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Edited Transcript of AJX.TO earnings conference call or presentation 13-May-20 3:00pm GMT

Q1 2020 Agjunction Inc Earnings Call

HIAWATHA Jun 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Agjunction Inc earnings conference call or presentation Wednesday, May 13, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Deborah Mack;Interim CFO

* M. Brett McMickell

AgJunction Inc. - President, CEO & Director

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Conference Call Participants

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* William Fred Nicklin

Circle N Advisors, LLC - Senior Portfolio Manager

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Presentation

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Operator [1]

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Good morning, everyone, and thank you for participating in today's conference call to discuss AgJunction's financial results for the first quarter ended March 31, 2020. Joining us today are AgJunction's President and CEO, Dr. M. Brett McMickell; and Interim CFO, Deborah Mack. Following their remarks, we'll open up the call for your questions. All the materials, including the press release announcing the company's results, were issued and filed yesterday and are available on the SEDAR database or on the company's website at agjunction.com.

I'd like to remind you that this call is also available via webcast at the company's website, and a replay will be accessible until May 27.

Before we go further, I'm required to provide the following statements regarding forward-looking information, which may be made on behalf of AgJunction by its representatives on this call. Remarks and answers to your questions today may contain forward-looking information about future events or the company's future performance. This information is based on certain assumptions made by management and is subject to known and unknown risks and uncertainties that may cause actual events or results to differ materially from those anticipated in such forward-looking information. There is no assurance given that such forward-looking information will prove to be correct, and actual results could differ materially from those anticipated in such forward-looking information. Any forward-looking information is made as of the date of this call, and AgJunction disclaims any intent or obligation to update any forward-looking information whether because of new information, future events or results or otherwise, other than as required by applicable securities law. Please read the forward-looking information and Risk Factors sections in the company's Management Discussion and Analysis dated March 31, 2020, and the forward-looking statements section of the company's press release dated March 12, 2020, as these sections outline the company's assumptions and the material factors, which could cause or would cause actual results, events or performance to differ.

I will now turn the call over to Deborah Mack, AgJunction's Interim CFO.

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Deborah Mack;Interim CFO, [2]

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Thank you, Chris. Good morning, everyone, and welcome to our first quarter 2020 earnings call. This time around, we are going to structure our call differently than we have in the past. I'm going to start out by reviewing our quarter's financial results and highlighting our strong liquidity position. Then I'll pass it over to AgJunction's President and CEO, Dr. Brett McMickell, for a more in-depth discussion on progress with our refined strategy and current COVID-19 environment.

Before we go into the financial results, I want to remind everyone that we've completed the final shipments of our bulk purchase order in the third quarter of 2019. As a result, we had challenging financial comparisons during the first quarter that will continue through the third quarter of this year as we will no longer be generating revenue from the bulk purchase order.

Now turning to our financial results. Total revenue in the first quarter was $5.2 million compared to $14 million in the year-ago quarter. Removing $8.7 million in revenue generated from the bulk purchase order during the quarter -- the first quarter of 2019, sales were nearly flat, reflecting the progress we have already made in our refined strategy. Breaking down sales by geographic region, sales in EMEA were $0.7 million compared to $9.0 million in the year-ago period. The decline was due to the first quarter of 2019 having significant revenue generated by the bulk purchase order. Sales in the Americas were $4.0 million compared to $4.7 million in the year-ago quarter, primarily driven by lower demand in the United States within our bar channel. Sales in APAC increased to $0.5 million compared to $0.3 million in the first quarter of 2019 as a result of increased demand from our flexible modules in Japan and China. Gross margin in the first quarter increased significantly to 56.6% compared to 41.1% in the first quarter of 2019. The margin improvement was primarily driven by an increase in flexible module product mix sold, a reduction -- a reduced impact from the lower margin bulk purchase order sales and less manufacturing costs due to streamlined processes. Total operating expenses declined to $3.6 million compared to $5.7 million in the year-ago quarter. The improvement was primarily driven by cost savings initiatives from our consolidated strategy, including a reduction in staff and a closure of our facilities in Brisbane, Australia and Fremont, California.

