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Edited Transcript of AFN.TO earnings conference call or presentation 14-Nov-19 1:00pm GMT

Q3 2019 Ag Growth International Inc Earnings Call

Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Ag Growth International Inc earnings conference call or presentation Thursday, November 14, 2019 at 1:00:00pm 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

* 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's third quarter 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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Good morning, and thank you for joining Steve Sommerfeld and I to discuss our Q3 results, our business update and outlook. I'd like to start by addressing the charge we took in the quarter. This onetime charge related to product design issues that were discovered during the execution of projects. And we determined that we needed to amend the design and add additional time and materials to ensure the projects were completed to the expectation of our customers.

A charge of this type is exceptionally rare at AGI. While commercial projects can be subject to changes, additions and redesign, we complete hundreds of projects annually without incurring a similar circumstance in our entire history. We identified the root cause, quarantined the issue to move to ensure we limit this to a onetime event. This event actually highlights a competitive advantage in the AGI model.

We stand behind our work, we are accountable, responsive, and we work to ensure our customer comes first. We are confident we have the team, the products and processes to ensure this type of event remains extremely rare, and our accountability creates the confidence that our customers need to entrust us with supplying their critical business infrastructure.

Moving to the quarter. Despite significant global headwinds and excluding acquisitions, sales across AGI were equal to our record results in 2018 in both the third quarter and year-to-date. Inclusive of acquisitions, we grew sales by 7% in Q3 and year-to-date, as we brought on our platform in India, expanded our food platform into beverages and grew our technology platform. The contribution from these 3 areas further diversifies AGI, adding growth levers outside of our traditional base in North American grain.

Our diversification is also gaining momentum in international markets with solid backlogs heading into the end of the year in Brazil, EMEA, India and Southeast Asia. Paul Householder joined our team in June as Executive Vice President International, coming with extensive industrial products experience at Air Products, with a career spent growing businesses internationally. Paul has restructured our international sales and execution structures, putting key people and regional teams to continue our global growth. During the quarter, we grew our capacity in EMEA with a new production line in Italy, expanded our product lines in India, achieved positive EBITDA in Brazil and began to see growth in our fertilizer systems backlog in global markets.

We have made solid progress in building our regional teams internationally to put our expertise in production closer to our customers to be more responsive and deliver tailored solutions for each market. We expect to see continued growth in each of these key markets as the world responds to changes in regional crop production and consumption, driven by shifting trade, regional dietary changes and food processing changes.

We are making excellent progress in our sensor and technology business. During the quarter, we brought together and rebranded our technology products and services as AGI SureTrack. On the farm, AGI SureTrack is now a leading farm and grain management system that extends from seed selection information right through to grain marketing -- right through to a grain marketing tool.

Farmers are connecting with grain buyers on our platform and being paid premiums for using SureTrack to provide grain content, crop traceability and visibility to the grain bins on the farm. On the grain buyer side, AGI SureTrack allows the operators to monitor their facility and inventory levels then utilize the platform to manage their supply chain from the grain held at their sites then extend that to live monitoring the crop they have contracted to purchase as it sits in grain bins at farmer sites.

By applying technology to our equipment, combined with sensors throughout the farm, by our mobile data captured in the field and a grain marketing platform, we are automating the collection of over 10 layers of data, and we've automated the population of our farm and facility management tools. All this data is controlled by the farmers to use with their partners to better plan their crop, grow their crop, store and protect the crop then find the best market for that crop. Now imagine the global processes that is buying thousands of farms globally and can now watch the crops they're buying go in the ground, watch the application of nutrient and crop protection in season, watch the crop being harvested and then see the crop in bins around the world.

On top of that, they can see what the content of the grain is, the protein oil and starch content in the crop in every bin. They can see the precise volume of grain in the bins or if you're an ag retailer, you can see the precise volume of the fertilizer, chemical and seed, that you have in every bin, every container, every tank at every facility.

That is robust supply chain visibility and supply chain management, and that is AGI SureTrack.

Our focus with this platform is to expand our relationship with our customers to add more value and differentiate our entire product offering. And we expect this deeper relationship to have a positive impact on sales across every division of AGI. With that, and those comments, I'll turn the call over to Steve to discuss the quarter, and then we'll circle back for questions.

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

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Okay. Thanks, Tim. Trade sales in the third quarter of 2019 increased over the prior year due to higher sales of portable grain handling and drying equipment, sales growth in Brazil and a strong performance from AGI's recent acquisition in India.

