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Edited Transcript of AFN.TO earnings conference call or presentation 8-Aug-19 12:00pm GMT

Q2 2019 Ag Growth International Inc Earnings Call

Aug 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Ag Growth International Inc earnings conference call or presentation Thursday, August 8, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Steve Sommerfeld

Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary

* Tim Close

Ag Growth International Inc. - President, CEO & Director

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Conference Call Participants

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* Andrew D. Wong

RBC Capital Markets, LLC, Research Division - Associate Analyst

* David Francis Newman

Desjardins Securities Inc., Research Division - Analyst

* Greg R. Colman

National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst

* Jacob Jonathan Bout

CIBC Capital Markets, Research Division - MD of Institutional Equity Research

* Michael Doumet

Scotiabank Global Banking and Markets, Research Division - Analyst

* Steven P. Hansen

Raymond James Ltd., Research Division - SVP

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Presentation

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Operator [1]

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Good morning. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to AGI Second Quarter Results Release and Conference Call. (Operator Instructions)

Mr. Tim Close, President and CEO, you may begin your conference.

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Tim Close, Ag Growth International Inc. - President, CEO & Director [2]

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Good morning. Thank you for joining Steve Sommerfeld and I to discuss our second quarter results, our recent progress and our outlook for the remainder of 2019 and into 2020.

As we advanced from Q1, we saw unfavorable weather and trade activity, combined to impact sales in key regions. Weather in North America, India, Australia and partly Europe impacted sales in the first half. The lengthy trade disputes and political environment has also added a level of uncertainty to the market that is causing delays in investment decisions. Our business has remained resilient throughout the first half of 2019, demonstrating the benefit of our diversification, and we achieved sales growth of 12% in Q2, including organic growth of 3% and adjusted EBITDA growth of 4.3% over last year.

Despite our expectation that the current conditions will persist through to the end of 2019, we remain confident in the strength of our core businesses, and our conservative expectation at this point is for a second half that approximates H2 of 2018. However, there are many moving parts. Our backlogs are strong, quoting activity is robust and final results will depend on how harvest plays out in the pace of quoting conversion globally as the market adjust to current conditions.

With an expectation for stable year-over-year performance from our core farm and commercial business, we remain positive on opportunities for growth as we leverage recent investments. We are particularly positive on our progress in India and Brazil, our food platform and our developing technology platform.

As anticipated, Brazil had a tough Q2 largely due to timing in sales and the political changes earlier this year, which caused some delay in investment decisions, pending resolution of government support for grain markets. Volumes are expected to catch up in Q3 and position us well going back to -- back of the year and into 2020. Key progress in sales, product and execution have us excited coming through the start-up phase in this important market and turning to a more positive contribution to our results going into 2020.

India integration has been progressing on plan with key collaboration with our other businesses. A delayed and below-average monsoon season has impacted recent results. However, the business is gaining momentum in new regions to minimize the impact of regional weather. We expect this diversification to continue into Q4, and our forecast reflects a resilient business poised for additional growth into 2020.

Our food platform is growing quickly, albeit from a relatively small base. AGI food consists of Danmare, Improtech, Sabe and part of our MMS business. We have recently brought these businesses together as AGI food. The food group is focusing on designing, manufacturing equipment and overall project management for food processing facilities globally, everything from pet food, poultry production, beverages, chocolate products and alternative protein products. There continues to be significant investment by our -- by food processing companies in new or retrofitted production facilities to support increased volumes and new products.

We see continued growth of protein consumption, driving feed and processed meat products, along with significant growth in plant-based protein products, along with continued investment in pet food production, all key focus areas for our food group.

AGI food is actively involved in significant projects across these opportunities. We are adding to the team rapidly to expand our capacity and capabilities to align with our customers' growth plans. This platform is approximately 5% of our sales today, and we anticipate growth of 15% to 20% annually.

