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Edited Transcript of AFN.TO earnings conference call or presentation 25-Mar-20 12:00pm GMT

Q4 2019 Ag Growth International Inc Earnings Call

Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Ag Growth International Inc earnings conference call or presentation Wednesday, March 25, 2020 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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* David Francis Newman

Desjardins Securities Inc., Research Division - 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 Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to AGI's fourth quarter and final year-end results release and conference call. (Operator Instructions)

Mr. Tim Close, you may begin your conference.

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

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All right. Good morning. Thank you for joining Steve Sommerfeld and I this morning. I'll start off with a short apology. I've been dealing with a round of non-COVID-related illness in my household. So I may mute sporadically throughout the call as I cough up inside.

We'd like to open our comments this morning by recognizing our team members in Northern Italy, who up until are in complete lockdown, continue to operate across 3 locations during this crisis, all in one of the most intensely impacted regions in the world. Our team there developed and implemented all-season procedures to responsibly and safely operate without a single positive case of COVID. The Italian team has been an inspiration to all of AGI, we are implementing what we learned there across all of our facilities. We learned that we can prioritize the safety of our people, while continuing to operate to also safeguard the livelihood of our people. We have many shareholders within AGI and many that are listening this morning, Steve and I would like to thank everyone in AGI and our partners for the outstanding response and support for each other, for AGI and for our customers.

Now let's jump in here and summarize where we stand today. We entered this crisis with good momentum across AGI. We have record backlogs in our International business, strong backlogs in our North American farm business and stable backlogs in North American Commercial. As we move through Q1, our technology business is up over 200% year-over-year, and we are set to launch B2 of our SureTrack platform. The beta is out now, and it is a beautiful platform, that drives tremendous value for our farmers. We are very excited to get this released.

Farmers are preparing to plant or are planting right now in much improved conditions over the last year. These are good underlying fundamentals. The COVID crisis has created substantial uncertainties across all of our markets and operations. Today, we have suspended production in France, Italy, Brazil and India due to strict lockdowns for regional conditions. As it stands, the suspensions, excuse me, are scheduled for 2 to 3 weeks. While production is suspended, we are continuing with all design and engineering work and quoting our new projects. This work is carrying on rather well with our teams settling in to working from home. This important work -- this is very important work that represents roughly 25% of the work that goes into a typical project. So we are far from idle. Continuing this work positions us well to resume production post-crisis.

Farming facilities with suspended production, we are utilizing vacation time, leaves and government programs to mitigate the impact. Now at this point, we believe that our backlogs are solid, the pipeline of new business is solid and we can efficiently resume production in the plants that are, or may have production disruptions. In fact, we continue to add to our backlogs each week. For example, Sabe is having a record month in new orders, and our North American farm business intake is higher over the past 5 weeks than the same period last year. At the same time, the uncertainties created by COVID will have an impact on capital decisions for projects and the timing of those delays is simply unknown.

The crisis has been steadily marching west, and we have been preparing our businesses in Canada in the U.S. based on those important lessons from Italy. Multiple states and provinces have declared our products, services and technologies as it's central services, providing us with the opportunity to use what we learned in Italy to implement strict policies and procedures and continue to safely and responsibly operate in this environment. We fully understand the severity of the current situation. We are living through the worst bit in Italy and across our operations in India, Brazil and France. The most important unknown at this point is the duration of the lockdowns. If the production lockdowns are limited to 2 or 4 weeks, then the impact can be mitigated. As we move into longer lockdowns, then the impact, obviously, starts to build. At this point, we simply don't have visibility into the ultimate length of the lockdowns.

Now the world -- how the world looks post-crisis will ultimately determine the longer-term impact on each business. The cruise line industry is unlikely to bounce back, for instance. For AGI, the picture is quite clear. Fertilizer and seed will need to make their way to fields. Farmers will plant spray, harvest and market. Grain will trade, animals will eat and grocery stores will continue to fill with fresh and processed products, along with newly expanded toilet paper sections. Our customers are critical participants in the world's food and supply chain from farmer to feedlot to food processor. They are experiencing increased demand for the products now, and current or required exemptions from lockdowns in order to continue to supply the world. Our customers are busy during this crisis. My bet is that they will be even busier post-crisis as the world builds additional capacity into the food infrastructure to better prepare for the next crisis that now seems that much more likely.