Sales growth in the quarter was tempered by challenging farm conditions in both Canada and the U.S. as well as by global economic uncertainties and their impact on the timing of customer commitments, most notably in offshore markets. Our gross margin percentage in the quarter remained strong and was consistent with 2018, despite the impact of challenging market conditions on some product lines. Adjusted EBITDA as a percentage of sales did decline by 150 basis points compared to Q3 2018. However, this impact was due to AGI's continued investment in sales and marketing initiatives, digital tools and its technology platform. The benefit from these investments is expected to gain momentum in future quarters and to accelerate as our end-user markets normalize from the transient items experienced in 2019.

AGI businesses have performed well in 2019, despite significant headwinds in North America and offshore, and management anticipates adjusted EBITDA in the fourth quarter of 2019 to approximate 2018 levels. EBITDA percentages in the fourth quarter of 2019 are expected to decrease compared to the prior year, largely due to investments in marketing and technology, the impact of poor harvest conditions on certain product categories and due to commercial sales mix.

Several factors exist today that suggest we are positioned to enter 2020 on very solid footing. First, there is a growing expectation that U.S. farmers will plant a record amount of corn acres in 2020, which would has positively impacted demand for portable grain handling equipment and grain storage systems. AGI Brazil continued 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 has started to build, and we currently expect to enter the year with strong book of business.

Finally, we expect growth from our platform acquisition in India due to increased market development and synergies with other AGI divisions. In summary, while we face certain headwinds in 2019, we look forward to increasing our pace of growth in fiscal 2020.

With those comments, I'll turn the call over to Jessica 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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I had a question on the 2020 outlook. So saying that things look a little better, talk a bit about what you think that ramp looks like. You talked about higher U.S. acreage, is this kind of a second half 2019 in the U.S. and then Canada, any indication that the On-farm in Canada is starting to improve?

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

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Our own farm businesses have been very strong, really throughout 2018 -- or sorry, throughout 2019. When we're looking forward to 2020, really, I think you begin with the new planting season in Q2. There's really nothing to differentiate Q1 of '20 from the back half of 2019. But I believe once -- like every year when the seed goes in the ground and a new set of condition is in the front of our farmer customer base. We expect that planted acreage and similar drivers to what we experienced in 2019 on the portable grain handling equipment to lead to a very strong year on the farm.

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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 as far as backlog, when you look at Canada, U.S., international, there were some comments in the MD&A about that. Maybe can you provide a bit more color. It sounds like international is up, how does U.S. compare to Canada?

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

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Backlogs there are quite strong as they were in 2018, our record year. So looking at it by geography. I mean, the farm backlogs when we get into this time of the year, Jacob, as you know, we're kind of winding up in the very late harvest. Not quite as relevant as it will be as we enter 2020. However, the farm backlogs are higher than they were at this time last year. Our commercial backlogs are consistent and as strong they were in 2018. It's a bit of a mix in the U.S. that's regarding the platforms where we're stronger in fertilizer and food currently than we were at the same time of last year, and that's -- it's a testament to our diversification in recent years into these separate platforms. Internationally, our backlog is tracking along with a strong '18. We're building the next book of business for 2020. The backlog is geographically diverse. Brazil, in particular, is strong as is Europe and Eastern Europe. So we're very comfortable with where our backlogs sit today, and we believe we'll enter 2020 on a good footing.

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

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And the angst that your clients were talking about earlier on in the year, as far as international trade, is any of that subsided at all?

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Tim Close, Ag Growth International Inc. - President, CEO & Director [7]

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Yes. I think, Jacob, I think we're seeing signs of it subsiding or making -- our customers making adjustments to what they perceive as new reality. And there's been changes in trade and where the crop is being consumed, where it's being processed. And -- so we are seeing a resumption of activity, I guess you'd call it, the pipeline is strong, and it's recently seen an uptick in the closing rates. So I think there are positive signs internationally around -- there's the resumption or whether it's just gone through -- a little bit of both, I guess, it's our expansion into new markets, both by product and regionally and then resumption of activity.

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

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Last question. Any insurance recovery for the $7 million charge?

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

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No, there has not been, and we don't expect to receive insurance on that charge, Jacob.

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Operator [10]

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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 [11]

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First question is on India. Just hoping if you could give us a bit of a sense for what's been transpiring there, monsoon conditions have improved, which I think you know since you helped Milltec out. But I think you've also alluded to some internal product development efforts or market development efforts more broadly. Just trying to get a sense for the status of that recent platform acquisition.