Off the back of our recent investment on Farmobile, I want to spend some time covering our growing technology platform. We have been working toward a vision of applying technology to our equipment and, in doing so, enhance productivity for our customers. AgTech gets a lot of attention globally as companies chase the holy grail of data acquisition, productivity and business disruption. And the industry is making great strides as imagery, automation and sensors deliver the data required to deal with the mountains of uncertainties that are very real in crop production. For the most part, AgTech is focused on what happens on the field: seed selection; precision planting; precision application; machine automation; crop inventory to detect plant health and problem areas. Now AGI provides systems to move commodities to the field and then from field to consumption. Our investment in technology has naturally followed the same approach with a focus on adding value preplant and post harvest, creating a unique platform for storing, protecting grain and fertilizer for marketing grain. And we started our technology investment by applying the sensors and automation required to run commercial grain and fertilizer facilities. Hazard monitoring equipment from our CMC division, metering and measuring equipment from Junge and Yargus blending equipment. Our development and facilities technologies is in its early days and is ongoing.

Our ultimate vision for our technology platform is to pick up where the field-based AgTech ends, as the crop comes off the field, when that crop becomes inventory. Inventory, like any other product, that needs to be stored, handled, protected and marketed.

Markets and consumers are changing. Consumers want more information about what they are buying, how and where it is made. That is true in consumer goods, and it is certainly true in what people eat. My simple mantra is that once it is possible, it will soon be expected then mandatory.

We believe we are now at the inflection point in terms of traceability in crop production and food. Traceability is now possible, starting to be expected and soon to be mandatory. Consumers want to know what is in their food, where it came from. Food processors want to know how to purchase high-protein wheat, high-protein peas, high-storage corn for ethanol, glyphosate-free crop, non-GMO crop, organics or high-oil crop for feed.

We now provide farmers with the sensors and data to maximize activities during the growing season, then efficiently store, condition, protect and monitor the crop. We also provide grain analyzers on farm, provide services providing commercial-grade data on crop content and a marketplace to connect farmers with the highest-value buyer for that crop. This robust platform is in place and growing every day and is all contained within our SureTrack farm and our SureTrack Pro systems.

Now Farmobile is an important addition to this platform. Farmobile provides farmers and channel partners with the hardware and software to collect, manage and share data to maximize productivity of operations, then a data store to monetize data on the farmer's terms. The company specializes in collecting second-by-second agronomic and machine data points across mixed equipment fleets. The Farmobile data engine platform turns this raw data into unique standardized visual electronic deal record, making it easy to gain insights, share with trusted advisers and power decision-making.

Built on top of the Farmobile data platform is the Farmobile data store exchange, which is the first to digitally connect farmers with data buyers, who can leverage this high-quality layer data in their business decisions. Farmers choose who and when to sell his data to, finally putting the control of his important data back in the heart -- in the hands of farmers.

In June, we bundled the entire SureTrack system into a subscription model, and we now offer the entire hardware platform an access to our farm management and grain marketplace in one annual subscription payment. Our investment and agreement with Farmobile provides a robust live detailed collection and auto population of field activity within SureTrack to give a scientific [grade] view of as applied, as planted and as harvested effectivity. This data feeds into SureTrack to allow farmers to have a comprehensive view of his field to then plant and manage his operations. The data collection also provides verified data that can be provided to buyers looking for confirmation of what was growing and what was applied. Buyers are paying a premium for this information today. A premium in this market is obviously extremely important to producers looking for every possible gain to the bottom line. It's a game changer for producers.

On the commercial side of this equation, in SureTrack Pro, we are working with traders, processors and coops to allow these buyers to develop grower programs, providing visibility and traceability to seed variety, growing and conditioning activity and grain characteristics, allowing sourcing based on required grain content. This detail on crop content provides buyers with huge savings and opportunities as they can buy only the crop they need; productivity gains at ethanol plants from high-starch corn, popcorn producers buying specific corn that has been conditioned properly, high-protein beans and wheat for specific products. We are seeing practical examples of this activity every day with the grain buyers paying a premium to farmers that use our system. This model has been well received, and our growth has accelerated, moving from 2 million acres on a platform in Q1 to almost 3 million acres today.

