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

Thank you. for standing by. This is the conference operator. Welcome to the AGI's second quarter 2026 results conference call and webcast. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity for analysts to ask questions. To join the question queue, you may press star and then 1 on your telephone keypads. As a courtesy to management and other participants on the call, we do ask that you please limit yourselves to two questions. Please note that lines will be muted after two questions and you are welcome to rejoin the queue if you have further questions. Should anyone need assistance during the conference call, they may reach an operator by pressing star and zero. Before we begin, we caution listeners that this call may contain forward-looking information, discussion, and that actual results could differ materially from such forecasts or projections. Further, in preparing the forward looking information, certain material factors and assumptions were used by management. Additional information about the material factors that could cause actual results to differ materially from the forecasts or projections, the material factors and assumptions used by management in preparing the forward-looking information are contained in our fourth quarter MD&A press release, which are available on the AGI website. I would now like to turn the comments call over to Paul Briesbaugh, President and CEO of AGI.

Please go ahead, sir. Thank you, operator, and good morning, everyone. I'm pleased to speak with you today about AGI's second quarter 2026 results. Joining me is Nicole Parker, our interim chief financial officer, who will walk you through some of our second quarter financial metrics in more detail during her prepared remarks. As we've discussed over the last several quarters, AGI continues to operate in a cyclical environment, and 2026 is unfolding against a persistent backdrop of uncertainty across North American and global agricultural markets. Our results reflect two very different realities across the business. On one hand, our North American farm business continued to improve, delivering double-digit revenue growth and EBITDA expansion. On the other hand, commercial markets remain soft globally, particularly in North America and certain international regions, resulting in lower project activity and margin pressure. While we are not satisfied with the overall financial performance, we are encouraged by the actions we are taking to strengthen the business, improve our balance sheet, and position AGI for long-term value creation. Let me begin with an overview of our Q2 results. At a segment level, our Q2 featured a continuation of the trend from the first quarter with farm picking up year over year while conditions and commercial slowed. Farm delivered a solid quarter with revenue up 10% to $140 million and adjusted EBITDA up 12% to $33 million. The most encouraging aspect of the quarter was the continued improvement we are seeing within our North American farm business. Farm revenue increased 16% year-over-year, driven by both the United States and Canada. We experienced stronger demand conditions for portable equipment in the U.S. and permanent storage and handling equipment in Canada. Farm EBITDA increased and margins remained strong, demonstrating the leverage and profitability of the business as demand begins to improve. While we are not yet calling a full agricultural cycle recovery, we believe the market is stabilizing and we are seeing encouraging signals from customers and channel partners. The commercial segment, by contrast, remained under pressure. Revenue declined 17% to $183 million and adjusted EBITFL to $19 million. Commercial plans continue to be impacted by lower customer investment levels and reduced project activity, as geopolitical uncertainty, including ongoing conflicts in key regions, continues to weigh on customer confidence, financing conditions, and the timing of capital deployment. Across North America, EMEA, and portions of Asia Pacific, customers remain cautious and are delaying capital spending decisions. This resulted in lower revenue, lower plant utilization, and reduced margin performance versus last year. On a consolidated basis, while a pickup in U.S. farm activity and cost savings initiatives serve to partially offset some of the softness in commercial, Overall adjusted EBITDA was $43 million, down 20%, with an adjusted EBITDA margin of 13.4%, a decline of roughly 217 basis points from last year. Outside of our quarterly results, we continue executing several initiatives designed to improve the organizational effectiveness and earnings power of AGI. First, our structural cost reduction program remains on track, and we continue to target over $30 million of annualized savings, with a large majority of this amount already in hand. Importantly, these savings are largely structural and are tied to permanent changes in organizational design and footprint rather than temporary spending deferrals. This means that volume recovery should drive incremental margin recovery on top of these