Let's talk about liquidity. We've been proactively dealing with our liquidity prior to COVID, as evidenced by the amended and extended credit facilities that we announced last week. In combination with the debenture we completed earlier in the year, we are well positioned from a liquidity perspective with $80 million in revenue in our current facilities, and access to expand that via our accordion in a very supportive banking syndicate.

Given the current crisis, we are in steady communication with our banking partners, working to prepare for the worst and remain confident that, that support will continue. We simply do not know the extent or duration of this crisis. So acting reasonably, we moved to monthly approvals for our dividend. Each day it brings more information. And as you would expect, we are digesting the developments each day to determine the impact on our business. We will do nothing in haste.

With those comments, I'll turn the call over to Steve to review the quarter.

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

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Okay. Thanks, Tim. Our results in the fourth quarter of 2019 were consistent with our previously communicated guidance. Trade sales increased 7% to $230 million due largely to strong demand for portable grain handling and drying equipment and contributions from acquisitions, most significantly, Milltec in India.

However, our adjusted EBITDA decreased compared to Q4 2019 due to the impact of very poor growing conditions in the U.S., the impact of trade uncertainties and the timing of sales related to our commercial backlog, as well as an increase in investment in sales, marketing and technical resources related to our AGI SureTrack platform.

Prior to the emergence of COVID-19, activity in the first quarter of 2020 was generally consistent with management expectations. Farm sales have been steady and our farm backlog at the end of February was 14% higher in the U.S. compared to the prior year, but we did not expect -- excuse me, but we did not -- let the carryover impact of a difficult 2019 drilling season in the U.S. to meaningfully reverse prior to the 2020 planting in Q2. Our international sales order backlog is 30% higher than the prior year and at record levels in Brazil. However, the sales remain weighted to the second half.

In addition, the investment in our growing AGI SureTrack platform and other technology and marketing initiatives, was higher than the prior year. Due largely to these factors, when compared against a strong Q1 2019 that included a significant contribution from our commercial business in Canada, we did not expect year-over-year organic growth. In summary, and I've described more fully in the MD&A, we expect adjusted EBITDA in Q1 of 2020 to approximate Q4 2019 results. On March 20, 2020, we announced we have amended and extended our credit facility with a syndicate of 5 Canadian banks led by CIBC. With the outbreak of COVID-19, this previously planned extension takes on an increased importance as this facility was extended to March 20, 2025, and the amendment included an increase in the maximum senior debt leverage ratio up to 3.75x for the balance of 2020 and an improved pricing grid.

As of December 31, 2019, AGI's senior debt leverage ratio, as defined in our credit agreement, was 2.65x.

And with that, I will turn it back to Tim.

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Tim Close, Ag Growth International Inc. - President, CEO & Director [4]

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Thanks, Steve. We will open the lines for questions. However, I will profess this by repeating that there are simply too many unknowns to be speculating on possible events. We have 34 locations across 5 distinctly different regions that are all at different stages of this crisis. Each region is implementing unique response to this crisis. The answer to many of your questions will be simply that it's too early to tell. Let's focus on the facts as we know them this morning.

Now with that, Joanna, let's open the line to questions.

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Questions and Answers

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Operator [1]

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

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

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My first question here is just as we think about what's going on right now and with these plants shut down in Italy, India, France and Brazil. Of those 4 areas, what would that represent as a percentage of revenue and EBITDA?

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

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Well, Jacob, it's Steve. I mean, as a percentage of revenue, I mean, that represents almost all of our international production or offshore production, which is -- our international sales are trending along 30% of our total sales. I would note, though, that our international sales also include exports from the U.S. So what you see in our international sales line would be partially manufactured in the U.S. We haven't disclosed EBITDA on a regional basis.