SureTrack is a unique platform. We combine the highest quality level of field data with a post-harvest grain management and marketing platform -- this marketing platform that enables marketing based on the grain content. The premiums available to producers are real. These premiums provide a rapid ROI to producers in a proper supply chain and provides huge upside to buyers. When applied to millions of acres of crop, the value produced by our system is obviously a large number. No one else is providing a system as comprehensive as SureTrack, and we have big plans for this business.

Now with that overview, I'll turn it over to Steve to talk a little bit more about the quarter and outlook.

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [3]

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All right. Thanks, Tim.

Sales and adjusted EBITDA in Q2 2019 exceeded 2018 results, despite challenging conditions in North America and the timing of sales in Brazil and other international markets. Our North American farm business continued to perform well as the replacement cycle for portable grain handling equipment remained stable, and wet conditions in the U.S. and increased market penetration in Canada resulted in higher field drying and aeration equipment.

Sales of commercial equipment in Canada were very strong due to continued investment in grain handling infrastructure, including grain terminals and port facilities.

In India, Milltec performed well as expected, despite the impact of a late and below-average monsoon.

Our EBITDA percentage in the second quarter of 2019 was 17.5% compared to 18.7% in the prior year. The decrease was largely due to an anticipated low sales volume quarter in Brazil, a seasonally low sales volume quarter in India and the impact of challenging weather conditions on grain storage system sales in the United States.

Looking ahead to the second half of 2019, we expect our farm business will continue to perform well. However, conditions in the U.S. are expected to temper demand for commercial equipment and grain storage systems.

Offshore, our international backlog has increased significantly in recent months, with large projects added in EMEA and Southeast Asia. And our quoting pipeline remains active in all geographies.

In Brazil, second half sales are expected to benefit from recent changes to our sales team and structure that have resulted in increased market penetration.

In India, sales growth may be constrained by a below-average monsoon. However, management anticipates the strong operational performance by Milltec will result in EBITDA levels consistent with their prior fiscal year.

Overall, management anticipates results in the second half of 2019 will approximate 2018 levels, despite near-term challenges related to historically poor conditions in the U.S. and components of our international business. Results for the balance of '19, particularly in the fourth quarter, will be influenced by the crop yields in North America, the timing of harvest in North America and the timing of international sales in Brazil and elsewhere.

Several factors exist today that suggest we are positioned to enter 2020 on very solid footing. First, there's a growing expectation that U.S. farmers will plow a record amount of corn acres in 2020, which may result in increased demand for portable grain heavy equipment and grain storage systems.

AGI Brazil continues to make progress, both in manufacturing efficiencies and market development, and management anticipates improved results in the country in 2020.

Internationally, our backlog related to 2020 have started to build, and we currently expect to enter the year with a strong book of business.

Finally, we expect growth from our platform acquisition in India due to increased market development and synergies with other AGI businesses.

In summary, while we face certain headwinds in the second half of '19, we look forward with excitement to increasing growth in fiscal 2020.

And with that, Jessica, I'll turn it back to you for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Jacob Bout of CIBC.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [2]

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Just a question on the second half guidance. When you're looking out, how much of the sales EBITDA is pushed from the second half into 2020?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [3]

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Well, yes. I know it's -- I think at this point, it's -- we're still looking at how those projects proceed through the back half of this year. So just -- as I was saying, there's a lot of moving parts here on timing of those sales. And we don't -- we're not tracking to an exact number in terms of what's going to land in Q4, for instance, or pushing to Q1 or Q2.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [4]

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Okay. But order of magnitude, $10 million, $20 million.