savings. sustainable improvements that will enhance margins and cash flow over time. Outside of cost containment actions, we have taken some tactical steps to capture incremental volume growth across the business. For example, in Q2, we initiated a strategic facility consolidation plan in the U.S. aimed at regaining historical storage and material handling volumes lost in the U.S. market. As part of this consolidation, we are making a measured capital investment to restart our grain bin business out of our Clay Centre, Kansas facility. Even as the broader farm market remains soft, this is a deliberate, high-return move to recover storage and material handling volumes we have seeded in the U.S. market. By retooling Clay Centre for bin line production and establishing it as a centre of excellence for North American farm manufacturing, we restore delivery certainty, can introduce a standardized North American bin design and create freight consolidation benefits our dealers have specifically asked for. The associated capex is modest, phased over roughly nine months from the second half of 2026 into the first half of 2027, and is more than covered by the expected proceeds from unused facility and asset sales underway as part of the same facility consolidation initiative. We announced this facility realignment in June, and we view it as an example of investing selectively behind the parts of the business where we can win even in a down cycle. Moving on to a few comments on governance and leadership matters. Reflecting the board's continued focus on maximizing shareholder value, we have formally established a strategic review committee comprised of independent directors who will oversee a formal review of the range of strategic alternatives and options available to the company. The committee's mandate is straightforward, carefully assess opportunities that could maximize long-term value for all shareholders. This review reinforces our commitment to maintaining a disciplined and objective approach toward capital allocation, portfolio optimization, and value creation. While process is ongoing, our management team remains focused on executing our operating plan and delivering results. Finally, we strengthened our leadership team with the appointment of Haris Uddin as Chief Financial Officer, effective August 4, 2026. We welcome Haris to the team and look forward to his official start date next week. I also want to personally thank Nicole Parker for her leadership and partnership throughout the transition process and for her significant contributions to the business. finance organization remains in her capable hands as we continue executing our transformation and deleveraging priorities. Looking ahead, our outlook reflects the same divergence we saw this quarter. In farm, conditions are showing early signs of stabilization, but the pickup in activity remains modest. It is measured against a very low base, and it is too early to call a definitive turn in the cycle. We'll continue to stay close to our dealers, support their stocking and in-season needs, and watch order intake closely for a more durable signal of recovery. In commercial, we expect continued softness, with pressure concentrated in North America and India, alongside the absence of new large-scale comprehensive project contributions in Brazil. Taken together, the combination of a still-guarded farm recovery, continued commercial softness, and the strategy shift in Brazil are expected to weigh on second half and full year results relative to the prior year. Stepping back into the bigger picture, while current order environment remains below prior year levels and market visibility continues to be limited in several regions, we believe that as volumes eventually recover and as the cycle strengthens, the benefits of our structurally reduced cost base will drive an outsized improvement in earnings performance. performance. In closing, we recognize that current market conditions remain uneven, particularly in our commercial business, and we are taking decisive actions to strengthen AGI's foundation. Our Our farm business is showing encouraging signs of recovery, our cost reduction initiatives are progressing, and we are working to transform our balance sheet through debt reduction and asset optimization. Most importantly, we are creating options. Every dollar of debt repaid, every dollar of cost removed, and every operational improvement we make increases AGI's strategic flexibility and long-term value potential. We recognize that our shareholders expect results and we remain intensely focused on delivering them. The work we are doing today is positioning AGI to emerge stronger, more resilient, and better positioned to generate sustainable returns through the cycle. We believe the intrinsic value of AGI is not reflected in our current valuation. Our objective is straightforward. Stay disciplined operationally, unlock the value embedded in our business, and deliver meaningful long-term value for our shareholders. Thank you to our employees, customers, partners, and shareholders for your continued support and confidence in AGI.

