Ag Growth International Inc. (OTCPK:AGGZF) Q2 2022 Earnings Conference Call August 11, 2022 8:00 AM ET
Tim Close - President and CEO
Jim Rudyk - Chief Financial Officer
Conference Call Participants
Jacob Bout - CIBC
Michael Doumet - Scotiabank
Andrew Wong - RBC Capital Markets
Gary Ho - Desjardins
Steve Hansen - Raymond James
Matthew Weekes - IA Capital Markets
Tim Monachello - ATB Capital Markets
Michael Robertson - National Bank Financial
Thank you for standing by. This is the conference operator. Welcome to the AGI Second Quarter 2022 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity for analysts to ask a question. [Operator Instructions]
I would now like to turn the conference over to Tim Close, President and CEO of AGI. Please go ahead, sir.
Good morning. Thank you for joining Jim Rudyk and I to review our second quarter results and outlook for the remainder of the year. Our diversified business model and the robust demand we are seeing across all segments continues to produce strong results, with double-digit sales growth and expanding margins leading to a record second quarter.
Despite regional disruptions and persistent supply chain issues, we have now announced three straight record quarters in a row. AGI is uniquely positioned as a supplier of critical food infrastructure globally.
Increasing population, rising food and feed consumption and expanding crop volumes underpinned the fundamental demand for AGI products through geopolitical and weather events, as well as economic cycles. We expect our pace of high organic growth to continue, enabling sustainable growth, while maintaining a focus on steadily deleveraging our balance sheet.
Let’s turn to some highlights from the quarter. Brazil remains a key highlight for AGI, with second quarter sales up 80% year-over-year. Strong demand for farm system sales were complemented by steady results in the Commercial business, as the entire Brazilian sector, from growers to inland terminals and ports, increased the pace of investments into new capacity and increased throughput to eliminate waste, increase productivity and keep up with expanding crop volumes.
Recently, we completed the transfer of additional products from the U.S. to Brazil for fertilizer products, enabling local production, along with local engineering and sales resources. This is consistent with our global strategy of having complete platform capability in each region. Expanding our product catalog and solutions in Brazil will help support continued gains in market share and sustain our high rate of growth within this opportunity rich environment.
While we have strong year-over-year comparables in Brazil, our Brazilian backlog is up 91%, and our sales pipeline is at record highs in the region. With these dynamics, we expect a trend of strong growth from this region to continue through the remainder of the year.
Our Farm segment posted 28% year-over-year growth, with strong results in several geographies, including Canada, the U.S. and South America. Canada was able to bounce back from a tough first quarter as the effects of the 2021 drought began to fade and planning for a significant year-over-year increase in grain output takes shape across the region. Towards the end of Q2, signals of a lift in demand in our sales pipeline began to materialize in Canada Farm and this has continued into Q3.
The U.S. Farm business delivered a robust second quarter, with both strong sales and backlog growth as demand for critical portable handling equipment was augmented by success in deepening our penetration of farm system dealers. Overall, momentum in this key market continued into Q3 and we have good visibility for a strong second half.
While the last several years have been unprecedented in terms of volatility and uncertainty across the broader economy, our Farm segment has proven that the demand for AGI products is relatively inelastic and critical to grow our operations. In addition to extensive distribution channels and growing market share, our Farm segment is well-positioned to drive further growth in the second half of 2022 into 2023 and going forward.
Our Commercial platform posted 20% growth in the quarter, with significant contributions from the North American Commercial team. In Canada, our Commercial platform sales were up just over 100% as the grain and fertilizer sector resumed investment programs, following a pause in activity post a significant build-out in 2020 and 2021. We anticipated an increase in activity given the uptick in quoting and pipeline activity, which began in Q4 of 2021 and accelerated into the first half of 2022.
In the U.S., sales grew 23%, as new projects were complemented by a steady flow of recurring maintenance and upgrade work. Our ability to accelerate growth and capture new opportunities has been supported by our North American Commercial reorganization efforts, which we have highlighted in prior calls.
While it’s still early days for our Chicago office, we have made significant progress in bringing together key functions from across the organization in sales execution, product management, customer success and applications engineering to heighten our customer focus. It’s a very positive signal to see these efforts drive early results and we expect the trend of continued growth in our North American Commercial business to be sustained.
In EMEA, the Commercial platform was flat in the quarter as the loss of work in Russia and Ukraine was offset by other opportunities from the region. Our team quickly pivoted to develop new opportunities and replace these volumes. We are well-positioned to play a significant part of the eventual rebuild in the region.
