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

Thank you for standing by. This is the conference operator. Welcome to the AGI Third Quarter 2022 Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Paul Householder, President and CEO of AGI. Please go ahead, sir.

Good morning. Thank you, operator, and welcome, everyone to AGI's Third Quarter 2022 Results Call. I'm joined today by our CFO, Jim Rudyk. We will cover a number of topics, including some comments on the recent leadership change at AGI, a note on AGI safety performance and culture, an overview of our quarterly results and I'll share my outlook for the year and heading into 2023. I'd like to first start by commenting on the incredible success and meaningful contributions that Tim Close had on AGI. It was his vision to create a resilient, diversified business model and set up AGI for a sustained period of growth despite fluctuations in regional or economic conditions. While the agriculture industry is cyclical for many, at AGI, we are now well positioned and proven to withstand regional disruption while continuing to grow and expand. This was Tim's vision, and his contributions across many areas of AGI are deeply valued and appreciated. We wish him well and all the best in his future endeavors. Picking over as CEO at such an exciting time for AGI is an honor, and huge opportunity to continue to advance our growth objectives. I began my time with AGI in 2019 as the Executive Vice President of our International businesses, and in 2021, I took on an expanded role as COO, which included coverage of our North America business and related functional activity. During this time, we steadily implemented many initiatives around strategic planning, organization structure, operating excellence and growth objectives across all our businesses. The key strategic priority set in motion during my COO tenure will continue and, in some cases, accelerate. As a result, we expect a smooth transition of CEO duties. Throughout its 26-year history, AGI has achieved outstanding growth through acquisitions and experienced tremendous success. We've assembled an incredible team and global capabilities with high-quality products and attractive market positions around the world. I am extremely optimistic about AGI's future as we sharpen our focus on 3 key areas: operational excellence, balance sheet discipline and profitable organic growth. This is an exciting and energizing time in AGI's history for our employees, our customers and our shareholders. Before getting into our Q3 results in detail, I'd like to first highlight a few areas where we've made significant progress in recent years, which have been key contributors to our success, safety and culture. For AGI, it all starts with safety. It's a primary focus across the organization and the first agenda topic at internal town halls, board updates and senior leadership team meetings. We have significantly increased our focus on safety over the past 24 to 36 months, adding resources, training and tools. I'm Very proud to report that these efforts are paying off with a dramatic improvement in our safety performance. One example is our lost time injury or LTI metric, which has reduced by 50% over the past 2 years. Safety is a cornerstone of our culture and an area where we will sustain focus and make ongoing improvements. Another key element of our culture that we have significantly strengthened over the past 2 years is our effort to unite as one AGI. As we deepen the level of integration across AGI, it's critical to set the foundation of collaboration and cooperation across businesses and regions. The centralization of key functions for an organization-wide view of our priorities, challenges and opportunities has been necessary and helps to ensure that we bring the absolute best equipment, services and solutions to our valued customers. Now turning to our third quarter results. Progress continued across all areas of AGI, culminating in an all-time record quarter for our company across both sales and adjusted EBITDA. Robust market demand and our increased focus on operational excellence have come together to drive incredible results and set up continued momentum as we look forward. I'd like to start by highlighting the tremendous progress of our North American commercial business. This is an area that I've personally dedicated significant time to help restructure, refocus and repositioned for growth over the last 1.5 years. Third quarter sales were up 27% and 30% year-to-date, with a meaningful jump in EBITDA contribution owing to enhancements in our sales capture, quoting and project execution capabilities. This is a dramatic turnaround versus a few years ago when this business was underperforming. We have since transformed the organization with centralized and dedicated sales, sales execution, product management, customer service and revenue management teams, among others. Many of these groups have revamped or pioneered new internal processes to support the business going forward. We will continue to refine this approach within North America commercial business while expanding and leveraging it more broadly across AGI. North America Commercial is a great example of what we can achieve with the United One AGI approach. Among our other key contributors to the quarter was our global farm segment as well as our Brazil and India businesses. Our U.S. Farm business continued to exhibit great results through the third