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [5]

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It's hard to say. It's hard to say, Jacob. It's -- the -- it's pretty fluid on some of these larger projects internationally.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [6]

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Okay. And backlog, you said both farm and commercial was up year-on-year. Can you help us out on a dollar basis or percentage basis how we should think about that?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [7]

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Sure. with -- they are up in most geographies in farm and commercial compared to 2018 levels, Jacob. And 2018 levels were quite strong, as you know. Our businesses are performing well. The order of magnitude over 2018, it's -- they're incrementally up, which, we believe, is a strong result given the conditions we're facing in North America, especially on the farm, and due to the timing of customer commitments that we've been talking about for a while, which have seemed to be -- being exacerbated by kind of trade uncertainties that we've talked about in our opening comments.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [8]

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And so on the commercial side because I was surprised to see that international organic growth was actually down 9% in the quarter.

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [9]

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Yes. There are 2 components to it. But part of that international decrease in Q2, we do have a farm component to international business. And that farm business is largely related to international farm business to Australia and Western Europe. Both regions have experienced some poor conditions in 2019, especially Australia. And part of that decrease in Q2 of 2019 relates to the farm. The commercial component sales realized in Q2 was down slightly compared to the prior year. However, backlogs are consistent or higher in both categories.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [10]

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Okay. And then just last question here just on your covenants. Remind us again what your covenants are. And then if you're assuming a flat second half 2019, would you be bumping up against those covenants?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [11]

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We're nowhere near our covenants. Our covenants are, for the balance of 2019, 3.75, which were increased due to the nature of the Milltec transaction, per the definition of our credit facility, bumped our leverage coming from 3.25 to 3.75. The covenant will return to 3.25 in 2020. We are nowhere near 3.25 and are very comfortable with our debt levels.

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Operator [12]

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Your next question comes from Michael Doumet of Scotiabank.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [13]

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Can you elaborate on the conditions that caused some of the deferrals on the international side for the second half of the year? I mean, you commented on trade tensions, but those don't appear to be fading away anytime soon. And then also just wondering if the deferrals took place in any particular region versus any other regions.

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Tim Close, Ag Growth International Inc. - President, CEO & Director [14]

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It's pretty broad-based. I think it's just -- there's a level of uncertainty that's fully become -- there's -- there have been expectation that some of those may be shorter term. Certainly, on general consensus, they're going to be longer term, as you mentioned. But the market needs to adjust to that. So it's just a -- the trade -- or the crop is still going to be flowing just in different directions until it's a -- it's decisions being made now where to move that investment. And so it'd be green lighting projects in different parts of the world to accommodate that flow of goods -- that flow of crop. And that's why the -- that's what we're seeing in terms of quoting volume across the board. It is -- there is activity and it's -- each of the buyers and processors are determining where those investments are going to be made. So we expect those adjustments to be made. They're being made, activity picking up in different regions to accommodate the changes in the market. So that level of uncertainty will have an impact in the near term. We expect it to moderate or to be alleviated as we move into 2020.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [15]

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Okay. And just to clarify, I mean, so far they're all deferrals and not cancellations.

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Tim Close, Ag Growth International Inc. - President, CEO & Director [16]

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Yes. Nobody is canceling anything. They may be -- it may be a postponement of a project in one geography and as they start an investment in another geography. So we think, over time, those investments come back in those regions, but it's -- those -- the market is going to adjust to current conditions.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [17]

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Okay, that's helpful. And then just on the working cap, I mean, we had another draw in the quarter, I think, as previously communicated by you guys. Just given the anticipated pace in international and North America commercial deliveries and the fact that steel prices are down quite substantially compared to last year, can we expect significant cash inflows from working capital for the remainder of the year? I'm trying to figure out how much of the increase is temporary or if there is anything structural in the business?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [18]

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Yes. It's not structural. I mean, the draw in Q2 was entirely -- or almost entirely related to higher accounts receivable, and that was due to sales growth in Q2, especially later in Q2. Our inventory, cash generation in Q2 was roughly $17 million. In H2, we continue to expect that inventory to generate cash. And we also expect cash generation from our accounts receivable [balanced] .

