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

Thank you for standing by. This is the conference operator. Welcome to the AGI First Quarter 2022 Results conference call. [Operator Instructions] And the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Tim Close, President and CEO of AGI. Please go ahead, sir.

Good morning, and thank you for joining Jim Rudyk and I to review our first quarter results and our outlook for 2022. With 2021 serving to validate the benefits of a diversified business model, that trend has continued into the first quarter of 2022. Sales and adjusted EBITDA were up 14% and 6% year over year, both setting first-quarter records, despite 2 significant headwinds in key areas of our business. Last year's drought in Western Canada had a significant impact on our farm business, which is historically an anchor for our Q1 results. 2021 crop production volumes dropped materially in Western Canada with wheat, Canada's largest crop, down 40% year over year. As expected, this type of decrease in crop production had a material impact on our business in the region. In addition, our digital segment was a material drag on adjusted EBITDA in the quarter, despite record over intake, as supply chain constraints impacted our ability to manufacture product to meet demand. Supply chain issues pushed some revenue recognition into Q2. Our investments to continue to build the digital team to support our ambitious digital growth plan also contributed to the higher drag in the quarter. Our first quarter results, despite these 2 impacts, highlight the strength of a now well-diversified AGI. With 3 of our last 5 quarters setting adjusted EBITDA records, our results continue to validate our recent investment phase leading up to 2021. This stable foundation is important as we move into the next phase of AGI's evolution and focus on deep integration, optimization, and organic growth. Now we'll turn to some highlights from the quarter. Brazil continues to be a tremendous success story for AGI. Sales were up 75% in the quarter against the strong 2021 comparable. Our backlog for South America is up 6%, but we also have a very strong pipeline that features a wide range of small, medium, and large projects that will continue to fuel the growth of Brazil throughout 2022 and going forward. Looking ahead, we expect a sustained trend of strong demand and sales growth in Brazil. The grain, fertilizer, and general food infrastructure gap in Brazil is massive, and this market has many decades of strong growth ahead. Our Commercial platform grew 17%, with Canada, the U.S., EMEA and South America, all leading the way. In Canada, our commercial sales and backlog were up 63% and 119%, respectively, and the commercial market was slow over the last couple of years, following a heavy investment period for the grain and fertilizer industry in Canada. Current dynamics have led to an increased spending cycle, which has been very supportive to our sales and backlog. AGI is well positioned to capture much of this demand, and we expect continued momentum for the Canadian Commercial platform. The EMEA region posted 18% overall growth in the quarter, anchored by 48% growth in the Commercial platform. Midway through the quarter, activity on projects in Russia and Ukraine largely came to a halt. Ukraine produces significant grain export volumes, which are critical to global food supplies, and our relationships in Ukrainian customers go back well over a decade. Going forward, the industry and the region will recover. We are well positioned to participate and support in a rebuild and expansion phase. In the meantime, we have pivoted our efforts and have already replaced the value of the impacted projects in Russia and Ukraine with new work sourced elsewhere within the India region. Strength in India continued, with sales up 33% and backlog increasing 31%. We continue to expand our rice processing system export sales from India. We have also finished the installation of a new grain production line in India. With the substantial reduction of wheat production and exports