities. We will now also leverage our investments in product configuration, selling and distribution tools and our extensive brand development, all focused on creating value and deeper relationships, resulting in an enhanced customer experience. Delivering the customer experience that will separate us from our competition is a complex challenge. We are bringing together design, engineering and project management services, many different types of products and technologies to come together seamlessly on our customer site to form the fundamental infrastructure that our customers rely on every day. To deliver the customer experience we are targeting, we will be focused on reducing complexity and implementing the tools to communicate and collaborate internally with our dealers, partners and customers. Now AGI SureTrack 2.0 is the customer-facing representation of the deep integration that defines AGI 2.0. Ultimately, our AGI SureTrack system brings together all of our equipment solutions to produce the vastly enhanced customer experience that defines our next phase. On the farm, AGI SureTrack is a complete operating system, built for complete management of the business of farming. AGI SureTrack brings together seed selection, input selection and management, crop planning, field activity, weather and soil data, automated grain conditioning and remote monitoring and 140 other data points. It also connects the farm to grain buyers in robust and new ways, including bid and price discovery, depth of markets and grain content-based bids, which result in live visibility of economics and the means to enhance profitability. For commercial buyers of grain, our system is built to enable deep supply chain discovery and visibility that extends to true and verifiable traceability of grain characteristics, live grain monitoring and farming practices. It's a beautiful platform, easy to use, comprehensive IoT data collection, robust business tools from inventory input and expense management for solutions for the farm, ag retail, AGI dealers and grain buyers, solutions for all of our customers that deepen our relationship and bring together all of our equipment as one system. I am incredibly proud of how the AGI team has responded to this crisis. I certainly hope we aren't tested to this extent again. However, there is no team I would rather be with to face the next test. I would like to thank the entire AGI team and our partners for persevering and excelling in the challenging times we faced through 2019 and now into 2020. These times have brought AGI together and, in many ways, accelerated our strategic plans around integration, collaboration and customer focus. I'm confident it will result in a likewise acceleration of the value we provide our customers and be recognized through market share gains and accelerated growth across our business as we move on to AGI 2.0. On behalf of our Board, our employees and your management team, thank you for your continued support. I will end my comments here and now take questions. We'll wait for another few seconds and see if we do have any questions come in. Okay. We don't see any questions coming in, so we will end the session there. And thank you again for your time and participating in our virtual AGM. Thank you very much.