I'll now hand the call over to Nicole. Thank you, Paul, and good morning, everyone. I'll focus my remarks on the following areas. Our leverage position, margins for the quarter, free cash flow, order book, and impairments. Our leverage ratio was 5.2 times at the end of Q2. respectively flat quarter over quarter. While we are focused on bringing this down over time, the flat result this quarter reflects the offsetting dynamics of softer trailing EBITDA against the benefit of applying long-term receivable proceeds to debt reduction. With the majority of our Brazil monetization proceeds now directed toward our senior credit facilities, asset sales and disciplined free cash flow will further support our deleveraging objectives. Turning to margin performance for the quarter, consolidated adjusted EBITDA margin declined 217 basis points from 15.6% to 13.4%. The primary driver was commercial, where margin compressed 602 basis points from 16.6% to 10.6%, reflecting lower volumes across the commercial segment. FARM was a partial offset with margins expanding modestly supported by higher volumes and the benefit of our cost saving initiatives. Our other corporate segment also improved year over year, reflecting the structural cost actions taken across our corporate footprint. The bottom line is that margin performance this quarter is fundamentally a function of low commercial volume, and volume recovery remains the key ingredient for the full return to typical commercial margins. On free cash flow, we saw a meaningful improvement this quarter. largely by the monetization of long-term accounts receivable in Brazil. We have now completed approximately $106 million of long-term accounts receivable monetization, with proceeds applied to reduce borrowings under our senior credit facilities and to fund the final stages of certain Brazil contracts. This represents the majority, but not all, of anticipated proceeds from the monetization program. Importantly, we expect more to come. As we consolidate facilities and rationalize the business, a number of locations and assets are in the process of being sold, and we expect to monetize more than $20 million in the third and fourth quarters. more than covering the capital requirements for our U.S. consolidation initiative with funds to spare for debt repayment. Combined with our structural cost savings and a disciplined approach to capital allocation, These actions are expected to support a stronger free cash flow profile as we move forward. One of our key corporate priorities is to generate consistent free cash flow, an initiative we are executing as we continue to restructure and simplify operations. A few comments on our order book. We ended the quarter at $560 million, down 22% year-over-year. The composition of our order book tells the same divergent story as our results. On the farm side, North America continues to strengthen. North America portable was up 77% and North America farm permanent up roughly 16%, providing improved near-term visibility as demand stabilizes in certain areas. The order book pressure remains constant. concentrated in commercial. North America commercial, EMEA and India all face challenging market conditions that have slowed customer decision-making which ultimately impacts order intake and our reported order book. In short, North America farm is beginning to turn, but that improvement is currently outweighed by continued softness across our commercial and international markets. Finally, during Q2, management identified impairment indicators within certain commercial segment businesses. These included the food platform within North America Commercial Operations, as well as within our Brazil business. These developments reflect evolving demand conditions. margin pressure, operating outlook changes, and strategic decisions made since the most recent annual impairment assessment. Thank you for joining us this morning. Operator, we can't hear you. We can now open the line for questions. Thank you.

You will now begin the Analyst Question and Answer session. To join the question queue, you may press star and then 1 on your telephone keypads. You will hear a tone acknowledging your request. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys. To withdraw your questions, you may press star and 2. As a reminder, please limit yourselves to two questions and rejoin the question queue if you have further questions. Our first question today comes from Gary Ho from Desjardins Capital Markets. Please go ahead with your question.

Thanks. Good morning. My first question, I want to chat a little bit about the North American farm. So it grew 16% with the order book up again year over year. Can you maybe unpack how much of that is in 2019? just dealer inventory normalization versus the true retail demand underneath, and any read into how the early order program may look like in the second half. And what would you need to see to call a more definitive turn in the cycle? Is it just better commodity prices, farmer's income? Like, what are other things we should look at?.