expected from Russia and Ukraine, India will now increase wheat and other grain production, leading to substantial opportunities for AGI in the region, now that we have grain storage production in the country. The Farm segment sales grew by 6%. So as I mentioned upfront, this includes overcoming a major hurdle with a 31% sales decline in Canada, as the Western Canadian market faced extremely challenging growth conditions in 2021. The challenges were felt across the industry, and AGI is able to retain market share in this key market, despite the temporary dip in sales. The impact of last year's drought followed the carryover effect in the first half of 2022, but as we move into the new crop season, the Canadian farm market will rebound. The growth in the Farm segment was largely a result of strong contributions from the U.S. and Brazil. In both markets, we continue to grow market share in permanent grain systems. Additionally, in the U.S., portable handling equipment was a key growth driver, as the combination of an expanding dealer network and overall low dealer inventories supported robust demand for AGI products. Our Food platform continues to be an area of very high growth, with sales up 62% in the quarter. Given the purchase of Eastern Fabricators in January, there is an element of acquired revenue embedded in the quarter, but the results also include strong organic contributions, which are representative of the significant demand we are seeing in this market. Throughout 2022, we see the pace of growth continuing, as supported by significant backlog growth, which was up 153%. With a strong backlog in hand, the near-term priorities for our Food platform will be on the Eastern integration, with a focus to build on early wins for revenue synergy capture, in addition to recruiting, as we continue to build the team to keep pace with significant demand. AGI Digital sales were up 8% in the quarter. However, as I mentioned in my opening remarks, this does not fully reflect the strength in this segment, as chronic industry-wide chip shortages constrained our production. Q1 was a record quarter for order intake, following our focus to expand the dealer channel through 2021. However, from a timing perspective, the chip shortages delayed some key revenue recognition into Q2. The combination of strong order intake, expanded sales channel, and additional resources to help drive growth sets up a positive outlook for AGI Digital. Supply chain challenges continue to impact the global economy. As discussed for most of 2021, supply chain dynamic for steel is an area we closely monitor, and we have made dynamic adjustments to manage our supply effectively. Through the first quarter, we saw lead times for steel improve marginally in most regions. Overall, steel pricing remains at elevated levels, causing a corresponding increase of working capital investment. Outside of steel, we are seeing more pronounced inflation for freight, components, and labor. However, our supply chain dynamics are manageable; we do not foresee a material impact to our margin profile. Overall, our record first quarter results and current outlook confirm the ability for our diversified business to mitigate the impact of regional issues, while maintaining robust growth. We have increased confidence in our outlook for 2022, which we expect to be another record year for AGI. One final note before I turn the call over to Jim. I'd like to reiterate AGI's support for the people of Ukraine. To show our support and help address the humanitarian crisis, we launched our Step Up for Ukraine collaboration in early April, with the goal of delivering urgently needed medical supplies to the country. Thus far, we have raised over $750,000, and we are delivering high-priority supplies into Ukraine. We are in the process of arranging additional deliveries and remain committed to providing ongoing help to those impacted. A special thanks to our AGI team for stepping up to quarterback this great initiative. I will now turn the call over to Jim for further discussion of our first quarter results.