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Tim Close, Ag Growth International Inc. - President, CEO & Director [12]

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Yes, we've -- the team there has got a phenomenal innovation product development team. And so they've moved into expanding the product lines. They've traditionally been building a product -- a robust product line, complete the turnkey capability in, what we would call sort of medium-sized processors. And now we're extending to launch the complete product line for large processors as well. So we extend really across the market now in

India. And then expanding it -- their efforts geographically within India and then in the region. We're seeing good traction momentum in both of those efforts. And then building out the additional product lines. So parboiling equipment within India is to sort of, I'd say, round out the turnkey offering.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [13]

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Okay, that's helpful. And just maybe a question on the technology side, you've compiled a number of assets in your technology portfolio. You've rebranded that now as SureTrack. Could you just perhaps describe how you're now going to go to market with this new offering? Is this something that has a new whole sales effort attached to it, and you're going up to new customers, and that's happening soon? Or is it just sort of rebranding what you already have and continuing as is. I'm trying to understanding how the customer set is changing, if at all? Or if you're just -- what's new in this rebranding effort from a sales standpoint?

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

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Yes, it's a little bit of both. We do have dealers that handle some of the hardware that we're talking about. And then we have a direct sales team at SureTrack. And that sales team is talking both to farmers and to -- on the commercial side to grain buyers. And so we would -- we're going directly to grain buyers to get them on the system using it to manage the facilities in their supply chain. So it's a combination of the 2 of those things, and those continue to evolve. And as we build on the capabilities of the platform as it exists today, and that will be slightly different as we take that internationally as well.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [15]

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And just a follow-up there, if I may. How does that mix look on a relative basis, commercial versus on farm today and then how you envision it in the future? Is there going to be a shift towards larger commercial assets? Or does it stay on farm? Or is it a combination of both?

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

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From a numbers perspective, it's very weighted to farmers. And now we're ramping up the efforts on the commercial side. And so as you can imagine, each grain buyer deals with hundreds or thousands of farmers. And as we bring on commercial customers, partner with them for their capabilities, they then bring the surrounding -- there's hundreds of thousands of farmers that need to be on-boarded on the SureTrack system so that you get that supply chain connection. So it's -- numbers wise, there will always be a lot more farmers on the system just because that's the reality of the market. So -- but the disproportionate impact is as commercial customers come on, they bring hundreds to thousands of farmers.

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Operator [17]

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Next question comes from Michael Doumet of Scotiabank.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [18]

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Tim, Steve, just given the crop conditions in North America, I thought the increase in sales in the portable handling equipment was quite impressive. I mean, are you seeing any -- is the main driver there still replacement demand? And if not, is there an element of share growth?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [19]

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Yes. Thanks, Michael. Yes, the sales of portable are very strong. As we expected, the product line, as you know, is largely replacement driven. When you get into a late harvest, like we're experiencing 2019, harvest conditions are very tough on our farmers, it's wet, the days are short, and it's very tough on the grain augers, and it drives in-season demand. It was a surge in demand that we expected, and it will leave us in a good place heading into 2020 as our dealers are doing very well here in Q4, and we'll enter 2020 with lower inventory amounts.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [20]

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Okay. Now that's helpful. And maybe a higher-level question. Obviously, understanding that this year's been really challenging across a number of your geographies. If we assume 2020 is a normal year, if that exists, I guess, in the ag space, and I think you alluded to this already, but what businesses do you think could see the most catch-up potential in 2020? And from a geography standpoint, is that -- am I right to think that's mostly the U.S. and international?

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

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I think that's right, Michael. The businesses of ours that were most impacted by the conditions in 2019 were the grain storage systems business in the U.S. Such a wet wild year in the U.S., that's given -- or that sector had difficulty gaining momentum in 2019. We did reasonably well through new customer acquisition. As that market normalizes in 2020, we would expect to accelerate our growth in the U.S. grain storage systems. Internationally, also, as you mentioned, would be the second area. The trade noise, we'll see if it dissipates or changes. It's certainly becoming more of the new normal than it was even 6 months ago. So we expect growth internationally also.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [22]

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Okay. And then just on Canada, I mean, obviously, you've had a number of strong consecutive years in the commercial business there, with the build-out in grain and fertilizer infrastructure. I mean, based on the backlog and the discussions you're having with your customers? I mean, would you consider the ramp-up in activity levels somewhat mature at this point?