quarter with sales up 26%. Market factors, including the combination of rising grain volumes and low dealer inventories provided strong demand for our products. Our strong results were further supported by the benefits of our reorganized sales team implemented earlier this year, which has strengthened the connection and relationships with our valued dealer channel partner. With elevated crop prices, which generally pushes growers towards selling versus storing their grain after harvest, a product mix within the business was weighted more towards our higher-margin portable, grain handling products versus permanent handling and storage systems. The favorable mix led to strong margins and significant EBITDA contribution in the quarter. While sales in the Canada Farm segment were only up 6% in the quarter, a similar dynamic to the U.S. in terms of a higher mix of portable grain handling equipment led to strong EBITDA generation supporting very good overall Q3 results. While the early drought led to a difficult start to the 2022 Canadian Farm business, we are encouraged by the resilience of our results as they steadily recover and come back stronger. Finally, our efforts to grow and expand our presence in the Australia farm market continues to gain traction. EBITDA for this geography grew 24% year-over-year, with backlogs up 22%, Australia is on pace to post a record year with strong double-digit growth in sales and EBITDA, including an attractive margin profile with favorable mix of portable grain handling equipment. Favorable conditions, strengthening channel partners and greater in-region leadership underpinned the strong Q3 results as well as our optimism for Australia going forward. Brazil continues to be a bright spot for AGI. Sales were up 30% year-over-year, building off of the Q3 2021 result, which itself was up 128% from Q3 2020. Strong demand for our farm products was complemented by an increase in commercial project work and delivery of AGI Brazil's first-ever food platform project in Brazil. Margins in Brazil continue to be broadly in line with corporate averages and improved year-over-year as steel prices eased off of high levels. This was Brazil's second largest quarter in its history and with the backlog up 59% year-over-year, we anticipate continued momentum in this key agriculture market heading into Q4 and 2023. Our India results were another key highlight from the quarter. Sales were up 59% for an all-time record quarter. Operating leverage, favorable mix and improving gross margins helped drive a 101% increase in adjusted EBITDA for the quarter, with margins well above our corporate average. By year-end, India is expected to be close to doubling in size since AGI acquired the business in 2019. While the last few years have been a tremendous success, we believe there is significant room for additional growth going forward. Near-term growth is supported by a backlog up 43% and over the long term, as we continue to increase India's manufacturing capability and product catalog through the successful technology transfer of several products from North America. Finally, it is important to recognize the outstanding leadership and team we are fortunate to have in India, which reaffirms our confidence in this business going forward. A few additional comments on the other areas of our business to round out the recap of the quarter. EMEA sales were up 32% despite currency pressure as the team continues to progress through large commercial projects. EMEA has managed the impact of the regional conflict quite well. While the backlog is lower than prior year, driven primarily by the removal of Russian and Ukrainian projects, the pipeline remains strong. Further, there are many opportunities in the Middle East and Africa that the team is actively pursuing to build momentum as we head into the end of the year and 2023. Our food platform sales were up 61%, with an improved margin profile due to increasing focus on project controls and management. Adjusted EBITDA contribution from food was up significantly in the quarter and is expected to be up significantly for the full year. We are focused on broadening our geographic coverage for this platform and winning new business to keep pace with customer opportunities and our growth objectives. Overall, our strong third quarter results demonstrate that AGI continues to perform as we work through the process of more deeply integrating our businesses and positioning the company to sustain a high pace of organic growth. Our Farm and Commercial businesses that anchors to AGI's results are both performing well with strong customer demand, favorable crop sizes and ongoing investment into critical food infrastructure, all supporting our outlook for the near term and into the future. In closing, I can't emphasize enough how excited I am about AGI and our outlook for the future. Assuming CEO responsibilities during an all-time record quarter is an ideal backdrop to continue advancing our plans to focus on operational excellence, profitable organic growth and balance sheet discipline. Building on the momentum of North America commercial turnaround, I see significant potential across AGI to strengthen our businesses, exceed customer expectations and accelerate growth. We have the people, the products, and positions around the world that serve as a solid base for us to continue to advance and grow. I'll now hand the call over to Jim for further commentary on our quarter.