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

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Okay. And then if we think about when things start to improve, how long does it take for plants to ramp up?

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Tim Close, Ag Growth International Inc. - President, CEO & Director [5]

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Yes. It's case-by-case, Jacob. But right now because of the engineering design work that we're doing, we believe we can do that quite efficiently. A lot of that work, or all of that work, needs to be done prior to those orders going to the shop floor. So as long as we have that work going on, then those orders are ready to hit the shop floor as soon as production is back on.

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

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And then if we think about your typical plant, what would be -- if we think about on the cost -- from the cost, what would the fixed versus variable would be?

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

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Jacob, it's Steve again. So the majority of our costs are variable. We are a low intense. Our capital intensity is low, and the majority of our production cost, we can flex.

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

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Okay. I wanted to move on to backlog. So you talk about record backlog and -- but if we think about the projects that are in backlog currently, what is the ability of clients to postpone them? And what is the ability to actually cancel them? And is there any type of financial penalties here at all? Or how should we think about that?

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Tim Close, Ag Growth International Inc. - President, CEO & Director [9]

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Yes. So each project is a little bit different. We've -- but there are substantial deposits involved in this projects. I mean, each of our customers are dealing with the same scenario. It's hard for them to get the SAP that they need to order -- to carry on with those projects. So we are in daily communication across our backlogs with customers, and very good communication back and forth. Certainly, everybody understands the situation of the world here.

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

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Okay. And maybe just last question here. On the decline in North American Commercial. So it's been very strong for -- the investment, it's been very strong for a number of years. So backing out COVID-19 and the impact there, is -- kind of reading in between the lines, are you expecting basically that this is going to be the new norm after very strong investment that things are going to tail off over the next 2 to 3 years?

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

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Jacob, it's Steve, again. So I think in Canada, that's the case. We had a period of tightened activity, and a year ago, it was really at full steam. The investment in Canada continued, but not at the pace it was 12 months ago. The U.S. is a different story. The U.S. has been bouncing along the bottom for a few years now. We feel there's reason for optimism in the U.S., especially -- COVID aside again, especially if -- with improved trade relation between U.S. and China and an improved macro backdrop. So the left -- or the decrease in Canada may very well be taken up by an increase in the U.S.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [12]

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And can you remind us again what the split is between U.S. and Canada for North American Commercial?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [13]

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Yes. So that would be very much change year-to-year. The U.S. market is certainly much larger than the Canadian market.

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Operator [14]

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The next question comes from David Newman of Desjardins.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [15]

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So obviously, you're hunkering down here a little bit. Are you going to be putting some of your -- obviously, you will go to the back burner, I think on M&A. I'm thinking about revisiting growth CapEx. And it sounds like going to month-to-month on the dividend, you're just kind of seeing what the timing is, related to how long these plants might be closed, and then make that decision. Because the yield would suggest that maybe a cut might be coming. So any thoughts on uses of cash?

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

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Well, I think the world is hunkering down, David, so that's -- maybe the understatement of the day. We are being extremely cautious, so all CapEx and is certainly on hold and being assessed as we go through this crisis. Yes. I mean, it's -- it is a day by day, and we're trying to be as cautious. And bring together, as I said in my comments, is digest and incorporate all of the information that we're learning on a daily basis. And so the extent of those delays will determine our path. A couple of weeks shutdown, actually, isn't that unusual for our plants. So it completely comes down to how long this lasts.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [17]

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Okay. And then are you seeing any supply challenges either for inputs or for, obviously, marketing the product. Any supply chain challenges that you're seeing, other than the blockades that we saw in the first quarter here, but any other things you call out that you're seeing any slowdown into supply chain?