Our India business continues to demonstrate consistently strong growth, with sales up 38% in the quarter. India has now become a meaningful contributor to overall AGI results with accretive margins to our consolidated profile. Looking ahead, India has multiple avenues for additional growth.
Our Food platform is among the strongest areas of growth across AGI. Sales were up over 100% in the quarter or approximately 55% after adjusting for the acquisition of Eastern earlier this year. Very strong industry-wide demand, growth within the strategic accounts and positive customer reception to our design, supply, manage model have all combined to maintain a rapid pace of growth.
The total addressable market for the Food segment is by far the largest across all of AGI’s businesses and we see a long runway for additional growth ahead as we integrate Eastern, expand the team, win work with new accounts and steadily penetrate new geographies, such as APAC and South America.
Turning to our Digital segment, record Q2 order intake and our continued focus on expanding our sales channels and dealer network helped support sales growth of 31% in the quarter. We ended Q2 with a higher backlog than we would like to see in this business, which would have augmented sales growth had we been able to increase production.
Access to components critical for production is still a hurdle for AGI Digital, as well as the broader industry, and again, constrained sales in Q2 as key inputs required for production had long lead times.
Of note, AGI Digital and Truterra signed a partnership agreement in the quarter, which aims to increase carbon market access and participation by Truterra members. Truterra is the sustainability solutions arm of one of the largest farmer-owned cooperatives in the U.S., representing over 300,000 growers.
This pilot project will combine AGI Digital’s ability to collect significant field activity data via our Farmobile PUC with existing Truterra sustainability tools used by Truterra’s grower network. This will improve their data entry, accuracy and consistency issues, eliminating common hurdles to common credit market participation. We look forward to advancing this partnership and playing a lead role in helping develop carbon credit markets.
A quick note on inflation, as this continues to be a key headline across the global economy. Steel prices have eased but are still elevated. Supply chain constraints are slowly reducing, but in an uneven pace across all regions.
While the situation is not ideal, it is less disruptive than the extreme volatility witnessed through much of 2021. Throughout that time, AGI developed and honed several standard processes to manage input cost escalation to ensure we are preserving our margins.
These tactics, initially applied to steel, have driven the pass-through of cost inflation for other inputs such as labor, freight and components. Our ability to deliver strong margin expansion in the quarter highlights the ability of our teams to effectively manage and mitigate the difficult cost environment.
With the backlog towards the high end of our typical four-month to six-month range and a very strong pipeline with climbing win rates, we have excellent visibility into the second half of 2022. Our confidence in the full year outlook continues to increase, and, as a result, we have raised our full year adjusted EBITDA guidance from at least $200 million to at least $215 million. This will carry AGI to another record year in 2022 and we expect the momentum to continue into 2023.
I will now hand the call over to Jim to review the quarter in more detail.
Thank you, Tim, and good morning, everyone. For today’s call, I will cover four topics; first, I will provide a brief overview of our second quarter results; second, I will discuss our balance sheet; third, I will provide some commentary on our cash flow; and finally, I will provide an update on our outlook for 2022.
Our second quarter results continued the momentum from prior quarters by setting another record result for both sales and adjusted EBITDA. Consolidated sales of $390 million were up 29% from $302 million year-over-year, with growth in all segments and all geographies except our EMEA region, which was flat.
Adjusted EBITDA of $66.1 million was up 43% from $46.2 million year-over-year. Adjusted EBITDA margins expanded by 160 basis points from 15.3% to 16.9%, the highest margin in any quarter since Q2 2020. Pricing management, cost control and scaling on an increased revenue base helped capture incremental gross margin.
Farm segment sales and adjusted EBITDA grew 28% and 23%, respectively, in the quarter. Adjusted EBITDA margins declined slightly from 25% to 24%. Strength in Canada, U.S. and South America all drove the strong results as fundamental demand for our products critical to grow our operations remains robust.
Consistent with our messaging from Q1, Canada continues to recover from the extreme drought from last year and we expect to see continued momentum in the Farm segment overall during the second half of the year.
Commercial segment sales and adjusted EBITDA grew 31% and 102%, respectively, in the quarter. Adjusted EBITDA margins moved from 9% to 15% year-over-year, as product mix, volume increases and SG&A scaling, all contributed to the expansion, particularly within the Commercial platform.
The Digital segment posted sales growth of 31% in the quarter. Adjusted EBITDA of negative $1.1 million is a significant sequential improvement, as our expanded sales and gross margin profile was partially offset by SG&A investments to set up and prepare this segment for rapid growth and product development.