Thank you, Paul, and hello, everyone. For today's call, I'll cover 3 topics. First, I'll provide an overview of our third quarter results. Second, I'll discuss our balance sheet. And finally, I'll provide an update on our outlook. Our Q3 results were not only a record for the third quarter sales and adjusted EBITDA, but an all-time record for AGI. Consolidated sales of $402 million was up 28% year-over-year and adjusted EBITDA of $76 million was up 65% year-over-year as broad-based strength across all segments and geographies contributed to the result, including notable strength in our commercial platform, Farm segment as well as ongoing momentum in the U.S., Brazil and India. Adjusted EBITDA margins of 19% were up 420 basis points and largely reflect the benefit of favorable product mix as well as the benefits of increased operating efficiency as higher volumes moved through our facilities. Farm segment sales and adjusted EBITDA grew 20% and 52%, respectively, in the quarter. Adjusted EBITDA margins increased from 21% to 26%. Strength in the U.S. and Brazil as well as a steady recovery in Canada from the 2021 drought, all contributed to the result. Strong customer demand for our portable grain handling products critical to grower operations remains robust. Consistent with our messaging from the first half of the year, Canada continues to recover from the extreme drought from last year, and we expect to see continued momentum in the Farm segment overall as we move into Q4 with the Canadian farm backlog up 16%. Commercial segment sales and adjusted EBITDA grew 40% and 97%, respectively, in the quarter. Adjusted EBITDA margins moved from 13% to 18% year-over-year as product mix, volume increases and SG&A scaling, all contributed to the expansion, particularly within the commercial platform. Finally, our digital business posted 9% growth on a record quarter for order intake. Supply chain issues, particularly for chips hampered production. However, the adjusted EBITDA loss in the quarter was primarily due to the increase of subscription sales relative to retail sales year-over-year as we introduced a new subscription plan late in 2021. Turning to key balance sheet metrics from the quarter. From a working capital perspective, our noncash net working capital investment decreased from $274 million to $264 million quarter-over-quarter and declined as a percentage of sales moving from 18% to 16% on an annualized basis. The overall reduction in net working capital was supported by a modest reduction in inventory as the strategic positions taken earlier in the year began to release. In addition, our days sales and inventory and organization-wide priority to monitor and reduce also continues to take downwards quarter-over-quarter. This is an encouraging sign that as we renew our inward focus and deepen the level of integration and coordination across AGI, we are able to sustain progress on this key metric. Our growing adjusted EBITDA continues to support our deleveraging objectives. Our senior debt-to-EBITDA ratio sits at 2.2x exiting the quarter. This is down from 2.9x in Q3 2021 year-over-year and 2.7x in Q2 2022 sequentially. On an all-in net debt to adjusted EBITDA basis, our leverage ratio now sits at approximately 4x, which was our target ratio for the end of 2022. We are very pleased to have achieved this goal ahead of schedule through a combination of growing EBITDA and debt repayment. While we are happy with this progress, we will stay disciplined and seek to further reduce this ratio through the end of the year and into 2023. We still have ample room to react to new opportunities with funds from operations growing 75% year-over-year to $56 million, $42 million of cash on hand and $220 million in credit facilities available. However, it remains a priority to stay disciplined in managing our balance sheet and continuing to make progress in gradually reducing our leverage ratios further. And finally, turning to our outlook for Q4. The demand for AGI equipment systems and solutions continues to grow across our segments and geographies. Consolidated backlog was up 4% year-over-year, just above the record level from the prior year, which itself was up 99% from Q3 2020 levels. The moderation of backlog growth was expected as the backlog resets at higher levels relative to historic levels, given our increased mix of project-based work. In addition, the backlog in Q3 was impacted by timing of our permanent grain handling equipment and storage projects in our Farm segment as well as the removal of Russia and Ukraine projects. Our pipelines remain robust, and we are continuing to see strong interest from customers across all segments and regions as they continue to invest in critical infrastructure equipment and solutions. Our backlog gives us clear visibility into Q4 2022 with over 100% of our internally forecasted Q4 sales covered by the backlog as well as line of sight into 2023. We expect full year 2022 adjusted EBITDA of at least $228 million, up from at least $215 million which represents another very strong year, driven primarily by organic growth. Our updated guidance implies flattish adjusted EBITDA for Q4 2022. However, we remind readers that Q4 2021 was a record fourth quarter for adjusted EBITDA, which was up 61% over Q4 2020. Our updated guidance signals continued strength and momentum in our business heading into the end of the year and 2023 as we sustain our record results and continue to execute against our growth objectives. Thank you very much for your time. And with that, we will turn it back to the operator to take any questions.