Net loss in the first quarter was $0.7 million or a loss per share of $0.01 compared to net income of $0.1 million or 0 per share in the year-ago quarter. While EBITDA in the first quarter was $0.5 million compared to $0.6 million in the first quarter of 2019. The decline was primarily driven by the decrease in revenue related to the bulk purchase order.

Now moving to our balance sheet. Cash and cash equivalents at March 31, 2020, totaled $15.6 million compared to $17.2 million at the end of 2019. We also remain debt-free and have full access to our $3 million line of credit. This strong liquidity position provides confidence that we are well positioned to weather potential challenges that may arise in the current operating environment.

With that, I'd now like to turn the call over to Brett to provide more details on the momentum we are having in our refined strategy and the effects we are seeing due to the COVID-19. Brett?

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M. Brett McMickell, AgJunction Inc. - President, CEO & Director [3]

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Thank you, Deborah. Good morning, everyone, and thanks for joining us on our first quarter 2020 earnings call. On today's call, I'd like to review 3 main points: one, the impact of COVID-19; reduction of stated capital; and three, early results from our refined strategy. I want to state that the health and safety of our employees remains top priority for our organization. As we reported on our previous call, we've implemented a work-from-home policy to protect our employees and are following all protocols issued by government at local, state and federal levels. We have been fortunate to work through the lockdown without any layoffs or furloughs. While the operating environment over the past few months due to the COVID-19 pandemic has been unprecedented, we believe the first quarter reflected the momentum of our refined strategy as OEM of our customers further understand the unique value proposition our flexible modules have to offer. We also continue to show progress in our direct-to-consumer channel with our Wheelman products. In fact, demand for both indirect and direct channels exceeded internal expectations for the quarter.

During my last call, I mentioned the efforts to mitigate a disruption in our supply chain due to COVID-19. Unfortunately, we've experienced some shipping delays due to shortages in components and limited-freight options. We appreciate our customers' patience as we work through these delays. AgJunction's operations team has been working tirelessly with our manufacturing partner on locating and integrating alternative suppliers across the globe to meet the demand and recover our schedule. While we don't believe this to have any material impact on our financial results at this time, it is certainly possible that these delays may have a negative effect on future orders. Many of our OEM customers shut down production during a lockdown, which has delayed qualification testing and new product introduction. However, over the last couple of weeks, OEMs have notified us that they are beginning to manufacture again. Although we've seen some delays, we have not received any significant cancellations at this time. During this unprecedented time, we've also been cautiously managing all operating expenses and meticulously combing through our costs to see where we can reduce nonessential spending. However, we have not reduced our R&D spending during this time and intend to come out of this period stronger. I'm incredibly proud of our -- incredibly proud of how our team has adapted to the current time and for their performance in Q1. AgJunction is not backed away from this challenge and remains committed to bolstering our values for our customers and shareholders. At our upcoming Annual General Meeting on June 4 and included in our information circular, shareholders will be asked to consider a special [resolution for] stated capital account maintained in respect of the common shares by $125 million. Decreasing our stated capital will provide the company with additional flexibility to pay dividends or to repurchase its common shares if and when the Board determines it's appropriate to do so. The proposed stated capital reduction will have no impact on our day-to-day operations and will not alter our debt arrangements or financial condition.

I want to conclude my statements with an update on the early results of our refined strategy. To reiterate, the 3 key priorities of our refining strategy are: one, refocus on manufacturers and suppliers or as we label them OEMs and VARs; two, offering flexibility through modularization; and three, realignment of our capital resources. Results from implementing our refined strategy are exceeding internal expectations. In our indirect channel, our modularization approach has created significant results from our current and potential OEM and VAR customers. These customers are able to benefit from our innovative and best-in-class technology without purchasing a full auto-steering system. In fact, we are working with OEM and VARs on joint development projects, extending our modularization approach. We expect to provide more details on these initiatives in the coming months.

In the EMEA region, we continue to work on transitioning our auto-steering system into OEM production. Although COVID-19 has delayed production orders, we expect to start limited production orders with at least 1 EMEA OEM in the second half of 2020. We also attribute the success that we've seen across our regions to the realignment of our regional sales and customer support teams that we discussed on our last call. By having our teams report directly to the regional general managers, we've increased our customer responsiveness and continue to identify areas where both current and potential partners could benefit from integrating our components into their machinery.