The trend of improving order intake continued in the quarter, up 45% year-over-year, as our efforts to expand sales channels gains traction, but sales were again constrained by industry-wide chip shortages and availability.
The outlook and strategic importance of our Digital segment remains bright, but the supply chain constraints will be a challenge for the foreseeable future.
Turning to key balance sheet metrics for the -- from the quarter. From a working capital perspective, our investment in non-cash net working capital increased from $226 million to $274 million quarter-over-quarter, but declined as a percentage of sales, moving from 19% to 18% on an annualized basis. The dollar increase was driven primarily by our strategic investment in inventory, as well as an increase in accounts receivable, partially offset by an increase in accounts payable.
Given our very strong sales growth, there is a natural progression to increase the dollar investment required to support accounts receivable. However, we note that our primary key performance indicator for monitoring accounts receivable levels DSO, continued to trend downwards in line with our strategic objectives to manage non-cash working capital.
In terms of inventory, given the ongoing supply chain environment, we made the decision earlier this year to invest in our steel inventory to ensure we can meet strong customer demand and maintain high levels of on-time delivery. This is a temporary measure designed to manage the current environment and is reflected by a rise in our DSI levels over recent quarters.
We do not expect this level of inventory to be required as a part of run rate operations into the future and anticipate that inventory intensity will begin to moderate in the second half of the year, as supply chain pressures gradually abate.
Our growing adjusted EBITDA continues to support our deleveraging objective. Our senior debt-to-EBITDA ratio sits at 2.7 times exiting the quarter. This is down from 2.8 times in Q2 2021 year-over-year and 2.9 times in Q1 2022 sequentially. We have sufficient room against our covenant of 3.75 times and we do not have any bank covenant concerns.
While we are comfortable with our covenants throughout 2022, we will continue to focus on managing the overall balance sheet with a clear objective to continue deleveraging. On an all-in net debt to adjusted EBITDA basis, we expect the ratio to trend towards the 4 times level from its current level of approximately 4.8 times by the end of 2022.
We have approximately $167 million in available undrawn credit facilities and $55 million of cash on hand. We closely monitor our liquidity position, ensuring we are flexible to react quickly to new opportunities.
Funds from operations grew 52% year-over-year to $49 million, though some temporary items impacted the conversion of this into cash on our balance sheet, including a strategic increase in non-cash working capital and underwriting and note repayment fees related to financing activities.
We view these items as largely transient and unrelated to the fundamental ability of our operations to generate and harvest cash. Cash flow management and optimizing our credit facilities are a key focus across AGI and will be an area we monitor closely in the second half of 2022 and beyond.
And finally, turning to our outlook for the upcoming year, supported by a strong backlog up 19% year-over-year and at near-record levels, as well as significant quoting [ph] activity across many regions, we expect full year adjusted EBITDA to be at least $215 million in 202,2 with growth weighted particularly towards Q3.
Thank you very much for your time. And with that, we will turn it back to the Operator to take any questions.
Thank you. [Operator Instructions] The first question comes from Jacob Bout with CIBC. Please go ahead.
Good morning, Jacob.
Good morning, Jacob.
Yeah. A question on the -- maybe just start off on Brazil, another strong quarter, I think, you said, backlog up, I think, better than 90% there. Maybe just talk a bit about what type of EBITDA you are generating there now. Are there capacity utilization constraints here, are you bumping up against this, are you thinking about expanding the plant and would you ever consider build a new plant there?
All right. Yeah. Well, look, that pace of growth there has been very, very positive, very robust now for quite a few quarters. So, yeah, we look at the debottlenecking and adding and I think we might have talked about this a little bit last quarter.
But we had -- when we built that plant, we had left some spots for expansion of certain production lines and we have recently added to those, we have been -- we have added from a laser capacity perspective and a gross rate perspective. From a weld cell perspective, we have been filling in those spots that we had left open when we initially built.
So that will be ongoing. We are right now, as we fairly regularly do at plants, we go through a leaning exercise across each process and look to debottleneck and be aware of where each of those critical and priority bottlenecks could be or will be and then get ahead of those. So -- but with this kind of growth, that has to happen and it has been happening more so there than anywhere else, I would say.
But -- so we are lifting production capacity. But it is a concern. Just a physical footprint is and from a logistics perspective is something we are addressing right now. And so we will add from both an equipment perspective and then, ultimately, yes, we will look at expanding that facility, just given the huge demand dynamics in Brazil.