[Operator Instructions] The first question comes from Jacob Bout with CIBC.

Congrats, Paul, on your new appointment as CEO.

Thanks, Jacob.

First question is just on EBITDA or margins in general. So maybe just talk a bit about the sustainability of that 19% EBITDA margin. I mean I understand that there is some tailwind tier from lower steel prices in mix. But what do you view as kind of a long-term run rate? I know you talked a bit about higher operating rates, but how should we be thinking about that?

Yes. Jacob, thanks for the question and absolutely acknowledge the great Q3 that we had, very excited about the EBITDA performance and the EBITDA margin expansion that we saw. I mean as we look at total 2022, we see EBITDA margin growing sequentially from where we were in 2021. So we are focused on EBITDA margin expansion as a key element of our business performance. And Jacob, looking forward, we expect that margin expansion to continue as we head into 2023. So we do see a lot of momentum with the business heading into 2023. Great focus on profitable organic growth and highly confident that that's going to support margin expansion going forward.

My second question here just on backlog, up 4% but U.S. down 8%. And just trying to get a read for that into 2023. Maybe just walk us through how that project-based work impacts backlog levels?

Yes. No, it's a great question, Jacob. Thanks for those comments on our backlog. First, just noting the backlog in general, in your comment, it's up 4%. We feel very confident about the backlog. And as Jim noted in his commentary, the backlog supports our Q4 expectations and provides great momentum heading into 2023. And also, as Jim commented, when you look at that 4% up versus prior year, it's important to note that, that prior year backlog did have a number of projects impacted by Russia and Ukraine that were actually removed from our backlog and didn't impact our 2022 performance. So normalizing that out, we actually sit in a backlog that's up double digits from prior year. Now your specific question on some increases and decreases at specific regions. Some of that could just be impacted by the type of business that we're seeing. We've noted that our portable business is pretty strong versus our commercial business particularly in the Canada and the U.S. Farm segment. The portable business moves quicker through the backlog than our commercial business. So that can be part of the dynamic Jacob, that you're seeing there. But again, we're really happy with where our backlog is and how that supports momentum into 2023.

The next question comes from Michael Doumet with Scotiabank.

Good morning, all. Paul, you've been COO for a while. You know the business well, our CEO, what would you like to communicate to the street, what you think are some of the best opportunities for Ag growth on a go-forward basis?

Yes. Thanks for that question, Michael. First, with the opportunity just as CEO that to comment on the outlook and our priority, you heard it in the commentary. It's just important to reiterate, our focus is on those 3 key parameters being operational excellence, profitable organic growth and importantly, balance sheet discipline. Very happy with our ability this quarter to make a notable improvement in the balance sheet discipline, paying down some debt, and that's going to be a priority for us going forward. In general, as you kind of look across all the different regions and both our Farm and Commercial segments, we're pretty excited about 2023. We see a lot of positive fundamentals in the Ag industry across our key segments that are very supportive of continued growth as we head into 2023. And that organic growth in the regions will be supported both by those strong Ag fundamentals as well as our ability to increase the capabilities in specific regions by transferring new products and new technologies down there that are a great fit for those respective markets. So I think there's a lot of reason that we sit with confidence looking into 2023.