Thanks, Tim, and hello, everyone. For today's earnings call, I'll cover 3 topics. First, I'll provide a brief overview of our first quarter results. Second, I'll discuss our balance sheet. And finally, I'll provide an update on our outlook for 2022. Our first quarter results continued the momentum from a record 2021 with record first quarter results for both sales and adjusted EBITDA, an impressive result, especially when considering the headwinds we needed to overcome to generate this result. Consolidated sales of $292 million were up 14% from $255 million year over year, with growth in all segments and all geographies except for Canada. Adjusted EBITDA of $41.3 million was up 6% from $39.1 million year over year. Adjusted EBITDA margins of 14.2% were down approximately 110 basis points from 15.3% year over year, but it is important to note that there was a significant change in our input cost structure in comparing the year-over-year results. The input costs used to support Q1 2021 sales were purchased largely in late 2020, ahead of the steep increases in steel prices. While we are generally able to pass along input cost increases, our ability to largely preserve margins despite the extremely challenging environment is a significant accomplishment. Farm segment sales and adjusted EBITDA grew 6% and declined 2%, respectively, in the quarter. Segment-adjusted EBITDA margins declined from 25% to 23%, as the rise in steel prices did have some impact. We are extremely proud of these results, given we were able to overcome a very challenging quarter for the Canadian farm segment, which is typically strongest in Q1. Despite the headwind, our U.S. and Brazilian divisions were more than able to make up the difference and led to a phenomenal quarter for the Farm segment overall. As farmers in Canada recover from the extreme drought from last year, we anticipate results to recover throughout 2022. Commercial segment sales and adjusted EBITDA grew 24% and 40%, respectively, in the quarter. Adjusted EBITDA margins expanded from 12% to 14%, as overall higher volumes benefited both gross margins and our ability to scale our SG&A base for the segment. The Digital segment posted sales growth of 8% in the quarter. Adjusted EBITDA of negative $4.8 million is up from negative $1.4 million, as we invest in building the team in preparation for rapid growth and further product development. As Tim mentioned in his remarks, we have begun seeing this growth materialize with record order intake in Q1, but revenue recognition and timing was delayed due to chip availability required for production. On balance, we expect strong growth in the Digital segment in 2022 and aim to be EBITDA neutral by the end of the year. Turning to our balance sheet, first, I'd like to highlight 2 key announcements made subsequent to the quarter. We announced a credit agreement amendment for our senior facilities that will provide us with more flexibility to meet the needs of our growing business, particularly in international geographies. Importantly, the interest rates on these facilities will remain essentially unchanged. We'd like to thank our long-standing members of the lending syndicate for their continued support and extend a warm welcome to 4 new members to the group, who will help add depth of service and coverage to AGI. In April, we closed a convertible unsecured subordinated debenture offering with net proceeds of $99.7 million, including a partial exercise of the overallotment option. The proceeds will be used to redeem the prior issuance of convertible unsecured subordinated debentures due December 2022 with an aggregate principal of approximately $86 million. The difference will be allocated towards paydown of senior debt and general corporate purposes. The coupon of the newly issued debentures is 5.20% per annum, 70 basis points higher than the debentures being redeemed. Turning to key balance sheet metrics from the quarter, from a working capital perspective, our investment in noncash net working capital investment increased from $143 million to $232 million year over year and also grew as a percentage of sales, moving from 14% to 20% on an annualized basis. This increase was driven primarily by our strategic investment in inventory. Given the ongoing supply chain, delivery timing, and availability of steel, we made the decision to invest in our steel inventory to ensure we can meet strong customer demand and maintain high levels of on-time delivery. In addition, the overall increase in the cost of steel further magnified the extent of the increase in inventory. We do not expect this level of inventory to be required as part of our run rate operations into the future, but believe that strategic benefits of a temporary investment in inventory are justified, given the unique supply chain circumstances we are managing. In the short term, we expect our initiatives to optimize our accounts payable and accounts receivable positions to help offset some of the investment in inventory. We continue to closely manage our senior debt-to-EBITDA ratio, which sits at 2.9x exiting the quarter. This is up from 2.4x from Q1 2021 year over year and 2.5x from Q4 2021 sequentially. We have sufficient room against our covenant of 3.75x, and we do not have any bank covenant concerns. The increase is primarily attributable to the strategic investment we have made in inventory to support our robust backlog in the coming quarters. That said, we remain vigilant in closely monitoring our senior credit facility usage and overall cash flow management, while also balancing credit facility usage to help enable growth, particularly in our international regions. While we are comfortable with our senior debt ratio, throughout 2022, we will continue to focus on free cash flow conversion and managing the overall balance sheet with a clear objective to continue deleveraging. On an all-in net debt to adjusted EBITDA basis, we expect the ratio to trend towards the 4x level from its current level of approximately 5.3x by the end of 2022. As previously stated, this will be achieved through a combination of disciplined capital management and the benefits of strong results and growing EBITDA. We have approximately $186 million in available undrawn credit facilities, taking into consideration the credit agreement amendment, as well as the repayment of senior debt in excess of what was required for the redemption of our 2022 debentures, and $60 million of cash on hand. We closely monitor our liquidity position, ensuring we are flexible to react quickly to new opportunities. And finally, turning to our outlook for the upcoming year, supported by a strong backlog, up 19% year over year and at record levels, as well as significant pipeline and quoting activity across many regions, we expect full-year adjusted EBITDA to be at least $200 million in 2022, with growth weighted particularly towards Q2 and Q3 of the year. Thank you very much for your time. And with that, we will turn it back to the operator to take questions.