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Tim Close, Ag Growth International Inc. - President, CEO & Director [23]

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Yes. There's still a lot of activity in Canada across the 5 platforms. There's -- you're right. There's been a fairly sizable build. You see that build at port facilities and then the knock-on effect, there that you need to build in the inland facilities to enable that supply chain. So you -- it's great to have port access, but you have to get the crop gathered locally, regionally and get it to port. So on the grain side, we are still seeing momentum and the build in feed and seed, likewise. So as fertilizers, sort of a consistent spend across Canada. So will it moderate over the next 3 to 5 years? Probably. But we're -- right now, we're seeing good positive signs.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [24]

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Okay. That's helpful, Tim. And maybe just one last, if I can squeeze it in. Good quarter on free cash flow. Now understanding the second half is seasonally stronger for cash generation. I mean, what do you expect for the full year in terms of free cash flow?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [25]

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We expect Q4, again, will generate positive cash flow from working capital, which is consistent with our historical seasonality. We've -- as we always will -- as we have done in the past, we'll strategically acquire steel, if and when we believe the time is right to enter the market, which would introduce a variable, I guess, to our seasonality. However, excluding it, we expect positive cash flow in Q4 from working capital.

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Operator [26]

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Your next question comes from David Newman with Desjardins.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [27]

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Your confidence in India and Brazil has grown. And certainly, it's great to see you turning to EBITDA positive on -- in Brazil. Maybe just an update on how you're tracking there as far as where you're at versus potential. And in addition to India, maybe a comment on the banking liquidity issues that prevailed earlier in the year, is that beginning to subside, such that they can buy?

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Tim Close, Ag Growth International Inc. - President, CEO & Director [28]

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Yes. Well, in Brazil, in both places, we've strong backlogs giving us good visibility into the coming quarters. That's growing on the -- in Brazil, a good expansion of our farm sales. And then with contribution from commercial sales. So we're seeing that right combination, that right mix to get us to the volumes we wanted to see in Brazil. So we -- as we look out Q4, Q1 into 2020, we see the right backlog going into the year, and then the right momentum in projects in Brazil to give us some confidence in that region. And likewise, in India, I mean, that's a fairly -- we've got good backlogs there. And good pipeline, good expectations for the coming year in India. And Steve, do you want to comment on banking there?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [29]

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Sure. Yes. So last quarter, we talked about a couple of things. One being the liquidity in India, the second being the timing of the monsoon. Of those 2, the timing of monsoon was far more important of the 2. Of -- regarding bank liquidity, I would say it's moderating slightly, far from a crisis, it's a somewhat negative factor, I suppose, on the growth of our market. AGI is obviously able to provide any support our team in India requires on the financing side of things. So it's not a significant factor in our growth. It's still a slightly, I guess, a slightly negative factor that we believe is dissipating modestly.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [30]

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Do you guys think the random walk on Brazil -- I think, as said previously that one quarter could be down, one quarter could be up. And earlier on the year, it was a little weaker in Brazil. Then now this quarter was pretty decent and EBITDA positive. Do you think you're kind of getting firmer footing there and getting traction? And are you seeing market share gains and things like that? Like what has been the surprise to you guys in India?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [31]

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No, I wouldn't characterize it as surprise -- right, with Brazil. I wouldn't characterize it as a surprise. We're gaining momentum in the country, with no question. Our backlogs are building further in advance than they had in previous quarters, which would lead to more consistency in your manufacturing flow and improves your margins. So looking ahead to 2020, we are going to enter 2020 with the -- in the best backlog we've ever had entering a fiscal year in Brazil, and our team and our market penetration and product awareness, the increase in it. We believe that momentum will continue throughout the year.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [32]

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Awesome. And then last one for me, guys. Just overall, as you head into 2020, I know that it's more of a corn crop in the U.S. but do you get any sense when you're kicking the tires of, I don't know, buying intentions at the farm level or commercial level overall despite crop prices where they are and the trade wars? And in Canada, obviously, recently, the Chinese lifted the ban on pork, hopefully on canola. So maybe just a comment on just at the farm level and a commercial level, just given all the myriad of things that have been challenging this year?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [33]

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Yes, the demand drivers on the farm remain very strong and that -- it hasn't changed. I mean, the weather conditions in Canada and the U.S. were by far the biggest factor in tempering our growth in 2019. We had a very solid year, despite the weather. Anticipating a more normal year in 2020, you would expect those demand drivers to become -- to thrive to the top and allow us to grow at the pace we expected to grow.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [34]

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Excellent. Congrats on hanging in there despite the many challenges this year.

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [35]

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Thank you.