Great. And I guess it's a segue to my next question here. And I think, look, you've spoken about it already, that specifically on 2023, on the one hand, there appears to be a ton of momentum. On the other hand, the guidance for Q4 EBITDA implies flat year-on-year. And I'm understanding that there could be some conservatism there. And as Jim commented, Q4 last year was a record quarter as well. I know it's early, but just given how strong '22 has been, how confident are you that you can comp positively for EBITDA next year and maintain maybe even some solid growth momentum as well?

Yes. Thanks, Michael. And yes, 2 quick comments there. First and foremost, highly confident on our opportunities in 2023 and our ability to deliver year-on-year growth in EBITDA as well as continued expansion in EBITDA margin. And then on top of that, as mentioned, quite confident that we're going to be able to pay down debt in the process. So very optimistic on 2023. You heard our guidance for the full year, also very confident in our ability to deliver that. And to look at 2022 and a performance of EBITDA expansion in that 30% year-on-year and above is just excellent performance by our team.

And the next question comes from Steve Hansen with Raymond James.

Yes. I'm curious if you could comment on both India and Brazil [Technical Difficulty] little bit more about the investment plans there going forward. I understand that the organic growth is now going to be a key driver of the plan. But what kind of investment do you need to make down there, if any at all, do you feel like you're well positioned, capacity availabilities? Just any comments around how well situated you are in those 2 markets in particular to handle organic growth.

Yes, Steven, thanks so much for the question. I'm just going to clarify because you're a little broken up at the beginning. I heard Brazil, for sure, and the investment that we needed there to sustain growth. You mentioned another region I didn't catch.

Sorry, India as well, please?

India. Yes. Thanks for that Steve. I mean, first and foremost, we couldn't be more excited about the positions that we have in Brazil and India, the teams that we have down there and obviously, the performance of both of those businesses. Just simply outstanding for the quarter, and it's been outstanding for the year. And yes, with that continued growth, there's opportunities for us to make incremental improvements in our capacity so that we've got the opportunity to sustain those growth projections going forward. That is a very typical part of our operating cadence to make those incremental investments in growth capital. We've done so throughout 2022 in both of those regions that position us well for 2023, and we'll continue to make those investments throughout 2023. We've got a pretty solid plan on being able to do that and support growth. And that plan is well vetted against our targets and goals relative to the balance sheet discipline.

That's great. And then just one follow-up, if I may, around the technology platform. It sounds like order intake has been really strong, but there still are some constraints in the supply chain. What kind of strategic focus will the technology platform gets under your new leadership? Is that something you still see as being a key focal point for differentiation? Or how do you feel about the platform?

Yes. Thanks, Steve. Yes, no doubt, our technology business, our digital platform is going to continue to be a strategic focus for us. It is a capability that is important. It's a product enhancement that is very valued by our customer base and it's a great enhancement to our core product line. So for a number of very compelling reasons, we'll continue to look at digital as a strategic opportunity for us going forward.

And the next question comes from Andrew Wong with RBC Capital Markets.

So I was just kind of curious on your backlog. Can you talk about the duration there? And just how much visibility does the backlog give you into 2023? Like does it give you line of sight into the first 6 months? Or does it kind of stretch through most of the year? I'm just kind of curious about that because it sounds like you're very confident on the 2023 growth trajectory there.

Yes. Thanks, Andrew. At the highest level, our backlog tends to give us visibility out and say that 4 to 5 months' time frame. So it extends beyond a quarter. There's a bit of variability in that as you look at our split between Farm segment activity and Commercial segment activity. Of note, the Commercial segment backlog is -- has a much longer visibility. So some of our large commercial projects that we're executing across our various regions, that does give us some visibility of our backlog out into like a 6 to 8-plus month time frame. So there's a couple of dynamics within our backlog that when we look at it and analyze it across our various businesses, we are able to garner some pretty good visibility into an outlook for 2023, and that really helps with our confidence level going into next year.