[Operator Instructions] Our first question comes from Jacob Bout of CIBC.

The first question is on margins. And just given the current environment we're in with the inflation pressure, supply chain, procurement issues, steel costs, is your expectation margins are going to be higher or lower year on year? And do you think you can get to 15% margins, EBITDA margins for the year?

Yes. So good question. And so in Q1, you do see our -- if you're talking EBITDA margins, you see us declining year on year slightly, but gross margins fairly consistent. A big factor of that is our investment in SG&A that will benefit significantly as volumes increase through Q2 and Q3. We're right on track to where we need to be. And as you recall, we guided our margins to continually tick up between 100 and 200 basis points over the next couple of years. This year, we see us to be slightly higher than our historical or last year's adjusted EBITDA margin, based on what we see right now, even despite all the challenges in the supply chain. We've gotten fairly good at being able to react and manage through a combination of pricing initiatives and procurement and operational approaches.

Okay. So then, my next question is just on Ukraine. And I think you highlighted in the historical relationship you've done there, a considerable amount of work that AGI has done there historically. So given the intel that you're hearing right now, how much damage do you think has been done in that area as far as agricultural infrastructure? How long do you think it's going to take to rebuild? And how big of a role do you expect to play in the eventual rebuild?

Well, we don't have perfect information, like everybody, but we do have our team on the ground there that are giving us fairly unique insights. I think I expect a very heavy damage. I think Odessa is being targeted currently, has been and will be, where there's much about -- the infrastructure is -- exists. And look, I think it's pretty grim. I think the outlook is for a lot of damage to that infrastructure. Most of the work we've done is in the commercial space, both at the port and then inland, I think, and it has been targeted. So coming out of this, I expect it will be years. We spent the better part of 8 years, 10 years doing projects there, and I expect that it will take that long to rebuild, whenever we come out of this. I think we are very well positioned. We continue to increase our commitment to the area from a team and resources perspective and ability to operate. And so we expect to be a big part of the eventual we rebuild.

Our next question comes from Michael Doumet of Scotiabank.

My first question is on the margin profiles of Farm versus Commercial. Historically, Tim, if remember correctly, I think you suggested that the margins of the 2 segments were roughly similar. And we saw a nice improvement in Commercial this quarter. Should we expect the margins of the 2 segments to eventually converge? I'm just wondering if that's part of the 100 to 200 basis point margin improvement story in the next several years.

Yes. No. Sorry, Michael, I apologize if that suggestion has been made. But, no, the Farm margin profile is very different than the Commercial margin profile. One of the unique things about Farm is our portable business there. If you recall, our Farm business is comprised of 2 types of products, one we call portable, and then another one we call more permanent. The permanent side of the Farm business trends more towards the Commercial margins. The portable side, though, is much higher margins. And so to the extent that the portable sales weigh in on the mix, you will always see the Farm segment reporting higher margins overall. In terms of our recovery, though, for the business overall, there's a few factors that will be benefiting it One is the scaling of SG&A. So a lot of the investments we've made will continue to benefit the increased volume that we continue to see running through the system. But in addition to that, especially if you're looking versus last year, the last 2 years, we've reacted very nicely to create processes and approaches to ensure our pricing more quickly reacts and adapts to the variability in a lot of the input costs, particularly the steel. And so that will benefit the Commercial segment, in particular, as margins will creep up. You saw that in Q1 this year, where margins increased quite healthily. But that's really the story on why overall corporate margins will trend higher. So you've got the SG&A benefit of ceiling and then slight benefits in some of the gross margins as we've adopted better practices to ensure that any variability in the cost inputs get matched with offsetting price increases.

That's really helpful in terms of commentary. And then, I guess the second question, commercial sales in Canada, that was down I think 30% last year versus 2020 and much more versus the prior year, so it's nice to see activity and backlog increase here. Can you give us a sense or maybe provide some context in terms of the medium-term outlook, maybe sort of what levels you expect to get back to?

Yes. So in Canada, you're right. We've talked about this a number of times over the last couple of years. Expectedly, given the high period investment in the 2017, '18 years in Canada, you had -- and the COVID challenges -- you had a bit of a delay or pent-up build of demand for commercial projects in Canada. We've been talking about our robust pipeline for the last couple of quarters in Canada, and that's starting to materialize. We continue to see very strong pipeline, both in -- around the world, but particularly in Canada, given it's coming off a couple of years of delay in the project. And so from an outlook perspective, we certainly have visibility through the rest of this year of Commercial Canada continuing to remain strong.

Perfect. And I'll just sneak one last one in, again, on Canada. Can you talk about the inventory levels at the dealer level as it relates specifically to farm equipment?

Yes. Look, if you're looking at just Canada, dealer levels are, I'd say, normal or maybe slightly less than normal levels, as the Canadian market comes out of that drought. So dealers are cautious and looking for activity in the new crop cycle, which is positive. There's moisture; in some cases, much too much moisture. But good expectations for planting, good expectations for crop volumes, so I think the Canadian market's cautiously optimistic, and we'll see some restocking as we move into Q2, through Q2. And more or less, the same in the U.S., if we want to broaden that question a little bit. We'll see inventory levels at very healthy levels, probably less than normal, slightly less than normal, and we'll see some restocking and some increased order intake as we, again, like Canada, as we move through Q2.

Our next question comes from Gary Ho of Desjardin Capital Markets.

First one, I just wanted to get an update on the dealer penetration in the U.S. farm permanent space. I know that has been a key focus for you. Any targets you can share with us with respect to how many dealer relationships you hope to achieve, let's call it, over the next 2, 3 years, so we can track the progression of this?

