Welcome to the AGI Second Quarter 2023 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there'll be an opportunity for analysts to ask questions. [Operator Instructions] I would now like to turn the conference over to Paul Householder, President and CEO of AGI. Please go ahead, sir.

Thank you, operator. Good morning and welcome to AGI's second quarter 2023 results call. As usual, I'm joined by our CFO, Jim Rudyk. I'll start the call with a review of our results as well as an update on outlook for the remainder of the year then turn the call to Jim for additional commentary on the quarter. Following our prepared remarks, we'll open the call for questions. The second quarter was again a record for AGI, making it seven record quarterly performances in a row. The strong second quarter results were marked by an exceptional gross margin performance. Many of the operational excellence initiatives set in motion late in 2022 and early 2023 are ahead of plan, pricing demand, manufacturing efficiencies, input cost, and supplier management and several other activities. These initiatives came together in the second quarter to drive margins to levels not seen in any quarter since 2016. Combined with consistent overall demand for AGI products across product lines and geographies, creating a balanced and resilient sales profile, we were able to generate an all-time record quarter for adjusted EBITDA. The second quarter capped a favorable first half for AGI with H1 sales and adjusted EBITDA growth of 8% and 27%, respectively, and adjusted EBITDA margins of 18.5% trending well above our initial goal of 17% for the full year. Given our success in growing the business, we also continue to make notable strides in our efforts to reduce key balance sheet ratios. Before expanding further on our results and providing additional business updates, I would like to make some comments on safety at AGI. We recently completed our third annual safety week, a global event that brings together team members from around the world to discuss and review safety protocols. With our ongoing focus on safety awareness, I am extremely proud to announce that 11 of our facilities have now gone more than one year without a lost time safety incident. Our collective focus on safety is paying off and reaching these types of safety milestones clearly demonstrates the commitment of our employees who are unquestionably the heart of AGI. Now turning to our second quarter results. Sales of $390 million were consistent year-over-year and showed strong underlying volume growth when normalized for higher prior year steel costs. Adjusted EBITDA margins of 22.6% were up more than 500 basis points year-over-year and helped generate 33% growth in adjusted EBITDA up to $88 million. Across our three corporate strategic priorities, our high level KPIs are generally trending in a favorable direction. For profitable organic growth, sales growth of 8% across the first half of the year is encouraging, once again demonstrating the resiliency of our business. For operational excellence, the extremely strong second quarter margin speaks to accelerated progress across many initiatives, from centralized procurement strategies, more sophisticated and segmented revenue management tactics, manufacturing efficiencies, reduced use of outsourcing and overtime, digital reorganization among others. In several ways, the Q2 margin performance was the culmination of many efforts made across the company. It is important to understand that these improvements are the result of structural changes to our processes, teams and to the way we manage the business. As these changes are steadily institutionalized, we expect many of the benefits of our operational excellence approach to be sustained going forward. For balance sheet discipline as expected, our net debt leverage ratio continues to move lower by carefully managing cash flow while also growing adjusted EBITDA. Moving into a review of our segments and businesses. The Farm segment was the anchor contributor to the quarter with Canada leading the way. Similar to the first quarter, Canada Farm was the key growth region for AGI. Sales were up 11% year-over-year and with excellent margins. Strong volume for our portable grain handling products in addition to disciplined pricing strategies helped deliver this result. Increased throughput and higher production levels at key manufacturing facilities ensured AGI was positioned to meet strong demand. Looking ahead to the second half of the year, our Canada Farm business maintains a positive outlook with an order book up 77% year-over-year, supported by significant order intake in May and June, both months setting record in a typically slower part of the year. The Canada Farm order book is exceptionally