Moving forward, we expect the momentum in our direct channel to continue. In fact, our backlog for second quarter has already exceeded our internal expectations as 2 new APAC OEM customers begin receiving production shipments. I also want to reiterate, as we grow our sales of flexible module components, we expect to bolster our financial position given the higher margins of these products.

Moving on to our direct channel. Our direct-to-consumer Wheelman products are also -- also performed better than expected. This channel continues to grow without any additional investment and is expected to continue despite unusual macroeconomics created by COVID-19. We attribute much of this growth to the significant amount of interest we continue to generate through word-of-mouth and industry trade coverage. Our data shows strong demand for our product for farms between 200 acres and 700 acres, which indicates that our products are reaching small farmers as intended. Due to strong inbound demand, AgJunction started shipping our Wheelman precision agricultural solutions to customers throughout Canada. Overall, we remain confident in our refined strategy and expect our sales trajectory to improve as we provide some of the most innovative components in industry. We've received positive feedback from customers across all of our channels and believe we're on the right path going forward. Our refined strategy, the realignment of our capital resources by consolidating facilities and reducing operating expenses and our strong liquidity position, we believe has us well positioned to successfully navigate this current environment and to continue to meet the evolving needs of our customers. We have an energized team that is ready to propel AgJunction through its next chapter, I look forward to providing you with updates on our progress along the way.

With that, I'd like to turn the call back over to the operator for Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Bill Nicklin with Circle N Advisors.

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William Fred Nicklin, Circle N Advisors, LLC - Senior Portfolio Manager [2]

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Congratulations to you and your team, it's the first time I can remember where the stock ever had a pop on a conference call today. I noticed, as you mentioned, that AgJunction rolled out Wheelman in Canada, and also that there is a lot of positive blog chatter. In fact, I think even of this morning there was a video of some farmer through up there. How do you view this kind of what is driving it? How do I put it in perspective? And then you kind of touched on it, but maybe you can go into a little more detail about how Wheelman is ramping versus 6 months ago? And then, again, you touched on somewhat with the size of the farm, but has there been any shift in purchaser profile?

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M. Brett McMickell, AgJunction Inc. - President, CEO & Director [3]

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Okay. On the Wheelman products, one reason that we moved the capital is just with the uptake in the agricultural market. Farmers require people to show them that it works. And so the word-of-mouth is actually very powerful for the agricultural market. You're seeing people now using it through the planting season, posting their own videos and actually -- basically doing our advertising for us. And that's been positive. We've had incredible positive remarks on the ag chats, and it's really exciting to see people so excited about our product that they're filming their own YouTube videos and putting it online. It just shows the strength of that Wheelman product. It took us a while to get it into the market. And really get the software and the product aligned to that market. And we feel like we have a very strong product now as demonstrated by our customers.

Regarding the size of the market, we have -- we've really got a slightly bimodal market. We do have the strength in the small market, which is why we -- the intention of developing the Wheelman product was to provide smaller farmers an opportunity to use auto steering. And we've got data now showing that we are, in fact, addressing that market. And people that have never had auto steering now are buying the Wheelman and have that ability. And I think that's what's lending itself to some of the positive comments as people who never had access to this, now have access to a very technically advanced auto-steering system. We are also seeing, though, that on the larger farms, the more commercial farms, we're also seeing some pretty strong interest in the Wheelman product as well.

Regarding our sales. Our sales are definitely above where they were 6 months ago by a significant amount. And we're continuing to see strong sales even as you would expect the ag season to come down. We're still seeing strong demand for our Wheelman products.

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William Fred Nicklin, Circle N Advisors, LLC - Senior Portfolio Manager [4]

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Great. Along the same lines, how does the time and money spent on Wheelman in the past, how does it show up in the product today? Like what are the features, the capabilities, all the money that was spent, what kind of enhancements have been made? And what kind of enhancements do you think you'll see in the future?