Yes. We continue to make really solid progress in the U.S. market, onboarding new dealers, expansion of share within dealers, both of those coming along very well. We don't have the public KPI to that, but we can tell you that we're very satisfied with those -- with that progress and aggressive targets and expectations internally around development of those -- of that sales channel. So it's come along very nicely. Expectation is for solid results in '22 and going forward.

Gary, one data point for you to reference: we do track sales in the U.S., specifically just in the Farm segment. So without a specific metric on just new dealer conversions, you will appreciate the U.S. farm segment grew 19% year on year in Q1. A good chunk of that is certainly our current dealers buying more, but also there are some new dealers in there. So you don't have those types of growth rates without our ability to start converting dealers.

Okay. Great. That's helpful. And then second, in your prepared remarks, you mentioned Digital few times. Maybe you can elaborate on the headwind this quarter. How much -- how do you plan to resolve the chip shortage issues there? And perhaps, can you quantify how much was pushed into Q2?

Yes, so a combination for resolution is new sources of supply. The industry is dealing with the shortages and coming out of that or easing of that -- those constraints. And then, we have redesigned some components, some products, to be able to manufacture with more readily available components. So -- those -- that's now put us -- for instance, we don't have those constraints now in Q2, currently in Q2. So unless something changes drastically, we should have unfettered ability to produce in the quarter, in Q2, Q3 going forward. And then, yes, we haven't quantified the push, but it was material and did result in that larger drag or burn in the quarter for Digital. You know, with the expected sales that we should have had in Q1 would have -- you get above an operating leverage point, and we would have had much better results in the quarter. But that's okay. It pushes to 2, and then to going forward, we have very good expectations and forecast.

Okay. Perfect. And then just lastly, more of a numbers question. Just on the leverage side, you mentioned a step down from the current total leverage 5.3x to roughly 4x by year-end. Can you help us kind of bridge that gap? How much would be kind of EBITDA growth? How much would be winding down of the working capital and/or other buckets?

Yes, so the working capital will reverse significantly as we work through the year. Part of the growth, as I talked about on the call, was strategically making sure we had the supply. As we've talked about and as we've shown in our material, our backlogs continue to be at record highs and our pipeline is very strong, so we have very good visibility to the sales coming through pipe and committed orders. And so we wanted to just -- wanted to make sure we had the inventory to not delay any production and shipments of that goods. And so we took that decision. It's significant. If you look at inventory alone, it grew versus last year at this time, almost $90 million. So that's an unusual growth and typically not generally required under normal circumstances. But with the drastic cost increase year on year and then the supply chain challenges, we decided to do that effort. So a good chunk will come from working capital management, but a significant amount, if you just run through the numbers, given our guidance, we will benefit from the strong growth in EBITDA as well.

Our next question comes from Andrew Wong of RBC Capital Markets.

I just want to ask about the backlog. So I remember when it was first introduced, the numbers were -- they were comping against market conditions that include COVID and steel pricing, which kind of impacted a lot of the numbers, so it was a little bit more difficult to use the backlog figures, except for directionally telling us things are getting stronger. Now that we've started to analyze some of those impacts of COVID and steel, there's still a little bit of that, but it seems to be normalizing a little bit. Are these backlog figures a little bit more representative of the potential revenue growth from the different segments? And how do you expect the backlog numbers to kind of evolve over the next few quarters?

Yes, well, an interesting question. I mean, the business has changed, grown around the world and by products and end markets. There are a lot of dynamics in that backlog. So is it representative of growth? I mean the backlog can -- up and down in the quarter, doesn't necessarily correspond to the sales growth. I mean, the duration is changing in terms of the -- that backlog as we add more commercial projects, more food projects. International projects are longer dated; we might be looking into 2023, for instance. So it's not that simple, unfortunately. But more so I think our color around the backlog is as important as the number itself. And really, what we're focused on is, is that backlog and the pipeline, very important that our pipeline today, about quality of our pipeline, the visibility into that pipeline is, for us, as important as the backlog and our win rate within the pipeline. So for us, it's more around our characterization, our view is to whether that backlog supports our outlook, which it definitely does. And so there's, I think, too many moving pieces at this point to have that direct correlation, but it has to be augmented and informed by our view and opinion about that backlog as it translates into outlook.

Okay. That makes sense. And just maybe looking at Brazil, what's the mix there between market share growth versus some of just the broader market strength that you're seeing in that region? And then, what kind of impact that there'd be from a volatility in the [indiscernible]?