Hi, Gary. Thanks for the question. Good question. Yes, I would say in general, I'm feeling a little more optimistic on the farm business. Obviously, 16% growth in the North American business was is favorable for us. What that means is that dealers are restocking because inventories are coming down. And in general, as we do inventory counts across North America, we see that inventories are coming down. We're prepped right now going into harvest in terms of loading up our stock points, warehouses and dealers for the harvest. I would say that on average, we're expecting an average crop across North America. I was just out in Saskatchewan last week and In fact, they probably have better crops than they've had in the past because of the moisture that they've had and the heat recently. Sometimes if it gets too hot now, they're going to ask for some more rain, but that's just the way farming goes, right? But right now, and we're seeing commodities. commodity prices come up slightly, particularly on canola, wheat, corn, still seems a little suppressed, but in general, feeling more optimistic about the farm market, not ready to call that it's a complete turn. We'll see how harvest goes. If harvest goes well, we see a lot of demand and pull through particularly on our portable business. We'll be set up well going into early order program as you mentioned and expect that early order program would be better than previous year. We're also, just to add from a storage perspective, seeing some last-minute developments. demand, really some of the barriers to doing more would be on accessibility of build crews versus having the capacity to fulfill the orders.

Okay, great. No, thanks for those. And then maybe just in terms of your outlook commentary, from your release yesterday. So it sounds like it's still a bit unclear for the second half, kind of weighing on results. So should we take that to mean kind of similar softness in Q3, Yipida, as you've experienced in Q2? Just any help there would be great.

I would say the story would be similar, H1 to H2. We see continued progression on the farm business and continued challenge on the commercial business.

Okay, great. Those are my two. Thanks for your time. You're welcome.

Our next question comes from Steve Hansen from Raymond James. Please go ahead with your question.

Yes, good morning, guys. Thanks for the time. Appreciate it. Paul, maybe just a couple. Is just any specific timeline that you think you can provide with more clarity on the strategic review and sort of how you expect those milestones to unfold? what do you need to effectively get done in the short term before you can think you can go out with a more broader process, just to try to understand the process and thinking here between short-term and medium-term on it at all.

Yes, thanks for the question, Steve. The Strategic Review Committee has now been together together for about six weeks or so and you know, They're making good progress evaluating essentially what management has pulled together to date, and then really taking a hard look at debt and understanding how do we refinance our debt and move this forward. We have some debentures So, it's really difficult to have hard timelines with regards to what that looks like. All options are being considered. asset sales and sales of non-core assets that we have in the queue. We talked about them previously. We are making progress on it, but it just takes time with regards to making those changes. finalizing the transactions if they were to take place going forward.

I understand that's helpful. Just wanted to dig in a little bit more into the U.S. consolidation strategy that you described and growing the footprint in storage and handling. I might have missed some of your earlier prepared remarks, I apologize, but just want to understand the true intention there and why that strategy is going forward. I understand it's self-funding. You're going to have some other assets to dispose to fund it, but is it really the core objective to... efficiency-based? Is it capacity-based to skirt tariffs? I'm just trying to understand the core objectives of the strategy. Thanks.

Yes, thanks, Steve. Good question. As we did the consolidation in 2025, shutting down our Grand Island facility, moving production into St. Boniface out of Canada, It was more challenging than we anticipated, particularly in dealer conversion. We've been fortunate enough to do well in our northern states in terms of shipping product into what historically we've done pretty good business in out of Canada. But the conversion of dealers that were in that Nebraska, Iowa, Arkansas, kind of a Midwest, core Midwest area was more difficult than anticipated. It was clear that and then we had the addition of tariffs that had a significant impact. And tariffs alone aren't the issue. It's just the paperwork that goes into that, the ability to deliver on time in full because of that paperwork and the tariffs. had us pause and take another look at what we needed to do. Given the fact that we still had our bin manufacturing equipment that was uninstalled, from Grand Island. We had the flexibility of reinstating this into one of our facilities. The Clay Center facility is a 300,000 square foot facility. It definitely has the capacity to produce bins and put that equipment in. Our dealers love the idea of consolidating permanent handling and storage for farm for our dealers into that one facility. So it really sets us up well to address more of the southern Midwest and in eastern states versus what we could do out of Saint Boniface. The other benefit of it is because we're going to a standardized bin, we have some redundancy in our equipment, which is really beneficial to us. Because without redundancy, we have situations at times where equipment goes down, and it really impacts our ability to deliver on time and full. And as you know from previous calls, customer focus is very important for me and our organization, and this redundancy will allow us to have more flexibility in terms of delivering on time and full.