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M. Brett McMickell, AgJunction Inc. - President, CEO & Director [5]

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Yes. So the investment in the Wheelman developed a platform system. And so we need to look broader than just the products themselves. But tangibly, what came out of it were the 2 Wheelman products that you see on handsfreefarm.com. The Wheelman Pro, which is a high torque and Wheelman Flex. In addition to that, is the Whirl infrastructure. So we have a Whirl app that provides the guidance as well as the auto-steering feature and a lot of capabilities in terms of job tracking were added and additional features, some limited mapping as well. We also have a cloud application that allows us to push updates. And allows users to store. And it also -- one of the main benefits from being a web product is it allows our global customer care to provide support to the farmer without having to do truck rolls. So we can look at log files online and help farmers if they're experiencing any trouble. So all of that came with the investment. Additionally, those products have translated over into our OEMs and VAR customers. So we have integrated the product line with our new MDU-G5 TORQUE, which was announced earlier this year. That product works with our existing ECU-S1 to provide a high torque electronic steer, auto-steering system. And we've integrated all of that with our terminal software. So you can now have the Wheelman product, the MDU-G5 TORQUE, so the high-torque steering well, working with our terminal software for more advanced mapping features, variable rates, the ISO control. So it's a really incredibly flexible product line and has many modules and can be adapted to our customers' needs. And so where we're seeing the innovation build on our Wheelman investment is really in the OEM and VAR market right now, both from a Whirl side, a cloud infrastructure side as well as the integration with the rest of the platform.

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William Fred Nicklin, Circle N Advisors, LLC - Senior Portfolio Manager [6]

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Great. In your -- you guys put out a great report on SEDAR, it's called the 2019 Annual Information Form. A lot of great stuff in there. But anyway, one of the things that they mentioned again, as you got into with the cloud and certain quotes, it's a referenced features. So I won't leave you hanging here, I'll read it. It says, AgJunction recently announced GeoSurf Corporation of launching an agriculture solution for rice and onion planters based on the company's Wheelman technology and using the Whirl Cloud infrastructure. AgJunction's engineering team has developed features and a class specifically designed for manufacturers and suppliers such as to support their customers with updates. The Geo is the first customer to utilize Wheelman Technology and the new Whirl Cloud infrastructure. So I'm trying to get an idea what the features are that makes this attractive to your customers and opens up more possibilities down the road for newer customers. So again, the question is, the referenced features, what are they?

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M. Brett McMickell, AgJunction Inc. - President, CEO & Director [7]

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Right. So as I mentioned, the Whirl Cloud was initially developed for our direct-to-consumer. What we've been able to do is adapt the cloud infrastructure. It was a very strong infrastructure and has ported well globally. We've been able to adapt it so the OEMs have a portal, so that they have access and can provide support directly to their customers without seeing or being interfered with by other customers. So there's an OEM portal or OEM VAR portal that they can go in and service their customers, password resets, push up dates as well as customer support, and that translates over. So as it's a tiered-escalation system from a support standpoint, the OEM and VARs manage their customers directly. And then if there's an issue, once again, the global customer care team can work with the OEM all over the cloud infrastructure and address those issues, look into them online, once again without a truck roll. If there are issues with updates or software, we can push those updates over the cloud and basically update in real time, if necessary. So that's some of the features that are being -- that the OEMs are really enjoying right now. Of course, there's the management of the customers as well. But the infrastructure in terms of broader capability, we've got a lot more functionality that can be added to the cloud, and we're exploring that right now. And so I'll be releasing some more details around some of these additional feature sets, as we go forward. But you can imagine, the capability now available to us with processing on the cloud and using connectivity in order to link the cloud and the actual vehicle.

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William Fred Nicklin, Circle N Advisors, LLC - Senior Portfolio Manager [8]

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Great. Jumping a little bit to maybe a broader subject. I noticed on AgJunction's website, there's been a migration from "guidance and steering to controlling things that move" as your tagline. Kind of what are the implications of that? What kind of -- what drove you to make that change, what's in your mind or the company's mind about that statement controlling things that move versus just guidance and steering?