A great question. Unfortunately, another complicated answer for you. The market itself is growing very well, very, very healthy growth there overall. And for us, it is a -- I'd say, if I had to ballpark it, I don't know, I'd probably say 50-50 there, our growth being a result of overall robust conditions, but our market share -- maybe that's not -- maybe that's too simple. It's probably majority is market share gains and then augmented by a quickly growing market. If you look in Q1, 75% growth, that's mostly market share. And then, as we look forward, I think we'll see, as we grow, the market share will moderate and the -- and we'll steer more towards that growth. But that's probably quite a few quarters out.

Okay. I only ask because one of the strategies I think I remember was AGI kind of introducing a lot of different equipment or just different platforms that maybe are better or weren't really introduced previously in that region. So part of the thesis was also you can gain some market share with the better equipment and the different platforms and things like that.

There's a component of that. We're -- we have some unique solutions in Commercial, but the market in general is catching up. And so it's -- we have some on the Farm, but it was largely focused on Commercial, but there is -- the market itself continues to evolve and change to grow, and some good healthy competition in Brazil. But I think we have quite a runway to continue to gain share in a quickly growing market.

Our next question comes from Tim Monachello of ATB Capital Markets.

Just a follow-up question on Russia and Ukraine. I just want to understand, I guess, what's happening to displace volumes, I guess principally for wheat and other grains in the region. And you mentioned India, but is there any other areas of the business where you're expecting to see more investment in storage infrastructure as a result of this conflict, and perhaps also just a greater focus on supply and security of supply? Is that impacting people's or countries' willingness to invest in strategic storage infrastructure?

Well, that's a global story. There will be more redundancy built into the entire supply chain worldwide back to North America, for sure. I mean, wheat production will increase in North America and Brazil, into other parts of the region, and in India for sure. They have a substantial ability to uptick in production of wheat and other grains. So look, it will increase. But Northern Africa, we're seeing a lot of activity around food security and going from a pretty low base of infrastructure. They have substantial investments to make there. We're very busy in the region. In fact, a lot of -- we mentioned some of the projects that have been postponed in Ukraine and Russia, principally Ukraine. We've already made up for that and those delayed projects and the value of those. And it's coming from places that are focused on good security or are investing around that same theme. So I think globally, though we're seeing an increased propensity to invest in the -- in increasing supplies on hand. And to it is weighted to regions that have very little today, and they're just getting to a reasonable level. But it is a general theme globally.

Okay. Is that a trend that you expect to play out over sort of a med-term period? Or is there sort of an initial reaction that people are shifting investment and trying to build that infrastructure to replace the volumes that were coming out of the Ukraine and Russia?

Well, it's a good point. No, this will be decades. The amount of infrastructure needed in emerging markets is huge, and it takes substantial investment in order to just to get to sort of 1% of supplies or production, or a 1% increase in crop [indiscernible] Farm, for instance, in North America, it just a massive amount of infrastructure, storage handling, and otherwise across the chain. So these are big, big statements when the industry says we're going to have more crops stored by farm or more redundancy, more storage available. That is -- that represents decades of investment.

Okay. Second question, just a follow-up on the working capital build in the quarter. Understand that's strategic in nature, but you saw backlogs building pretty significantly throughout 2021, and there were supply chain issues there as well. So curious what changed the mentality around building up that inventory. And secondly, the thought around reducing inventory levels throughout the rest of the year, is that contingent on supply chain issues mitigating and backlog stabilizing?

Yes. So 2 reactions to that first question. The differences versus last year: one, costs. So in Q1 in particular, steel costs, if you follow the charts and the trends, depending on what region we buy, in anywhere from 70% to 100% higher cost per tonne. A lot of the cost increases, as you know, affected us through Q2 and Q3 last year, when costs continued to increase very dramatically. So that's one factor that would have weighed into the difference. The second factor is the war. Last year, through the year, we did have COVID challenges, which we were getting comfortable managing through. But the unique dynamic now is the uncertainty that's created because of what's going on over in Europe. And So that's another factor that has caused us to be a little bit more on the conservative side, to protect the inputs and the raw materials that we need for the orders that we have. And sorry, your second question, what was that again? Just remind me.

Just around the thought process around that mitigating, or I guess we're coming down throughout the rest of the year. Is that contingent on supply chain issues getting better?