And Jacob, just one follow-up on, I think, you asked about margin profile there in Brazil as well. So we are very encouraged and happy to note that Brazil is operating very, very effectively and efficiently. Their margins are where they need to be. They are -- we have mentioned this in the past, where they are in line with our corporate averages. We expect them to continue to stay strong as we continue to grow that business down there.
Sorry, in EBITDA generation?
Yeah. Sorry. EBITDA, sorry, I was referring to EBITDA margins, but from an EBITDA perspective, yes, it will -- it’s now fully online. Last year, we still had a couple of quarters early in the year where it was below our expectations, got online towards the middle of last year and it’s continued to hit its stride and continues to do very well.
So very positive contributor to our EBITDA, which is part of why you see our overall EBITDA margin is doing quite well as we benefit from the volume and the growth in these key areas we invested in in the past several years.
And then just on the Digital side, revenue and EBITDA down year-on-year and I know you called out the chip issue. But is this both a hardware and a software issue, and maybe just talk through the data verification space and how demand there is progressing?
In Digital, I mean, we saw a very good growth -- revenue growth in the quarter at about 30%, 31% revenue growth in Digital specifically. Would have been higher, I think, I noted the backlog in digital, we actually -- well, this is a division or a business where our goal, my goal is to have zero backlog, because we want to be configuring and shipping that equipment out the door essentially immediately. And we ended the quarter with a higher backlog than we would have liked.
And also order intake was higher than that 31% would represent, but constrained by production and supply chain. So --but still, despite those -- that disruption, we came in with very solid growth in our Q2, which is often an off quarter from a Digital perspective. Farmers are out busy and not that focused on the bin, tech or the IoT side. So I am pleased with the quarter in Digital.
The EBITDA side on digital was a drag, a slight drag in the quarter, but really because we have expanded our product development teams that are working on future releases of this products across AGI Digital.
So some investment continues here. It’s certainly a part of the business that we are very excited about, continue to invest in, but that -- as those sales continue to grow, that more than offsets within the division itself and then we get a knock-on effect across our whole business that get benefits from having availability and inclusion of the Digital products in our systems.
Interesting. And how is the carbon and traceability markets progressing?
Yeah. We noted we signed an agreement with Truterra, which is a leader in the carbon market space. So, Truterra, we have a project going with them where our PUC -- our Farmobile PUC is being included in -- with some of the generation of their carbon credits. So we are automating the collection of that field data and then feeding that into Truterra’s system to automate that collection and really validate and improve the value of their carbon credit.
So we are actually involved in quite a few of the carbon credit programs across North America. Most of them we have our PUC involved in and playing exactly that role, the fundamental infrastructure of data collection, Digital infrastructure collection of that data that feeds into these programs to validate the credits.
Is this primarily a Canadian product or?
No. It’s mostly U.S.
Okay. Got it. All right. Thank you very much.
The next question comes from Michael Doumet with Scotiabank. Please go ahead.
Hey. Good morning, guys.
First question on the working capital. Jim, I think, you previously indicated that you expect to retrieve, I think, most of the $80 million that was invested in Q1. So the working capital, I think, it’s about $125 million year-to-date. Obviously, the increase in the ARs, it doesn’t surprise, obviously, with the sales ramping here. But I just wanted to maybe get a sense, given the sales trend, how much of the $125 million increase you think you can get back in the second half?
Yeah. So the short answer, Michael, is that we expect to reverse all of that by the end of the year from a working capital perspective and get back down to our historical levels. As we have talked about in the past, our -- we do have a very strong program on working capital management.
The metrics we use are the underlying metrics, DSO, DSI and DPO. We are making great improvements in receivables and payables in terms of improving the DSO and DPO metrics. DSI we purposely let run up a bit at the start of this year, particularly with the events unfolding around the world and some of the concerns we had on supply chain management.
So we consciously extended out our orders for steel and other fixed -- other raw materials to ensure that we are able to fulfill the growing demands as you see us flowing through our business here right now.
However, we have now got a lot more comfort on our supply chain as the areas have stabilized quite a bit and we are now reverting back to traditional practices and managing inventory levels and so we expect that to fully reverse and free up that cash by the end of the year. So the full amount of the increase this year, we expect to be able to chip away and get most of that back by the end of the year.
Okay. That’s great. Thank you. And then maybe just a larger higher level picture, you are on pace for record revenue and EBITDA this year. Tim, Jim, I think, a lot of us are still trying to figure out how much of this is coming from a favorable cycle versus what is structural. Obviously, you have made significant investments in the last several years and those are starting to pay off. But any way you can speak to your confidence level you could build further on the 2022 EBITDA into 2023?