strong signaling solid fundamental demand for AGI products and services to reinforce our confidence in a favorable performance this year as well as the years ahead. The US Farm business continued to perform well in the quarter, with sales stabilizing at levels significantly above what we would have expected just a few years ago. A signal that our efforts to grow market share in this strategically important region continued to payoff. In addition, the second quarter was marked by a meaningful improvement in margins for our US Farm business with product mix, SG&A discipline and manufacturing efficiencies all playing a role in the result. The order book for US Farm is up 3%, demonstrating growing demand for AGI products. We have been carefully monitoring local weather conditions to assess potential impact on customer behavior and demand. While the dry conditions have generally begun to subside in early Q3, we continue to carefully monitor overall market dynamics. Contributions from international regions in the Farm segment in the quarter were varied, but overall supportive. In Asia Pacific, we continue to have success in establishing the AGI brand in Australia where our portable grain handling products are growing in popularity. As the portable grain handling product transfer to India is completed, enabling local production with more competitive supply, support, and service, we anticipate a further uptick in demand into 2024. In EMEA, dealer engagement efforts in Continental Europe has supported pockets of permanent grain handling and storage solution demand. In South America, farm sales improved sequentially from Q1 to Q2. The shift in sales mix from farm to commercial in Brazil, which we noted in the first quarter, was reflected in the makeup of the order book entering Q2. Steady improvement in market conditions, including expectations for another record setting crop have provided increased confidence to Brazilian farmers. As a result, we observed a significant increase in Farm customer ordering as the quarter progressed. The overall Brazil order book inclusive of commercial posted a phenomenal increase of over 160% from the first quarter and is now weighted towards Farm. With a strong order book and highly active pipeline, we have good visibility to an outstanding Q3 for Brazil. Brazil is an important market for AGI as well as global agriculture markets especially in lieu of supply disruptions in Eastern Europe and we are optimistic that Brazil will continue to be a strong contributor to our results. Overall, our Farm segment continues to be a reliable growth engine for AGI, with an expanding margin profile and an order book up 27% year-over-year, we see a strong setup for further growth and success in the second half of 2023. Moving onto some commentary on our commercial segments and international businesses. Starting with the broader APAC region, which together with India, makes up our Asia Pacific geography. Overall sales were slightly down in the quarter. Strong sales from India as this business builds on last year's exceptional results were slightly offset by commercial sales from the broader surrounding APAC region. Sales were up 17% in India as demand for rice milling products continues. This growth was supported by targeted promotional packages in new areas within India where our rice milling business is under-penetrated. India is a leading margin contributor across our mix of global businesses and a continued focus on effective cost management enabled an acceleration of profitability in the quarter. The order book in India supports a strong outlook in the second half of the year. It's up 10% and very close to record levels, including an exceptional month in June where order intake is at an all-time monthly record. The outlook for additional growth is further supported by rice milling exports outside of India. As activity is now starting to ramp following a targeted effort our market trials and quoting across Southeast Asia, Africa and LatAm. In terms of product transfers, India continues to make progress on grain storage and portable grain handling equipment. On grain storage, the quoting pipeline continues to ramp and order intake is increasing with several wins in the quarter. Further transfer of some additional grain storage accessories and components will help the India team reduce costs and lead times further increasing our competitiveness to win grain storage projects. For portable grain handling equipment, the first trial units have been produced locally and shipped to Australia for further testing. In anticipation of building future volume, we have secured expanded facility space to accommodate an increase in production. Our South America region encompassing both Brazil and a broader LatAm region