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Tim Close, Ag Growth International Inc. - President, CEO & Director [18]

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Will those block -- Yes, the two different perspectives on that. The -- our supply chain, we've facility by facility, part by part, we've -- speed by speed, we've looked at the -- how critical (inaudible) and what our inventories are and what the supply chain looks like by component, by part, by material. And are implementing the strategies to ensure that we can continue to operate. From a supply chain, from our customers' perspective, I think the challenges are moving people and region by region, how many overall -- or how was rail? How was trucking? How are they able to operate in this environment? So it's day by day.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [19]

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And maybe, guys, could just remind me, you've got some, actually silver linings here. One being, obviously, steel costs, and that represents a pretty significant portion of your variable costs. And then I look at foreign exchange, I think you have a fairly substantial U.S. dollar component on translation, but obviously, that will be a bit of a tailwind, I think, just on your reported numbers. And I kind of looked at -- across a few other things that seem to be, obviously, lower interest rates and for your farmers and altering payment plans. I mean, so maybe just kind of remind us on the steel side, and the FX side, and what you're doing in terms of taking advantage of these near 0 interest rates?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [20]

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Sure. Yes. So on the steel side, you're correct, David, our steel component, typically 25% to 30% of our COGS. We've always been very active in the steel market and strategic with respect to our procurement strategy, and we'll continue to do that. We're in a difficult position today compared to the prior year, which will be a tailwind in 2020. You're right on the foreign exchange also. We are along USD. It's disclosed in our audited financials, the sales denominated in U.S. dollar down the cost and the delta, that's about USD 100 million. A strong USD impact other things, price of steel, prices of input for foreign markets, et cetera. But generally, it's a very positive thing for AGI when the CAD is weaker than the USD or weakened compared to the USD.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [21]

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And just, you and cross index to the Canadian dollar in Canada?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [22]

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Well, steel prices in Canada will increase with a weaker Canadian dollar.

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

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Right. Right. Okay. But what would be the split U.S. steel, Canadian steel kind of thing?

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

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You look again at our production facilities. We have a -- steel is the most important to our BIM business. And we have a BIM manufacturing facility in Canada and one in the U.S. It's important in both markets.

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

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Again, steel pricing is, overtime, a pass-through across the industry. And I think to the last part of your question, David, farmers are getting and will continue to get, a high level of support in this environment. It had been previously. They have been historically. They will get the support in this environment. FCC, I think, build a $5 billion support package from a credit guarantee perspective that, whether it's needed or not. And we expect robust growth in the U.S. as well.

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

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So that could be a big tailwind coming out of this?

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

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Well, I think so. If you look anecdotally, we can see our customers year out planting. They're buying fuel because it's at record lows, in recent record low. They're stocking up on all of the inputs that they need for a for a typical year. They've been practicing work from home and quarantined type of work environments for many, many years.

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Operator [28]

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The next question comes from Michael Doumet of Scotiabank.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [29]

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So a lot of questions have been asked, but just wondering, if at all, you're able to quantify the EBITDA impact from the 2- to 3-week suspension. I know you talked about the revenue, but just on the impact. And then as a clarification, how much that impact fell into Q1 versus Q2?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [30]

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Tim mentioned in his comments, there's so many unknowns today, so many variables that we aren't prepared to quantify impact. But I will say shutdown of the duration of 2 to 3 weeks. There will be a revenue impact in Q2, certainly, but it's revenue that we believe we will make up in the back half of 2020.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [31]

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Okay. Okay. That's helpful. Look, I'm honestly trying to think about the numbers here, and I know you guys are a little hesitant to provide some guidance obviously, last year, a number of challenges for AGI. I guess this year, and we're starting with a lot of uncertainty. And maybe just to get us some of your thoughts for the potential pluses if COVID is sort of a shorter period issue, some of the minuses. And just for context, I mean, management there, I think you all expected EBITDA growth in 2020 year, significant EBITDA growth versus 2019. So when we put the pieces together. I mean, does an EBITDA expectation reset back 2019 levels make sense for 2020? Just any color really you can provide us there?

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

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Yes. We just don't know at this point, Michael. It's way too many variables for us to be making a call or a forecast at this point? Yes, it's just too early to tell.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [33]

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Okay. No, that's a totally fair answer. Tim, I think it's hard for all of us to sort of figure this out.