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M. Brett McMickell, AgJunction Inc. - President, CEO & Director [9]

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Yes. So that change. It was a subtle change that was done last year. Right now, of course, with the new refined strategy, we're reassessing the branding and the messaging that goes out. But really that change was a first reflection of our ability to address the market outside of just steering and guidance. This goes in line with where we're going with the refined strategies, looking at automation and autonomy. And that extends well beyond the steering. So that was the first step, but we are looking at the overall branding and messaging to make sure that we're getting out the details of our refined strategy and the capabilities of AgJunction.

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William Fred Nicklin, Circle N Advisors, LLC - Senior Portfolio Manager [10]

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All right. I'm -- the way I understand things is kind of how they work. So this idea of automated and autonomous, can you help me out with what the difference is? And what it means for you? And what it means to your different customers as they roll these out in their own initiatives?

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M. Brett McMickell, AgJunction Inc. - President, CEO & Director [11]

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Absolutely, Bill. So automated is basically taking some of the functionality that maybe a human would have done and automating that task. And an example is some of the tasks that need to be done at a headland, not only do you have to steer the vehicle around at a headland, but usually, there's a number of additional task, turning off nozzles, lifting up booms. So those types of tasks can be automated. It's not an auto-steering system. It's really an automated system. When we're talking about autonomous, it's really looking at replacing the driver with full autonomous control of the vehicle. And so that's -- you can kind of look at it as a scale where you've got auto steering. There's that autonomous scale that's already out there, level 1, level 2 autonomy. And so it's just that scale is we're progressing from more and more automated features until we get to a point where we've got autonomous -- fully autonomous control.

In terms of customers, some customers are more interested in automated, repetitive tasks on the vehicle, such as headland automation or the additional tasks that we're working with our customers on automating. And then other customers, we're working on a couple of initiatives looking at more fully autonomous applications. And so we're using our test site to do evaluations on full autonomy, including obstacle detection and every -- all the other elements that come with the full autonomy.

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William Fred Nicklin, Circle N Advisors, LLC - Senior Portfolio Manager [12]

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All right. On the last conference call, I was pleased to hear you saying that as you started calling around your -- the customers, there was pretty good uptake on kind of what you call your refined strategy for emphasizing cooperation and joining in a team with the customer and that sounded good. Do you have any more evidence of that? Is that -- was that just "It's nice to meet you, Brett," kind of talk? Or can you -- is there really more evidence that this is having some traction?

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M. Brett McMickell, AgJunction Inc. - President, CEO & Director [13]

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No, there's a lot more evidence. As a matter of fact, the conversations we've had have only expanded now as we're really engaging to the next level beyond the "It's nice to meet you, I see you've got a refined strategy. Thanks for listening to me." But what we're finding is that there are a lot of unmet needs that the customers have, and we just weren't listening to them. And so now we're actually engaged in some -- in building up some commercial deals to go and address those unmet needs, using our flexible modules. So we're seeing adoption of our technology. As I mentioned in my previous statement, we're seeing customers come in and buying those -- buying our products and buying them in different ways than we've been able to sell them in the past. We've already seen -- we've already shipped our MDU-G5 TORQUE product. So the new products are taking into market. And we've got a backlog on MDU-G5 right now that we're working through. So the new products we're selling, there's already strong interest in the new products. And the flexible modules, we already have people working on integration. And because of the way that we're providing our support now, we're seeing them be able to integrate our product faster than they have in the past, which is why you're seeing now the conversation about OEMs now coming online for production. I know there's been some questions about what's the timing of this. And it does take time to get an OEM get through all the qualification and get an OEM up and running. But with our new integration, our new tools and the way that we're interfacing with the customers, we're seeing them be able to integrate the products in a shorter amount of time. So we're trying to decrease that cycle time to adoption.

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Operator [14]

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(Operator Instructions) All right. At this time, this concludes our question-and-answer session. I would now like to turn the call back to Dr. McMickell for closing remarks.

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M. Brett McMickell, AgJunction Inc. - President, CEO & Director [15]

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Thank you, Chris. Thank you for spending time with us this morning. I look forward to speaking with you when we report our second quarter results in August. Thanks again for joining.

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Operator [16]

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Ladies and gentlemen, this does conclude today's teleconference. You may now disconnect your lines at this time. And thank you for your participation.