Yeah. Michael we are very confident on continued growth. This is really -- this is not a connection to any type of cycle. To your point, we have -- we are seeing the contribution now, the steady and consistent and ongoing contribution of the places we have invested in over the last five years.
So that’s Brazil. That really went from a start-up of build to now a solid contribution and profile there for continued growth across the Board and into -- not related to a cycle per se, but related to the fundamental investment in the infrastructure in that country.
Likewise, in India, contribution of that business, net-net new and growing and will continue to grow. We have expanded our product lines in India, so net benefit from leading market -- leading the market there in rice processing and then expanding our product lines into grain, so continued growth into additional end markets in that country in broader region.
Same story in APAC. Very, very much the same story in North America, our technology business now contributing and will continue to ramp up and grow and contribute more. Our U.S. Farm business we invested in over the last four years or five years, is a net new contributor to our business from a Farm systems perspective.
Now seeing an increased growth rate from our Commercial platform in North America, where we have spent many years now bringing together the right products and then the right structure and capabilities from an engineering design and then a sales execution perspective.
So this isn’t cycle related. This is fundamental contribution from places we have invested. So net-net new that, we are very much and consciously focus on the description of our business around food infrastructure.
Infrastructure investment carries on through geopolitical events, we are seeing that now and through economic cycle, and fundamentally driven by food and feed consumption. So it’s -- that’s the demand drivers here. That’s the fundamentals that we are seeing and we see a robust profile of that continuing to grow going forward.
That’s amazing, Tim. So high confidence levels. And maybe if I can sneak one in, can you comment on the other transaction and transitional costs in the quarter? And I am just guessing or trying to think here, if M&A is or does take a pause, if that expense should kind of zero out in the second half?
Yeah. The other transactional costs that you see running through there, it’s broken out approximately a third related to some earn-out payments for historical acquisitions, earn-out costs that we approved related to some historical acquisitions.
We have an ongoing forward plaintiff, a lawsuit in the U.S. for Digital patent that is about a third of those costs. And then the other third is related to some costs related to us integrating some of our facilities in the U.S., a couple of facilities that we have been able to relocate and move some of the production to other facilities, which is help -- helping drive notably some of the improvements you see in our gross margins in the commercial space.
The next question comes from Andrew Wong with RBC Capital Markets. Please go ahead.
Hey. Good morning. So I am just kind of curious like regarding supply and on the production side, demand obviously seems like it’s really strong right now. Are there any supply side restrictions that might come up that could prevent AGI from meeting some of that strong demand, like, for example, how the tech segment had some difficulties sourcing chips, like, on the rest of the business, could there be labor issues or anything else like that?
Yeah. Good. Short answer is, no. Nothing that isn’t very much manageable. Labor is generally tight, but is actually improving and so is supply chain. It’s --we are coming from rather severe supply chain environment. So anything less than that seems much easier these days. So from the supply side, we are in very good shape.
Okay. Perfect. And then just thinking broader, like, more strategically, now that Brazil and India looks to be up and running and trending really well, are there other geographies that you might now start looking to expand into kind of building on top of what you have done in those regions, which seems to have worked out really well? And would you consider maybe doing even greenfields in other geographies if maybe there aren’t any businesses that you can kind of buy into, like, what you did in those areas?
Yeah. For the most part, we have -- we now have complete operations in all of our key regions, in fact all of the key either grain production or consumption markets worldwide, except for China and we won’t be looking at China anytime soon.
And so right now, really, we have talked about this -- our AGI in terms of phases up to 2020 was really about that geographic expansion and establishing the footprint in each of the regions we wanted to be in.
So that was complete. The next stage is really around expansion of those businesses in those regions, which is what we are mid-stride on right now and seeing fantastic momentum and traction on doing so.
So we will continue to build in each of the regions we are in. We will continue to expand -- organically expand our product lines, our sales channels, and ultimately, see that manifest itself and the kind of growth that we are seeing right now.
So the short answer -- that was a long way of answering your question, but we are very excited about this phase where we are building out or organically building on the investment that we completed in the prior phase.
So we do not see any greenfield expansion -- geographic expansion right now. I think the only -- the one note, I would say, would be that Northern Africa in particular is a geography where we are growing and we are focusing on that is relatively new. Not -- that’s been growing over the last 24 months, will continue to grow.
But that’s really organic expansion of our capabilities in the region. We are adding sales offices throughout that region and seeing very good traction and pipeline build for opportunity. So, but -- and then that sort of same concept carries on into Southeast Asia, APAC around as we expand our reach from India.