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Operator [19]

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Your next question comes from David Newman of Desjardins.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [20]

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Just along the same vein on the backlog, do you view any of it being at risk? And what are your customers saying, especially in the commercial international? And you talked about the trade wars aggravating decision-making. I guess while Trump is still in power, that will remain for a period of time. So what are they actually saying? And is there any risk at all in the backlog?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [21]

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No. Thanks for the question. We're very careful regarding what we call backlog. When we say it's in the backlog, it's confirmed to most optimal with the down payment and noncancellation. The comment around the trade war, it's something difficult to put your finger on, but we're sensing a sense of the customer just being a little hesitant and not a -- not in, I guess, a long-term fashion. But we're just -- the conversations that we've had recently, it seems people just want to kind of get their head around kind of recent developments, and we expect that to change in the near term as some of the more recent headlines fade away.

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Tim Close, Ag Growth International Inc. - President, CEO & Director [22]

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Yes, and let's just to add to that. I mean, that's true down to the farm level as well, where there's crop marketing decisions, what they want to hold and wait for higher prices. We -- there's a good reason. That's why we were kind of talking with a lot of moving parts here because some of that trade tension creates opportunities, quite a bit of it creates opportunities for us in the near and longer term, especially. But in the short term, farmers are going to deal with the crop they have coming, how much they want to market at the current pricing or wait for higher prices. So there's certainly many positives to the current environment. It's a matter of timing, what happens in the next quarter or next 2 quarters. But I think there's actually more in the longer term. There's more positives out of the current environment than the negatives for sure.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [23]

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Does that include the, as alluded to in the last question, the steel prices? Would that cascade into margins towards the latter part of this year and maybe next year? Never mind the volatility of what's going on, but -- which were on [strange signs] , but do you think the margin could actually recover in '20 on the back of just higher volumes and more stable environment and better crop conditions and all that? But also the steel prices, could that cascade here as well?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [24]

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There's some upside there in sort of Canadian market, but -- and we do expect margins to come back. So it's -- as we move through into 2020.

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Tim Close, Ag Growth International Inc. - President, CEO & Director [25]

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And it's important to note is that our divisional gross margins remained very strong in Q2. They were steady compared to the prior year and on a consolidated basis were consistent with last year. Our guidance towards the second half of 2019 is largely related to 2 or 3 specific areas that have been impacted by this uncertainty, which -- or weather -- and/or weather. And with the kind of a higher sales volume component [and] influenced overall margins, and that includes our U.S. grain storage systems, where the unpredictability, I suppose, of sales in the second half. It's (inaudible) production. It's more complicated [to plowing your] production in an environment like it. So margins are holding up very well and we expect that to continue in the future.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [26]

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Very good. And last one for me, guys. Just on Brazil, you seem to be, certainly, I think, a nuance of you inflecting towards more the positive. So any change in how the EBITDA -- a, how the EBITDA could evolve? And I notice that Dreyfus and Bunge did note some issues with farmer defaults on loans under their barter systems. And I know you guys are offering finance packages. So maybe just, a, how does the EBITDA picture improve here? And b, just on the financing packages, any risk to your loan book?

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Tim Close, Ag Growth International Inc. - President, CEO & Director [27]

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Yes. Our team in Brazil continues to evolve and grow and get incrementally stronger. And we've made some positive changes in recent months to our sales team and its structure, which has had -- which has led to some very positive results and a higher quoting -- higher-quality quoting pipeline. We're positive with respect to Brazil in H2 of 2019 and into 2020. We have had no issues on our barter financing programs and no defaults.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [28]

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Okay. And do you think you'll be single digit sort of the EBITDA kind of positive?

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Tim Close, Ag Growth International Inc. - President, CEO & Director [29]

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Correct. We expect to be EBITDA positive in the second half of '19 and for that to continue to increase into 2020.