Okay. That's great. And then maybe just like a broader question here for you. Obviously, AGI has gone through a pretty significant period of buying different pieces and adding capabilities in different regions and different business segments and think it's more of a focus now on growing organically. So as you kind of takeover in the CEO role, would you say that AGI has all the right pieces now to grow organically? And if you were to look at an acquisition, are there any parts of the business where you think maybe you could beef it up a little bit? And I'm just kind of curious, your thoughts there.

Yes. Thanks, Andrew, and I appreciate the question. And it's a great opportunity to note just a tremendous success that we've had over the past 5 to 6 years in building out those capabilities and our global position, very consistent with the 5-6-7 strategy that Tim Close outlined. Because we've been so successful over the past few years, we can look at our business currently and feel quite confident in the products and the positions that we have globally. And based on those capabilities, it gives us the right opportunity to focus on organic growth. So we feel confident that we've got the products, we've got the positions and we've got the capabilities that we need globally to support the organic growth objectives going forward. And at this point, do not see the need to enhance or any of our capabilities through acquisitions. So that solidifies our focus on organic growth over the near-term future.

The next question comes from Gary Ho with Desjardin Capital Markets.

Paul, congrats on your new role. So maybe along the same line of questions as to others. What are some of the key KPIs and metrics you're measuring your team against just given the 3 pillars that you talked about, imagine margins or leverage? And where would you like to kind of take those 2 over time?

Yes. Thanks, Gary. I'm happy to comment on these and provide you some insights. Obviously, I'm going to get to sharing my views on our balance sheet discipline. And then in that, we'll turn it over to Jim to give you a little bit more specifics on the metrics. But when we look at operational excellence, profitable organic growth and balance sheet discipline, if I start with the top, the easiest way of measuring operational excellence from my standpoint is margin expansion. I mean there's obviously quite a number of factors, quite a number of attributes that are within a defined operating excellence. We've made a lot of key investments in resources over the past 12 to 18 months. We feel we're very well positioned to increase our focus in that area and drive a higher level of efficiency and effectiveness that will ultimately be measured in margin expansion. So that will be the key KPI that we look to as an indicator of improvement and progress that we're making in that area. Profitable organic growth. We'll obviously be looking at topline expansion as well as EBITDA dollar expansion year-on-year. Those will remain key targets and key KPIs for us into 2023. Balance sheet discipline, you've heard the comments around our commitment to paying down debt. We have a few KPIs around leverage ratios that we will use to measure that. I'll turn it over to Jim to give a little more color there.

Thanks, Paul. Yes. So just on the balance sheet. The obvious metric is our overall leverage ratio. So I look at total debt -- total net debt versus our EBITDA. We've guided to 4x by the end of this year. We're at that now. We'll continue to make progress on that in Q3. We were able to pay down some debt. We paid down almost $50 million of debt. Offsetting that, though, was a little bit of FX because we do have some U.S. dollar debt on our balance sheet so that the overall debt progress we made from our payment perspective was about $30 million. That will continue in Q4 with more debt repayments, and we're focused on targeting significant debt repayment next year. All in, when I look at our net debt leverage ratio, we'll be below 4x this year, so it'll probably be at 3.7x, 3.6x ratio by the end of the year now, and we'll march that down to the low 3s now by the end of next year. That's a comfortable operating level for us given the dynamics of our business, the well-diversified nature of our business and so we are comfortable with some debt. And when we get down to the 3x level, we'll reevaluate what our capital allocation priorities are in.

Perfect. And then Paul, there's been a large chatter on food security globally, just given all the geopolitical concerns. Just curious, kind of your thoughts on this and how AG Growth can benefit from this and also opportunity on the commercial side?

Yes. Thanks, Gary. And I appreciate the comments on food security. It's one of the fundamentals that we see that is going to support our growth objectives going forward. Obviously, AGI's vision and mission is to support the build-out of the food infrastructure globally. Some of the conflicts that we've seen arise this year has only enhanced as kind of the global perspective on the importance of food security. We've absolutely seen that in our commercial activity, in the customers, those that we are engaged with, the quotes that we're providing and some of the order intake that is occurring across our businesses. So you're absolutely right. We see the enhanced focus on food security globally being a strong driver to support growth in our commercial segment going forward.