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

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I guess, you just -- I should answer your first part of your question, you asked for some of the deposits. The negatives are the unknown and certainly as evidenced by the suspense production suspensions. The positives, our -- I mentioned in my comments, our customers primarily are receiving exemptions from shutdowns. They have to operate for the world that as part of the supply chain in support of those customers, we are captured by those essential service separations as well. So that provides us the opportunity to operate in this environment. Many and most businesses don't have that opportunity. So we are -- we have a team across AGI that are overwhelmingly looking to continue to work and continue to do our part to contribute during this crisis. So to -- i think we've demonstrated in Italy, the ability to do that to safely and responsibly operate in this environment, in one of the most intense regions in the world, we were able to do that without a single positive case. Up until the 14-day lockdown they had just on Saturday. So with those -- I'll repeat it again here because it's an important point. With those lessons learned there that we're implementing everywhere, we believe there is a way to operate safely, number one. #1 priority across our business is the safety of our people. We believe we can safely operate and as we go forward. So it is -- provides us with the opportunity to continue operating in this environment. So there's many pluses to that across the board. I think coming out of this crisis, I think the importance of that supply chain, that sort of unseen global food infrastructure is going to be top of mind from a government perspective and from a an investment perspective. The world will overbuild in order to account for this type of crisis in the future. I think this certainly highlights what we've been talking about over the last number of years, is that there is a massive amount of investment needed. For -- around the world, even in mature markets to make the existing infrastructure more efficient, more productive and more reliable in good days, and certainly as needed in days like these.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [35]

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I appreciate the comments, Tim. And obviously, a good job in Italy and good luck for the rest of the team.

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Operator [36]

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(Operator Instructions) The next question comes from Steve Hansen of Raymond James.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [37]

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Tim, the decision on dealing with this crisis in Italy and France, now India seems fairly logical. Is there any reason that Brazil was added to that list as well, just out of curiosity?

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

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Brazil is more regional. It's not -- they haven't moved to government required lockdowns at this point. It's just region by region. And so it's -- each case is going to be slightly different. So in that case, we're, like many of the businesses in that region, following the lead of other regional businesses, so.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [39]

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Understood. That's helpful. And just thinking forward, I mean, I think we all recognize how uncertain this all is and appreciate the challenges. But do you think that an update to the market intra-quarter, if there is greater visibility at the time, is going to be warranted. I'm just trying to understand, I mean, we're sort of at this on period in the calendar here. Now we're not going to hear from you for a couple of months. Just trying to understand, do you plan to give updates?

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Tim Close, Ag Growth International Inc. - President, CEO & Director [40]

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I mean, short answer is yes. We plan to provide as much transparency as we hit these collection points as we gather material information. We plan to continue to be open and continue to communicate.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [41]

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Okay, great. And then just maybe finally on (inaudible) of more optimism around AGI SureTrack. I think you -- in your opening comments, you suggested that you've had good traction there. Do you want to maybe give us an update as to what you're seeing there in the last quarter, you had some constraints as I recall, in the implementation or beating demand? Could you just give us an update as to where you're at?

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Tim Close, Ag Growth International Inc. - President, CEO & Director [42]

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Yes. We ramped up production through Q4 and into Q1 from a hardware perspective and now have very good inventory levels. Brought down lead times across the board, and we're sitting in a very good position. Those businesses continue to operate, to manufacture, to install. And now with the release of our second version, which is just a -- it's a beautiful platform to operate and it has expanded capabilities, we hope to launch in the coming weeks. So very positive on the rollout and the expansion of the technology business, having good impact on integration and cross-selling across AGI, all of our traditional products that are being brought into and able to monitor, manage and operate within the SureTrack platform.

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Operator [43]

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There are no further questions at this time. You may proceed.

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Tim Close, Ag Growth International Inc. - President, CEO & Director [44]

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Okay. Well, thank you for your time this morning. I appreciate the continued interest and support. We'll sign off here and just ask everybody to stay safe. Thank you very much. Take care.

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Operator [45]

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