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Operator [30]

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

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Andrew D. Wong, RBC Capital Markets, LLC, Research Division - Associate Analyst [31]

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Could you provide a little bit more details around some of the liquidity issues in India that was mentioned? I think we've seen banking issues in India in the past. I don't think that's different. But is there something new that you're trying to flag here?

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Tim Close, Ag Growth International Inc. - President, CEO & Director [32]

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Nothing brand new, Andrew. You may be aware that in kind of recent months, or perhaps longer, the government of India has mandated public banks to clean up their balance sheet as we've seen in other countries. There's a bit of a pain pinch in the short term. When that happens, the liquidity becomes less, the bank are less able to loan money to the private sector. So they -- it sounds to us like that's working towards the end now. Our team in Brazil believes that by the end of 2019, those banking issues will be to the point where they're no longer significant. But there is a short-term period here where they are seeing some instances, and it's not a crisis, but they are seeing some instances where bank liquidity has influenced the amount of credit available to their customers.

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Andrew D. Wong, RBC Capital Markets, LLC, Research Division - Associate Analyst [33]

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And is AGI doing anything to help alleviate that? Or do you have any plans to do so?

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Tim Close, Ag Growth International Inc. - President, CEO & Director [34]

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Yes. No, that's right. We have the balance sheet to assist the team in Brazil -- or sorry, in India. And we've had discussions with our guys there. They're doing just fine. [And the measures] that they've asked us to take to help them with the banking situation in India. We're not going to put a strain on our balance sheet. We're allowing them to provide some slightly different credit terms to their customers. And we don't expect the banking issues to have a significant impact on demand in India in the second half of '19.

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Andrew D. Wong, RBC Capital Markets, LLC, Research Division - Associate Analyst [35]

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Okay. And just on Brazil, you mentioned some of those recent changes in the sales structure and how that's helped the business. Can you just talk a little bit more about that?

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Tim Close, Ag Growth International Inc. - President, CEO & Director [36]

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It's a continued evolution of our distribution in Brazil, so it's having -- looking at their -- our sales team and having the right people, right agents in the -- in key geographies. So as we fine-tune our distribution model there, we know the right partners to be expanding our business with and looking at additional warehousing opportunities to get the product closer to the customer. So it's fine-tuning and focusing the business on the -- our best opportunity areas.

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Andrew D. Wong, RBC Capital Markets, LLC, Research Division - Associate Analyst [37]

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Okay, because -- and maybe just lastly, just more of a strategic, broader-type question on AGI. And there's a lot of operations now across different geographies, different platforms. How do you ensure, as a management team, that you have the right structure in place to make sure all of these varied businesses are operating together and operating efficiently? And what's that right balance between having a nice diversified business that kind of offsets volatility versus having a focused business and not focusing on too many things at one time?

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Tim Close, Ag Growth International Inc. - President, CEO & Director [38]

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It's a good question. I mean there's -- that's fundamentally what we're -- we spent all of our time on. We've recently restructured the business to have regional teams and to sort of simplify our entire business. To us, it is very focused, very focused on the systems that we deliver. So those regional teams are how we deliver that, how we manage it, what looks like the complex business, how we simplify and manage it by having the right people, the right team structure in each of our key geographies. So we restructured the business in North America, in Brazil, in EMEA and then addition of India, which is a robust platform in and of itself. So it's a continued evolution of the business and the leadership team to accommodate that management and growth.