Okay. Perfect. Thank you.
The next question comes from Gary Ho with Desjardins. Please go ahead.
Thanks and good morning. Just -- maybe just first question on the overall margins, pretty strong, 16.9%, maybe you can walk me through kind of the drivers behind it, the sticky price increases, the steel costs rolling over and maybe recouping some of the lost margins from last year, you can you quite a bit more color on that, that would be great?
Yeah. Hi, Gary. Thanks for the question. From a margin perspective, we have talked about, we have said this number of times now about our expectations to increase our margins back to historical levels by about 100 basis points to 200 basis points over the next year and a half, two years.
And really a big part of that is driven by a number of enhancements we have done internally from a pricing perspective. So our approach at pricing has evolved where we are a little more sophisticated in being able to respond to changes in input costs and make sure that those costs don’t hurt us as we fulfill those contracts.
We also are doing a number of things and investments in our capacity and our facilities. I mentioned about some of the integration things that we did earlier, which driving, we are able to scale on our SG&A line quite healthily and in some cases improvement from a gross management perspective.
Now we did benefit a little bit from last year. If you remember Q2 and Q3, we did have a situation where our margins were negatively impacted, because of the extremely dramatic increase in cost of steel that occurred that we had some projects shipping at lower margins than we would have, but we right-sized that with our pricing management and how we deal with some of the input costs and how we manage them now.
Yeah. Maybe as a follow-up then, you have reached your -- I guess, your historical levels 16%, 17%. So how should we look out for the balance of this year, should we flat line that or can we see a bit more improvement in the latter half of this year?
Yeah. No. You will continue to see improvement year-on-year. But just remember, just cautionary, there is some seasonality, mix plays an important role. And so Q2 and Q3 you have the Farm segment being very strong, and in particular, our portable segment of the Farm segment has much stronger margins historically and generally, and so they will skew the quarter margins to be slightly higher.
However, having said that, if you think about an annual basis, we will continue to improve year-on-year and quarter-on-quarter. For this year you should see improving margins as well, EBITDA margins, I am talking about.
Yeah. Okay. Make sense. And then my last question, if you can talk about the progress on the dealer onboarding and penetration in the U.S. Farm permanent side. You flagged this as a major organic driver?
Gary, great question. It carries on and we are seeing very positive momentum there over the last -- well, all of H1 and we expect to have continued progress for the remainder of the year and into next year. So it’s a key part of our strategy and we are seeing very good results.
And do you have internal targets, like, how many you want to onboard this year, anything you can share with us?
We do. We do have internal targets. Absolutely, we have got our priority accounts and we are actively building those relationships across the Board. So it’s a key component of building share, obviously, those channel partners are extremely important and we are really happy with our outlook there and results to-date, so. Yeah.
Okay. Great. That does for me. Thanks.
The next question comes from Steve Hansen with Raymond James. Please go ahead.
Yeah. Good morning, guys. Tim, can you just perhaps elaborate a bit more on the maybe recovery in Canada, I understand that the crop is looking a lot better. But just trying to get a sense for how confident farmers have been and are -- to what degree they are stepping up relative to last year. You had a few remarks in your prepared comments, but just like to hear a bit more about how that recovery is trending?
A little hard to hear, Steve, but good morning. I think you are asking about Canada and just a little bit more detail there. I mean, that drought last year was quite severe. So then you combine a drought with really high crop prices, canola, for instance, and all crops, like, canola and Canadian crop prices, I mean, have been very strong.
So, obviously, bins get emptied out and it’s somewhat constrained by logistical capability to get that -- all of that to port, but it’s -- that’s really -- the load out of those bins carried out throughout H1.
But, yeah, now much better crop dynamics going on in Western Canada, the farmers are very positive in general around that crop volume and so there is now an uptick in interest and demand across the Board from portable and then into storage and systems and permanent handling. That will continue to increase as we go through H2.
We would -- I think it sets up for a very strong 2023 and 2024. So the subdued demand in 2022, which by the way, we have had a very solid year despite in U.S. Farm. So -- and complemented, augmented by market share gains in some of our key products, and so all things considered in pretty good shape for this year.
And then -- but I am really excited about 2023, 2024 in U.S. Farm. I think it will -- our Canadian environment, it will set up, some of the make-up for the last 12 months, 18 months, will happen and inventories are going to be stocked towards the end of the year and into next year.
That’s helpful. Apologies for the connection. Just one last one, if I may, is on the leverage target, I think, you referenced 4.0 by year-end. Are you still comfortable with -- they -- maybe just describe where you would like to be sort of a normalized level of leverage as we look into next year.