delivered sales growth of 64% in the quarter. Good results in Brazil driven by mix complemented by a very strong quarter for the broader LatAm region drove the favorable South America results. The overall order book across South America is down 14% primarily due to timing as the broader LatAm business resets from a strong second quarter and Brazil continues to deliver an attractive order pipeline. The outlook for the commercial business across South America remains encouraging, particularly our strategic plans to penetrate food, feed, fertilizer and rice milling platforms continue to gain traction. South America is an important contributor and a critical piece of our overall growth story. Our EMEA business continued to generate stable results despite the unstable situation in the Eastern European market. Sales in the quarter were down 10% largely due to timing on the shipment of a few projects that will push to the third quarter. Similar to other areas of AGI, gross margin expansion and tight SG&A control enabled the region to drive heightened profitability and increased EBITDA contribution. The EMEA order book is up year-over-year and now represents a complete recovery of the impact from the Eastern European conflict as the shift to Middle East and Africa gains consistency. Overall order intake in June was significantly above prior year providing optimism that the strategic investment in sales support resources across Africa and Middle East is paying dividends by accelerating sales growth. The EMEA region remains highly competitive as industry capacity adjusted the reality, the two large buyers of Food Infrastructure in Ukraine and Russia are currently not coming to market with the same level of investments as they were pre-conflict. The EMEA's team's ability to still deliver impressive results despite these challenges is yet another indication of strong demand for AGI products, the benefits from our strategic plans and the outstanding performance of our local teams. The North America Commercial business, which for reporting purposes now includes most of our global food platform, was down 19% in the quarter with most of that result being directly attributed to a decline in the food platform as well as softness in the fertilizer market. While the overall North America Commercial order book is down in both Canada and the US, this is also largely weighted towards the food platform, which, as previously discussed, is in the middle of an extensive restructuring initiative. Both the food and fertilizer teams have recently won a few nice-sized orders and are showing early signs of improvement though we do not anticipate a sustained turnaround in these areas for a few more quarters. The order book for Core North America Commercial grain handling and storage products is up year-over-year and is serving to stabilize results. The heightened focus on operational excellence initiatives have helped drive margin expansion. And we expect our North America Commercial business to continue to deliver positive EBITDA growth. And finally, a few comments on our AGI digital business. Early in the quarter, a second significant phase of restructuring was completed. Our leadership team is now fully in place. An overhauled approach to business management, including improved pricing strategies and overall reduced cost structure has led to a dramatic improvement in financial results. The second quarter was the first time the digital business posted positive adjusted EBITDA. This is well ahead of our internal target where we aimed to achieve this milestone by the end of the year. An outstanding achievement from the team leading the turnaround efforts who now turn their full attention from cost control and stabilization to accelerating growth. Overall, the second quarter highlights the clear benefit of rallying our global team around common and consistent objectives, profitable organic growth, operational excellence, and balance sheet discipline. We have achieved substantial progress across all three areas during the first half of the year. Our diversified and resilient business model continues to deliver stable and consistent growth and is now bolstered by operational excellence initiatives that are accelerating margin expansion. With the strong first half in hand, we are clearly on our way to another banner year for AGI. We are confident in the outlook and have increased our full-year guidance for both adjusted EBITDA as well as adjusted EBITDA margins. Jim will provide additional details on our updated full year guidance. We are optimistic about the second half of the year and see further potential in late 2023 and early 2024 as we progress across our businesses in transition such as food and fertilizer. I will now hand the call over to Jim.