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Operator [36]

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Your next question comes from Greg Colman with National Bank.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [37]

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I just wanted to start with your near-term outlook, and I apologize in advance for the pedantic nature here, but I'm a little confused, and was looking for some clarity. It is all just lifted right out of your prepared press release, but you mentioned that adjusted EBITDA in the fourth quarter will approximate 2018 levels, which, on the surface, seems very clear and easy to understand. But when we come into the details there, you mentioned that sales in both farm and commercial should be flat year-over-year, but EBITDA percentages in aggregate, should decline year-over-year. So I'm trying to reconcile how sales will be flat, EBITDA percentages will decline, but EBITDA will somehow be flat. Does the sales, perhaps, guidance exclude acquisitions?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [38]

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Again, with all of our guidance, we're providing general guidance, Greg. And I think maybe you're splitting hairs here a little bit. Our general guidance says that Q4 EBITDA will approximate Q4 of 2018.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [39]

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Got it. So that should trump any sort of nuances underneath that.

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [40]

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Pluses or minuses, yes.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [41]

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Got it. Okay. And then does that, Steve, just about the charge, and we've already talked about it a little bit, but I just want to be clear. The onetime charge is that entirely isolated to Q3? Or should it trickle into Q4? And if it does trickle into Q4, does your comments about approximating year-over-year EBITDA incorporate that?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [42]

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The $7 million charge we accrued in Q3 remains our best estimate of the total cost of -- related to those 2 projects. We have no information that leads us to believe that number will change.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [43]

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Got it. Good to hear. Just -- and then on the backlog, it is great to see the fertilizer and food components contributing there in a meaningful way. Can you give us any idea how much of the backlog is in those, sort of, what I'll -- I guess I'll call a merging division. Is it coming up on, I don't know, 1/4, 1/3, 1/2 or is it still sort of a much smaller percentage of the overall backlog?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [44]

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It's a smaller percentage of our overall business. feed and -- sorry, fertilizer and food today would depending on the quarter, of course, comprise 10% to 15% of our total sales. Now the backlog by platform can vary from quarter-to-quarter. But fertilizer and food are growing pieces of our business.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [45]

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Got it. And then just my last one here, still on the backlog. We talked a little bit about the trade tensions and how things are normalizing a little bit, but just to be totally clear as things get a little bit better. Have there been projects, I guess, any meaningful projects that have been taken out of your backlog with the changes in sort of the global picture there?

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Tim Close, Ag Growth International Inc. - President, CEO & Director [46]

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Not out of backlog, Greg. There's plenty of -- on the pipeline projects that are on the sort of drawing board around the world. There's changes in timing of those. There always is, but maybe there has been more throughout '19 than previously, but the backlog is solid, nothing -- no changes there.

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Operator [47]

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(Operator Instructions) Your next question comes from Steve Hansen with Raymond James.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [48]

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Just a follow-up on Brazil manufacturing efficiencies, which you cite in the release. I recognize it's still relatively early innings here, but can you just give us a sense for where your utilization levels might be at your new site. I know you sized that for future growth. But I'm just trying to get a sense for what degree of scale benefits we still have to realize as the sales ramp up here? Are you -- just rough magnitudes where utilization sits?

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

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Well, I mean, you've seen it, Steve. It's -- obviously, it has a lot of capacity, and we're nowhere close to it. I guess, it would be a high level way to answer your question. So we have plenty of room to grow within that facility and plenty of room to improve on our manufacturing margins.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [50]

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Okay, fair enough. And then just on the sales cycle in Brazil and the ability to get third-party credit to facilitate sales that's been an obstacle historically. Just wanted you to describe some of the efforts that you're taking down there to allow that fluidity or that capital to be available for third parties to see at the sales cycle moving?

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

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Right. So the government financing is, as it has always been, it's slow to make it way to the farmers. So some of it doesn't make its way to the farmers. However, what we've done, as we've discussed in recent quarters is, a provided alternative financing through what's called the CPR, where we will accept as collateral, the crop of a farmer. And it's a very well-recognized, efficient, legal instrument in Brazil, and it's a very favorable instrument for us in obtaining new farm business in Brazil.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [52]

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So you're recognizing traction on those efforts then?

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Steve Sommerfeld, Ag Growth International Inc. - Executive VP, CFO & Corporate Secretary [53]

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Absolutely. It's a key piece of our sales strategy. And as our sales team becomes more mature and more, I guess, familiar with the instrument, which they are now. It's relatively new in our space. We believe that will accelerate in future quarters.

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Operator [54]

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And there are no further questions at this time. Please proceed.

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Tim Close, Ag Growth International Inc. - President, CEO & Director [55]

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Okay. Thank you. We'll close it out there. Thanks very much for participating.

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Operator [56]

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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.