Yeah. Well, we will start to bring, overall leverage will tick down to sort of 3.5%. Obviously, that puts a senior at a very good level, I mean, better -- even better than it is now, but put senior very good and overall at a very reasonable and appropriate place as we move into that 3.5 going into next year.
Okay. Appreciate the time, guys. Thanks.
The next question is from Matthew Weekes with IA Capital Markets. Please go ahead.
Good morning. Thanks for taking my questions. Just talking about supply chain again and just coming back to that, maybe you say things are kind of improving a little bit from that perspective and it seems like you are doing a pretty good job of sort of mitigating things there. But maybe comp -- supply chains is still relatively complex. I am thinking, besides sort of a lot of the sort of strategic inventory stocking that you are doing. Are there any other sort of specific measures you are taking at this point to mitigate supply chain risk across different areas of the business?
Well, good morning. The -- I think the question or the comment was around supply chain hedges. I mean, that essentially is what -- when we talk about strategic purchases, that is what we are doing.
We are matching supply to lock in our margins with -- as we build our backlog, so we are essentially, call it, dollar good in our backlog. And that has required or we made a decision to invest in that inventory to lock that in, just given the dynamics.
Lead times on supply in general are longer, have been longer, but probably more importantly, they are more unpredictable. And so we need to take that uncertainty out of the supply chain and we do that by a physical hedge in our inventory. And so, yes, it sees an uptick in working capital, but it also sees an uptick in both our certainty to supply and our certainty to meet customer expectations.
And those strategic, you call them strategic, because it adds to our profile and our customer -- our ability to delight our customers in an environment like this is absolutely adds to that and then all those things come together to mean we build share in each of our markets. So it’s an important part of our -- of how we are operating right now in this environment to give us certainty around supply and margins and growth.
Okay. Thanks. Appreciate that. And just one last question for me and you talked about sort of gaining and augmenting market share in certain product categories in the U.S. If you think about market size in the U.S., I am just wondering if you have any thoughts on sort of the growth there, sort of given positive trends that, I think, we are seeing in biofuels and regulations there and you think about the new Climate Bill and things like that, just any thoughts on sort of market demand trends given increasing biofuel use? Thanks.
Yeah. The biofuel is a positive element of North American demand both in Canada and the U.S. Our Farm -- just to note, I mean, it’s a good -- you raised a good point that we often don’t focus on. But our market share in U -- in Farm systems, U.S. Farm systems, actually Canadian Farm systems is much lower than our market share across other product lines.
And for us, that’s a very big positive, because we have the platform to continue to grow share. So it’s a large market, it’s a growing market with components that you have identified. The biofuel is -- will be a meaningful contribution to market size over the next five years in particular.
And our share is growing and will -- we believe accelerate our growth -- our market share growth within that overall large market. So U.S. Farm systems, Canadian Farm systems together is a substantial growth opportunity for AGI.
Okay. Thanks. Appreciate the commentary. I will turn it back.
The next question comes from Tim Monachello with ATB Capital Markets. Please go ahead.
Hey. Good morning, everyone.
Good morning, Tim.
Just looking at the guidance for $215 million or at least $215 million of EBITDA, that would suggest roughly a flat second half from the first half, Q3 is your biggest quarter. And over the last couple of years, Q4 and Q1 have been sort of comparable, but you have got a 19% building backlog going into the second half year-over-year, so fair to say that [Technical Difficulty]
We have a bit of a bad line I think in the sense. Yeah. Can you -- sorry, Tim, can you just repeat the tail end of that?
Sorry. Yeah. I was just saying that, based on that and the fact that backlog is up 19% to the second half, would seem to me that the guidance is on the conservative end, is that a fair statement?
Well, I think, in general, guidance is always going to be a little conservative. We -- but look, there is a -- yeah, as you extrapolate and do the math, we are -- and you look at those components that we have identified, growth in backlog, in win rates, in contributions. That’s what gives us the confidence and it’s why we said at least $215 million.
But, look, that still implies a strong close of the year and so we are confident on that number. And is there upside? Yes. Is there risk? Yes. Of course. So it’s -- we think it’s a good balanced place to be overall. I note the aggressive and robust growth across the business, but.
Okay. That’s helpful. Thanks for that. Second thing is just on Brazil, you guys have seen very substantial growth there. It’s becoming increasingly material to the business. I guess two parts to this question. One, at what point do you break out Brazil on a standalone basis, and two, like, over the next three years to five years, how big can Brazil be just in the context that the Brazilian agricultural market is one of the largest in the world, could it be something that’s comparable in size to Canada or the U.S. market in terms of materiality to your company?