Thank you, Paul, and hello, everyone. For this call, I'd like to address four areas including an overview of our second quarter results, an update on our balance sheet and related key metrics, a few comments on our cash flow and a few notes on our outlook for the year. On a consolidated basis, second quarter sales of $390 million were stable year-over-year. Very strong gross margins helped drive over 550 basis points of adjusted EBITDA margin expansion and led to 33% growth in adjusted EBITDA for an $88 million result, an all-time record for adjusted EBITDA in any quarter for AGI. In the second quarter, our Farm segment delivered $233 million in sales, growing 3% year-over-year. Adjusted EBITDA of $70 million grew 37% year-over-year with margins expanding over 700 basis points to 30%. Growth in Canada, the US, and Australia, coupled with the onset of many operational excellence initiatives designed to support margins drove the result. In the Commercial segment, sales of $157 million declined 4% year-over-year, adjusted EBITDA of $29 million grew 22% year-over-year with margins increasing over 350 basis points. Similar to Farm, and as Paul elaborated in his prepared remarks, gross margin expansion due to operational excellence initiatives supported the strong results. Our second quarter adjusted EBITDA included some one-time items that are worth a quick comment to provide a bit of clarity. The accrual related to the bin incident of $15.6 million was disclosed a few weeks ago in a standalone press release. The $4.9 million for equipment rework relates to the completion of the remediation of the customer site in British Columbia and isn't directly related to the bin incident. The $8.8 million in transactional and transitional costs includes a few items including retention and legal costs in connection with the digital reorganization, which underwent a second round of restructuring in the quarter, our broader workforce optimization initiative, also completed in the second quarter, integration work for recently consolidated facilities and a few other miscellaneous one-time items and accruals. Finally, the $1.7 million in accounts receivable write-down in the quarter reflects our conservative perspective on our last remaining balances from customers in the Russia-Ukraine region. We have no more receivables related to the region on our books with all amounts still owing from this region now fully reserved. If and when any amounts owed from this region are collected, it will provide some incremental cash flow. But for now, the timing and amount of any recoveries remain uncertain. Overall, we expect fewer and smaller sized one-time items as we progress through the back half of the year. Moving onto our balance sheet. We continue to make meaningful progress in our leverage ratios and working capital metrics, key indicators for the structural improvements we are making to support the strategic priority. Working capital investment is a key focus across the organization. Our net investment of $212 million in the second quarter was down from $274 million year-over-year. As a percentage of sales, working capital investment fell from 17.6% to 13.6% year-over-year on an annualized basis. Given the stable sales in the second quarter, both the absolute dollar working capital investment and the ratio as a percentage of sales are clear indicators that our efforts to optimize how we use and manage our cash are steadily taking hold. A key contributor to this result has been our focus on inventory and DSI metrics. We are managing DSI closely and on a facility-by-facility basis, we are pleased to see DSI continue to make progress on both a year-over-year and sequential basis. From a balance sheet perspective, our KPIs continue to trend positively. Credit Facility Management is a focus item as we work to optimize how we manage cash flow and we are encouraged to report that our net draw on our facilities was very minor in the quarter. More importantly over the first half of the year, our total drawn debt and credit facilities was $28 million versus $96 million last year. We anticipate the usual trend of lighter credit facility needs towards the end of the year, in addition to strong cash flow to help us further drive down overall debt levels. Our net debt leverage ratio decreased to 3.3 times in Q2. This is a significant improvement from 4.8 times year-over-year and 3.6 times sequentially. We are well on track to reach our goal of approximately three times by the end of 2023. Longer term, the steady state leverage ratio target remains at 2.5 times. Turning to a few comments on cash flow. Funds from operations of $71 million were up from $49 million year-over-year. The step up in available cash flow mirrors the increase in adjusted EBITDA and demonstrates our ability to capture and convert our growing adjusted EBITDA into cash flow. Looking ahead, our cash inflows are typically stronger in the second half of the year, enabling us more flexibility on how to redeploy and the pace at which we can make debt repayments. The recently announced settlement of the bin incident will have an impact on cash flow and we expect approximately a $55 million net outflow in the third quarter in connection with resolution of the matter. Given our strong results and growing adjusted EBITDA, we do not expect this to impact our goal of reaching approximately the three times level by the end of the year. And finally, turning to our outlook, we remain excited about our momentum heading into the second half of 2023, supported by our order book up 3% year-over-year. We are encouraged that the order book continues to grow despite a few pockets where we are rebuilding the pipeline, most notably, our food platform in addition to our fertilizer in EMEA platforms. As Paul outlined in his remarks, we have increased our guidance to reflect the optimism and confidence we have in the business. Our new outlook for full year adjusted EBITDA is now at least $290 million up from at least $265 million and with adjusted EBITDA margins of at least 18% up from our prior outlook of at least 17%. This updated guidance now indicates approximately a full 200 basis point increase over last year's result of 16%. Thanks everyone for your time and we'll now open up the call for questions.