That's actually very helpful. I appreciate it. Thank you. Our next question comes from Michael Tupholm from TD Cowan. Please go ahead with your question.

Thank you, good morning. First question is just on the outlook. You provided some commentary about your expectations for commercial to weigh on the second half of the year as well as full year 2026 relative to the prior year. I guess I'm wondering from an EBITDA perspective, the prior year comp looks quite tough in the third quarter. Not quite as tough in the fourth quarter. And given sort of some of the dynamics you're seeing, and again, the fact that comp isn't as tough and you're going to have more cost savings flowing through by the fourth quarter, Do you expect there's any scenario here where by the fourth quarter you could be back to sort of flat year-over-year EBITDA or potentially even up? Or is the thinking here that you're still down in the fourth quarter?.

It's a good question. Thanks, Michael. I would say we're going to, right now, it's difficult to call, and we believe that H2 will be a similar story to H1. The reality is we have the Brazilian SPE business that is coming up. to the end at the end of Q4. And just with regards to order book and how we look at that, to make some additional comments, right now we're at 22% below. If we take out those SPs from previous year, we'd be about 18%. And the reality is doing that year over year comparison. We're going to continue to see less in our order book because of those SPEs. But the reality is we're choosing to do that because we want quality of revenue, risk adjusted returns, cash flow over the order book. So I may have veered off away from the EBITDA question, but order book is a big component of that. In general, I would say H1 or H2 similar to H1 right now. And until we get better visibility on the return of the farm business and what early order program looks like, it's hard to change that view.

Okay, that's helpful, thank you. And then for the second question, you touched on the balance sheet and some of the maturing debentures and convertible debentures in the context of some commentary around the Strategic Review Committee, but to, Can you just elaborate a little bit on, I guess, first off, how the committee and yourselves are thinking about this $85 million to venture at year end, plus, I guess, the converts also for next year. It sounded like there was some mention of potentially being able to use some of the proceeds from these asset sales. I'm not sure if it's just the 20 million less, whatever you spend on this low-capax US project, or if there's more opportunity there, but how are you thinking about, I guess, the refinancing or repayment of, first and foremost, the $85 million? What are the options and sort of the highest likely options that you're evaluating there?.

Yes, the Strategic Review Committee is looking at all the options in terms of, you know, future debentures, what that could look like, looking at timing of our asset sales and what the impact has on on on. I guess, paying down that debenture, looking at the larger asset sales and timing of when that happens. It's, you know, at this time, difficult to comment on exactly how we're going to address it, but there are definitely lots of options that we're considering. and working with our lenders in terms of what the best option is to move forward.

Okay, thank you. Our next question comes from Andrew Wong from RBC Capital Markets. Please go ahead with your question.

Hey, good morning. Thanks for taking my questions. Just wanted to ask more on free cash flow and your... your thoughts longer term. What would be a reasonable free cash flow conversion from EBITDA's longer term target as we kind of work through some of the transitions here regarding CapEx, what's a longer term CapEx number that you'd need to sustain the business? Thanks.

Well, free cash flow is very important to us. had a very positive quarter with regards to monetizing the Brazil dollars that came in. So we're happy with the direction that we're going on free cash flow. It's critical for our board that we focus on free cash flow and debt reduction. In terms of giving a number or a target, very difficult to do on a go-forward basis.

know that that's one of our highest priorities with regards to free cash flow. And Nicole's going to give a little more information here. Yes. So we expect for 2026 to have free cash flow going forward. You know, with how Paul keeps talking about the monetized of the assets going forward that have also helped us with our working capital. alignment now, we're also in very good shape for our own So again, just a free cash flow positive for the remaining of 2026.