The next question comes from Michael Tupholme with TD Securities.

My first question relates to the Farm segment. In the third quarter, margins benefited from a higher proportion of higher-margin portable grain handling equipment. Just wondering if you expect that favorable mix to continue into the fourth quarter and into early next year? Or do you see that normalizing?

Yes. I mean there's no doubt, Michael. We had a great quarter, and we've had a great year so far with our affordable business, really happy how the team there has been able to step up a lot of our manufacturing and our capabilities to meet fairly robust demand across a number of geographies and portable. You heard the commentary that, that was favorable across Canada, across the U.S. and into Australia. We do anticipate that our permanent side of the Farm business is going to start to pick up coming off of some of the softness that we saw in 2022. That was particularly in Canada, as we noted, the drought early in 2022 as well as in the U.S. In fact, we've actually seen some of our order intake in the Canada permanent pickup as we head into Q4. So it actually gives us confidence that, that part -- that side of our business on the Farm is going to pick up and support our growth expectations for 2023. That does introduce a dynamic from the mix standpoint, that we'll continue to evaluate that. And obviously, there's opportunities for that -- for us to continue to work on our margins through operational excellence and what we can do from a manufacturing efficiency standpoint.

And then second question for Jim. Just regarding changes in noncash working capital, I think there was a suggestion last quarter that you expected to see much of the first half's investments in working capital reversed in the second half. And I think there's a little bit of progress in the third quarter. But is that still the expectation to see that full amount reverse in the second half?

Yes. Thank you, Michael. First of all, welcome to the group of covering us. Appreciate your support and coverage of us. And yes, you're right. So we made some improvements, particularly in our inventory balance we talked about earlier this year. We took positions in inventory based on the strength and some of the concerns on supply chain that are now starting to reverse. A little bit more slowly than I would have hoped, but we continue to see progress on our inventory balances, and we expect a large reversal of that incremental buy happening through the rest of this year.

The next question comes from Tim Monachello with ATB Capital Markets.

If you can't hear me, just let me know, I've got a little bit of a weak connection this morning. So -- but thanks very much for the comments on the balance sheet outlook. That was my first question. I had a little bit of a query on the backlog, up 4% year-over-year. I'm curious how much the comp last year was positively impacted from steel price inflation. Steel costs are down over 60% in some cases. I was wondering if like on a per unit basis, you're seeing stronger demand in the backlog than perhaps the 4% number suggests?

Yes, Tim, and thanks for the questions. I mean, you're looking at it from the right perspective, the same perspective that we look at it, and it's why we're more optimistic going forward than, say, a 4% backlog would indicate. I commented that one of the dynamics is obviously the impact of Russia and Ukraine and some of that prior year backlog from those projects came out. But you're absolutely right. There's the other dynamic just on the cost of materials and the supply chain that we've seen and the softness that has now occurred over the course of 2022 also is a dynamic that we absolutely look at relative to the backlog supporting our optimism going forward. It's just also important to note, Tim, is just that improvement in the supply chain that Jim was referencing. We've seen steel prices ease, which is favorable. We've also seen lead times, not just for steel, but across a number of our other commodities start to go back towards norms, and that's another element that helps in our working capital discipline is that supply chain improving and those lead times getting back to a more normal level.

Okay. That's helpful, for sure. Second question I had was just around U.S. Farm actually food backlog, down I guess, most meaningfully year-over-year. How should we think about that? And what gives you confidence that you're going to grow the food business in the U.S. as we go forward here? And are there any concerns if you see a broad-based recession that you could see demand in the food platform, in particular, start to decrease?

Yes. Thanks, Tim. And yes, we note and are obviously closely looking at that food's backlog relative to prior year. I mean, it was incredibly strong. Prior year is 1 element to note. But we think this is more of just a temporary impact in the Food segment. A lot of the projects that we've been getting involved in now in the Foods area with some of our most important customers are more of those commercial projects. And sometimes, the order intake of those projects can be a bit lumpy. So we look at that food backlog a bit with the lens of timing and have confidence that as we progress into Q4 and into Q1, we're going to see that backlog start to improve and get closer to prior year levels, which were quite strong.