Yeah. I mean sure. Brazil can be that large. It’s got years of growth ahead of it, right? It’s -- they are just starting a fundamental build of the infrastructure for, as you note, a huge growing and crop region. So there’s relatively very little there now and much that needs to be built.
So we expect continued growth to -- well beyond where we are now. I mean, I just note, it is a -- still I deem it emerging market that can have volatility. So we expect an upward trend that can have some ups and downs.
Okay. Can you estimate or just give some bookends to, I guess, the revenue capacity of that business without having to inject a meaningful amount of capital into it?
Well, I -- look, the -- we talked about off the top here, we are augmenting capacity to be able to continue to see and facilitate growth. And then, it -- we will to get -- if you wanted to talk about 50% or 100% increase over time in that business, it will take more investment from a CapEx perspective.
But it’s relatively low when you folk for model, in general across our business. Our CapEx is generally quite low and in relation to the growth there and the size of the market, we can continue to grow that, scale up to meet that demand.
Okay. And then just last question for me, have the supply chains around the chips for the Digital business started to loosen a little bit over the last month or two, just given sort of broad market pullback in demand for chips globally?
Yeah. I should clarify, too, it’s not just chips, but we have redesigned a lot of the components to be able to use more available chips and components. I will give you a good example. We had one bottleneck on our dryers was actually the screen that’s used to control the device or control the dryer. We have modified that to be able to use an iPad or any tablet, for instance.
So -- and that unlocked some production capability and supply capability. So we have redesigned motherboards to use different chips that are readily available. That’s -- I think it’s a relatively common approach to get around supply chain crunch. So that work completed, carried out throughout H1 and now making it easier for us to supply into H2.
Okay. Got it. That’s all for me. I will turn it back.
The next question comes from Michael Robertson with National Bank Financial. Please go ahead.
Hey. Good morning all. Congrats on a really strong quarter and that’s for taking my questions. Just had a couple here, mostly you actually spoke about [inaudible] touched on already. It seems a lot of headlines with concerns from farmers surrounding emission reduction targets related to fertilizer. And I was wondering if maybe you could speak to how some of your Digital offerings could aid in increasing crop yields, while reducing fertilizer use, whether that’s SureTrack or maybe even some of the partnerships that you have done. I think it was with MyLand Systems in terms of monitoring soil and making sure it’s got a proper amount of nutrients?
Well, fundamentally, those regulations, you will see an increasing amount of regulation or scrutiny around things like fertilizer usage, right? So fundamentally that’s going to start with measurement.
So you have to be able to accurately, reliably, transparently measure application and that’s where we will see the initial traction. So our Farmobile PUC will play a role in that, being able to accurately record and distribute the information around application.
And then with measurement, they can then set or put in place targets and guidelines around reduction. And of course, if you don’t measure, you can’t reduce. You don’t know what reduction means.
So that’s where we see this starting to have an impact from our perspective and that will carry on now, I think, to accelerate the -- in terms of regulation, but voluntary measurement fundamentally. And so, they will -- we are working with a lot of industry participants to be able to provide that measurement and that data.
Got it. Thanks for color there. Maybe just one more follow-up to Gary and Jim’s commentary on the EBITDA margin profile, you spoke to targeting 100-basis-point to 200-basis-point increase over, I think, the 15% you guys did back in 2020. And just wondering maybe what -- maybe what inning you guys feel like right now working towards that target. Obviously good to see stronger margins than you have had in some time in the quarter, and based on your commentary for Q3, I suspect that continues near-term. But just kind of hard to disaggregate the sort of levers that are there with the volatility in the supply chain and raw material input costs. So looking out on an annual basis, like, how far along in that process do you feel like you are today if things sort of plateau a bit and stabilize at these levels?
Yeah. So we have done a number of things already, certainly, from a plan perspective, gaining some efficiencies, our growth is helping us out. We still think we have got a fair bit to do though in the SG&A area. And so, if I had to give you the baseball analogy that you mentioned, I would say, we were probably in the fourth inning.
All right. All right. Fourth inning. I like it. I appreciate the color. I will turn it back.
This concludes the question-and-answer session. I would like to turn the conference back over to Tim Close for any closing remarks.
Okay. Well, thanks for joining us this morning. I think great questions that provided opportunity for us to add some good color and detail around the quarter and the business. So we will end the call there and thanks again for joining.
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.