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Operator [39]

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Your next question comes from Greg Colman of National Bank Financial.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [40]

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Sorry to harp on the guidance, but I want to come back to that for a second. You generated $68 million in EBITDA in the second half of 2018. In your prepared remarks, you said you expect the second half of '19 to approximate the second half of '18. Should we interpret that to mean you're anticipating $68 million in H2 of this year? Or are you anticipating $68 million in the second half of this year, plus the impact of acquisitions?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [41]

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Greg, it's Steve. Our guidance that approximate second half of 2018 is not specific guidance. We're still in the middle of in season. Like Tim and I both said in our opening comments, there's a lot of game to be played yet in the 2019 in season. We need to watch profit develop -- yield -- the North American crop yield will be important. The timing of harvest will be important. And also we have a number of international projects, including projects in Brazil where it's difficult today to determine whether they will be Q4 2019 sales or Q1 2020. So we're not going to provide specific guidance. We're trying to provide a kind of a general indication of where we expect 2019 will end.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [42]

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Got it. I mean I understand there's a lot of moving parts there, but just trying to look at that language there and figure out what you mean by it. Do you mean that your guidance is inclusive of acquisitions? Or would acquisitions be on top of that guidance, the one you already made, like the Milltec that's already in the system, things that you've already purchased?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [43]

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No, we're talking about inclusive of acquisitions. But again, not being specific, we're saying conservatively, we -- we'd look to approximate last year across the entire business, but with key areas, we think, for some upside and being conservative, though, in looking at the current conditions to give some general outlook for the remainder of the year.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [44]

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Okay. On Milltec then, there's some moving parts here with a big bulk of their sales. I think, 70%, 75% of their sales being in Q4 and Q1, and monsoon season coming through midyear. I'm still getting comfortable with how this works exactly, but does a weak monsoon season in India mean that the bulk of Milltec sales in Q4 '19 and Q1 of '20 are at risk and a recovery for sales in 2020 -- a meaningful recovery for sales in 2020 isn't something we're going to know until, like, Q4 2020? Or am I just understanding this incorrectly?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [45]

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Yes. Maybe I'll just kind of correct how you worded that. I mean it's not the bulk of their sales that are at risk. What the below-average monsoon -- and the monsoon is still ongoing. The below-average monsoon that we've seen to date is tempering their growth. We expect their results to be in line with the very strong result they had pre-acquisition. What it's doing and what our outlook was suggesting is that it's tempering the growth that we would have otherwise expected.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [46]

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So the bulk of the sales are not at risk, but the growth expectations are tempered.

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [47]

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Correct.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [48]

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Okay. Got it. And then when we -- keeping on India there, just wrapping it up here. But what's been the bigger impact on that growth? Has it been -- you mentioned the monsoon season and banking liquidity kind of in the same breath in the remarks. What's the bigger impact there? Is it the weather? Or is it the banking? Or is it difficult to determine which one's bigger?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [49]

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It's the weather. The banking issue, as Andrew mentioned earlier, they're not brand new. But it is an item that we wanted to bring to the attention of the investment community. They are dissipating. And we believe they will largely be dissipated by the end of 2019. The more important -- the more immediate item is the weather.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [50]

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Got it. Okay. And then just a picky modeling question. And Steve, please tell me to take this offline, if you want. But you mentioned a $1.3 million expense related to the amortization of the backlog intangibles regarding the Milltec acquisition. What is a backlog intangible?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [51]

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Well, when we -- it's similar to any other acquisition we've made. When you acquire a company, you need to write up their inventory to fair value, so it's no longer a manufacturing cost. And the excess over manufacturing cost is amortized through -- is expensed through amortization, normally over 3 to 6 months, however quickly [or] inventory turns, and that's what I'm referring to.

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Operator [52]

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Your next question comes from Steve Hansen with Raymond James.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [53]

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Just very quickly, I apologize if I missed it, I jumped in a bit late here. But you perhaps maybe just give us a little bit of an indication on what the strategy is on the digital side with the Farmobile acquisition and how we should think about that integrating with IntelliFarms and some of the other smaller deals you've done prior to that. Just trying to get a broader sense for the full strategy here and whether there's impact going forward?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [54]