So if you look at, I guess, the bid pipeline in that business, how would that compare year-over-year?

Yes, the pipeline is strong. That's exactly the point. And the pipeline is strong. Our quoting activity is pretty strong, and our customer engagement is positive. You made a comment on recession and recessionary impacts. We're really not seeing anything across the food or really our broad geographical platforms, food and -- farm and commercial at this point.

Okay. And then last one for me, just around margins. Paul, you mentioned that you're expecting margins to increase again as you go forward. And it sounds like that has a lot to do with operational efficiencies in the business. But perhaps you could give us a little bit of the guidepost on where you think margins might go and what the major levers there if they're not just operational efficiencies? Are you seeing any pricing improvements as well?

Yes. I mean thanks for the question, Tim. I'm not sure specific guidance where we expect margins to go beyond our focus on continued margin expansion. My comments earlier were really focused on our EBITDA margins and expansion in EBITDA margins. We anticipate that we're going to end the year fairly favorable from a year-on-year increase in EBITDA margin expansion, and that will be our focus going forward. So operating excellence just continuing to look at and across our entire supply chain, our engagement with suppliers, our manufacturing practices as we continue to enhance those sharpen those and make improvements that supports our margin expansion expectations as well as growth and just further leverage across our P&L as we get that favorable top line growth, just getting good operating leverage down to increase in profitability.

The next question comes from Michael Robertson with National Bank Financial.

Paul and Jim, congrats on a stellar quarter. I've noted some of your peers highlighting the raw material input prices driving up costs in 2022 and potentially deterring some producers from making larger purchases and expectations for sort of a second wave of demand as those raw material input prices come down and flow through the equipment cost. I was wondering how you see that dynamic and if you foresee some potential pent-up demand as a result looking out to next year?

Yes. Thanks for that question, Michael, a very insightful question. And I think that plays very well to some of the parameters that we're seeing, particularly in our North America Farm segment. I commented earlier, as we entered 2022, we had the drought in Canada. That, we think, had an impact on the permanent side of our business and then specifically, the elements that you mentioned, we believe, had an impact on the permanent side of our business for U.S. Farm. Those dynamics have now shifted and based on that, it gives us a lot of confidence that we will see a bit of a pent-up demand releasing in the permanent segments of our Farm businesses in both Canada and in the U.S. And in fact, we're actually seeing that play out now already in our Canada business across Q4. So it's kind of supporting that theory as we actually see it in order intake and backlog.

The next question comes from Steve Hansen with Raymond James.

Just one quick follow-up, if I may, relates to capital allocation. What are your thoughts on a buyback program at some point here? I recognize that debt paydown is the central pillar of the plan at this point. But if you're going to be low 3s by mid- to late next year, I presume it has to be contemplated at some point. The ones asked is you continue to trade at such a discount relative to both history and even relative to your peers. So just any thoughts around buyback even if it is maybe a next year thing, but just any comments around how you think about that opportunity set?

Yes. Thanks, Steve, for that follow-up. Our focus is 100% on paying down debt and continuing to grow organically. And so we have not contemplated any share buybacks. Once we get down to that 3x level, we'll reconvene and assess our options. And at that point, it may be something to consider. But at this point, the focus is entirely on debt paydown. .

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

Thanks, operator. And I just want to say thanks for everybody that dialed into our Q3 results call. Really appreciate the engagement through the Q&A session, providing Jim and I an opportunity for further clarity on our Q3 results. As we started out with, we just couldn't be more excited about the performance that we've seen in Q3. It underscores just a tremendous team that we have across AGI. They're the ones that are delivering these fantastic results. So congratulations to the AGI team, and we really look forward to continuing our strong performance going forward. So thanks very much, and I look forward to catching up with everybody soon.

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