Yes, yes. So the cost year-on-year impact will be muted. Actually, it should turn the corner starting in Q3, as costs year-to-year should be lower than the prior year, so that will help from a cost perspective. And then, from a -- how we react, given what's going on in the world, I don't know. I mean, I don't have the crystal ball. But what we know now, we're starting to see supply chain, getting steel starting to stabilize, getting back to more consistent levels as the world adjusts, and so that will impact our strategies and our plans as well in terms of potentially the need to stockpile a lot of steel. But I don't have a definitive answer, because I don't know what really the world looks like month-to-month, what's going on over there.

[Operator Instructions] Our next question comes from Anthony Linton of Laurentian Bank.

Just wanted to start with a clarification from one of your prepared remarks. I think you talked about the digital segment moving towards EBITDA neutral. I'm just wondering if that's -- by the end of the year. I'm just wondering if that's on the full year or on a quarterly basis, and then just some of the moving parts to get there.

Yes, on a full year basis, yes. So it's a combination of increase in sales as we normalize that production and catch up to some of the backlog in that segment; growth in the overall business; and along with an increase, but closely watched our expansion of the team and the SG&A within that division.

Yes. The digital space is fairly -- what's the right word -- seasonal, I guess, where Q2 and Q3, you see it will be the bulk of our sales. So it's not unusual that you'll lose -- or you'll have a negative contribution in the outer quarters, Q1 and Q4, but Q2 and Q3, you benefit significantly by the volume. And so that's what we currently are seeing, and so for a full year, we're looking at tracking close to neutral.

Okay. That's great to hear. Then just on the backlog, I was just wondering how the margin profile of the backlog, particularly on the Commercial side compares to what you've seen today. I believe last quarter, you talked about some lumpier projects, particularly in the international regions.

Backlog is strong across the board. It is up over really high comparable last year. We have -- it's a very good pipeline as well. I mentioned how important that is, and it really is more and more so backlog and the quality, size and quality of the pipeline. So both of those give us very high confidence around this year and certainly momentum moving into even next year.

And particularly as it ties into our confidence in outlooking margins, EBITDA margins and overall EBITDA results. So because it's at such a strong level, and because of our approach at supply chain management, we're very good at understanding and knowing what those margins will be.

Our next question comes from Michael Robertson of National Bank Financial.

Congrats on slides had a couple of quick follow-ups. First off, just seeking to clarify, the increase in the senior leverage covenant ratio from 3.25 to 3.75, was that on a permanent basis moving forward?

Yes. Sorry, the only caveat is, to the extent we do M&A, that would get upticked; there would be an uptick for, I think, a 1-year period post-acquisition.

Got it. Got it. And then the other question I had, I would assume that supply chain snares aren't necessarily ubiquitous across regions. And I was just wondering if there's any regions that were more difficult than others to be able to deliver on time, convert the backlog, what sort of pressures you're seeing on a region-specific basis.

Interesting question. Just thinking if there's one -- if there's any standouts. I mean, Brazil has been a challenge more because we seem to be well ahead of our delivery dates, or at least one time, in a market that's it's not used to on-time delivery. So there's some components of it there, but certainly not supply chain-related or due to anything on our side. I think logistically, logistics continue to be a challenge around the world, for sure. So our team has got pretty used to factoring that in now as we're making commitments around timing. We talked about Digital. That's certainly a component there. But then, otherwise, yes, I don't see a lot.

Yes, the general thing that we see more of is, believe it or not, just shipping our finished product to our customers, getting containers. Especially with what's happening over in Shanghai, container availability has been difficult, and that can be region-specific. Certainly, we've seen some struggles over in EMEA. And all that's done is impacted the timing of the delivery to our customer. It may shift it out. But that's -- we've been dealing with those struggles now for a fair bit of time. It's slightly exaggerated now, but we're getting good at managing through it.

This concludes the question-and-answer session. I would like to turn the conference back over to Tim Close for any closing remarks.

Okay. Thanks for your time this morning. We'll close it out there, some great questions. And just to summarize, we're really pleased with the quarter of great results, given the components of the growth and the dynamics in the Ukraine region. But a very solid outlook for the remainder of the year that, given the setup, the backlog, the pipeline, we have increasing confidence around that forecast. And again, special thanks to all of AGI, as we came together to implement and execute on our Step Up for Ukraine initiatives. So thanks again for the time this morning, and we'll end the call there. Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.