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We did cover this quite a bit in the opening comments, so maybe you missed that, and I can catch up offline. But the Farmobile is a really integral part of our technology platform and feeds directly into SureTrack into our IntelliFarms business, so the SureTrack platform, SureTrack Farm and SureTrack Pro. In terms of SureTrack Farm, Farmobile data feed through an API is bringing live, robust data right into SureTrack now to give comprehensive view of field activity for farmers using our system and then provides that verified data on what happened on the field for traceability through to -- for a farmer to offer, as you saw, and gets grain on our marketplace. So it's a really exciting part of our overall business. We've been working with Farmobile for a better part of 7, 8 months previously. That API has been in place and has been providing that data into our system and now our investment and commercial agreement. Strategic agreement with Farmobile provides us an even closer integration between the 2 companies as we look to leverage that data, data acquisition, data provision through SureTrack for our customers. So it's a very robust, very unique platform. I don't think anybody else has a system like ours. We're pretty excited about the capabilities and the means for us to expand and monetize the overall platform. As we pick up from an AgTech perspective, we pick up from the crop leaving the field along with collection of data during the growing season and be able to provide that on our marketplace, but be able to market on the grain [content] . So we can -- farmers can look at selling his specific crops, so sell high-protein wheat, sell high-starch corn for ethanol production. And this -- there's pretty significant premiums being paid right now by buyers to have -- to farmers that are using our system and providing the data -- the traceability dataset on that crop, so that you can verify whether it was glyphosate-free or whether it was non-GMO or whether it was organic or whether -- and at the end of the day, what that crop was and how it was conditioned, which is extremely important. So you can get verification of the full production cycle of the crop and provide that in marketing, which is a game changer for the entire industry. To date, generally speaking, all crops are sold on a generic basis, and this is moving to segregation and moving to specific marketing and specific grain based on content.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [55]

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That's relevant. I mean where are we in this evolution? And using baseball analogy, what inning are you in, in the investment cycles here through, I'll call it, the AgTech platform, the digital platform? Are we still early innings? Or are we getting to what you view now as a [fulsome] solution?

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Tim Close, Ag Growth International Inc. - President, CEO & Director [56]

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Well, we have a [fulsome] solution. We have a complete system that's being used right now. Sensors, all the way through the farm from -- through soil, weather, things that [happen] , data being fed into the Farmobile hardware and API. We have a full operating system that is providing that traceability. Nobody else has got it. And we'll combine that with all the equipment for handling the grain, for storing the grain, for protecting the grain and then provide visibility through to buyers, so that they can buy [on content] and then they can see where that grain is and see live view of what their purchased inventory looks like and use that in their supply chain. That's all live and being sold right now. As I sort of mentioned off the start, we wrapped that all into a subscription model, so took what would have been a hardware sale upfront, moved it to a subscription model and farmers now paying upfront. They pay once -- one payment per year ongoing at the end of a postharvest, which, obviously, is a model that -- it benefits farmers. There's a quick payback on the whole system because premiums are getting -- by being able to provide the traceability and the data on the -- on their crop. So from an investment perspective, we have all the pieces in place and are actively using marketing, selling that full system. It will evolve over time. We've got lots of additions to it that are being made now. We have a robust product time line and map for additions to, improvements to the full model, so ways for -- make it easier to use, for instance, and additions to the whole platform, adding better inventory control, more accurate inventory control, adding -- we just added tank manager for -- sort of for liquid visibility, so visibility for liquid, either fuels or chemicals in tank, to monitor live. And all of that live data being fed through to either mobile or to desktop platforms for management and marketing of the crop. So it's a pretty exciting platform. I think it's -- it is extremely unique and also -- unique in what it is and unique that we actually have it in place and are building on it right now.

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Operator [57]

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(Operator Instructions) And we have no further questions at this time. Please proceed.

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Tim Close, Ag Growth International Inc. - President, CEO & Director [58]

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Okay. Well, thanks for your time this morning. We'll wrap it up there and look forward to talking more as -- one-on-one as we go through the quarter. Thanks for your time this morning.

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Operator [59]

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Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.