Thank you. We will now begin the analyst question-and-answer session. [Operator Instructions] Our first question comes from Jacob Bout of CIBC. Please go ahead.

Good morning.

Hey, Jacob.

Great quarter from a margin perspective. But I wanted to dive into the -- into the revenue growth. Maybe just starting with Canada and the US. I guess for the on-farm dry weather doesn't seem to have much of an impact. But on the commercial side, what's the need for restructuring. Why you're doing this now and what do you view as kind of a normalized growth rate in Commercial in the US and Canada?

Yeah, Jacob. Thanks for the question. I mean the comments on the Canada and the US Farm, correct, we do see nice stable growth in both of those sectors, very pleased with how our Canada Farm business has performed in the first half and then when you look at the order book, it sets it up for a nice strong second half of the year. But turning to the Commercial and the need to restructure that business, it's really focused on our Food segment, Jacob. And it is very consistent with the restructuring that we completed on core North America Commercial business about two years ago. And it's really to fully leverage the combined capabilities of our foods business into a little bit more of a unified business in which we can take the full suite of capabilities out into the market and out into our customer base. That's objective number one to better leverage the capabilities that are inherent in our food business. The second opportunity there, Jacob, that we're focused on with the restructuring is broadening out our market reach and our customer reach. Our previous food business was outstanding and was focused on a few core large global customers. We feel it is important to diversify that customer base because that will give us a more stabilized and sustained ability to grow that business going forward. Significant effort restructuring. We've got some more work to do, which is why we are suggesting that the second half of the year will remain fairly stable for food and then we'll see and expect to see an increase into 2024.

Okay. And then maybe just turning to Brazil, record high interest rates creating havoc there. How is that impacting both your Farm and Commercial work there?

Yes. For sure, Jacob. We did see a softness in our Brazil business across the first half of the year. But as we noted in our opening comments, a significant improvement across Q2 as our order intake and our order book increase substantially. But you're right to note the interest rates. That did -- that was one of the factors that impacted our first half results. I think we might have started the year with interest rates as high as 15%. We have seen interest rates slowly improve, particularly across Q2. I think they are sitting at about 13.25% right now. That decrease in interest rates is one of the factors that we think is leading to an improvement in sentiment that combined with an anticipation of record crops in Brazil. Just one other further comment on interest rates. So the expectation is that they continue to fall across the second half of the year. We'll see how that turns out. The guidance that we're hearing is finishing the year around 12%. Certainly, as interest rates come down, that just adds to the confidence that we think will be reflected in the market and the demand.

If I can just sneak one more in? What do you expect overall company net revenue growth to be over the next two to three years?

Next two to three years, well, I'll start with the second half, Jacob. In terms of revenue growth, we expect the second half of the year to be stronger than the first half of the year, particularly as we enter a part of the year where we see an uptick in our international business. In aggregate, international performed quite well in H1, but in the second half of the year is typically when you see both Brazil and India as well as EMEA pick up from a volume and a revenue standpoint. Going forward, profitable organic growth continues to be one of our major priorities. We're very optimistic about our ability to be able to grow our business across our diversified platform. One of the key areas -- strategic areas that we're focusing on is product transfers. It's still early days in our efforts to transfer some of our core products into various markets that we have. But we are seeing a nice early progress, which is leading to our confidence. That's going to be a key lever for us to sustain growth into the outer years.

Thank you, Paul.

Thanks, Jacob.

Our next question comes from Michael Doumet of Scotiabank. Please go ahead.

Hey, good morning, guys. Because it's such a big jump, I really wanted to see if we can dive into that 600 basis points of gross margin improvement. Paul, how much, maybe to give us a sense, was price versus efficiencies? And importantly, how much of that improvement should we consider to be permanent? It's obviously a lot to digest, I guess, when you're looking from outside the business. I just wanted to make sure to get a better handle on it.

Yes, it's a great question, Michael. And first and foremost, we're very excited about the gross margin expansion that we've seen in the quarter. And it is directly attributed to the outstanding team that we have and the focus that we've been putting in this particular area, say, for the past six months or so. There is a lot in that 600 basis points improvement. I'll kind of try to break it down into a couple of buckets for you, still keeping it relatively high level. But getting to the major point, we would suggest that about 200 basis points, our structural improvements directly resulting from operational excellence that now reset a baseline for us and create an area for us to consistently grow margins from an operational excellence standpoint. So that 200 basis points, Michael, is consistent with what Jim outlined in his comments on our full-year guidance of at least 18%, showing a 200% improvement over prior year. We would say that, that kind of fundamental improvement and margin expansion is directly attributed to our operational excellence activities. When you look at the additional margin expansion, one area is certainly price. We've been focusing on price. We've been enhancing our capabilities and level of sophistication on price. We have seen steel come down sequentially from prior year highs where steel was up 30%. Our goal all along was to take advantage of that decline in steel and keep and hold some of that as margin expansion. So when you look at that prior year steel cost, about half of that we got as margin and about half of that is actually hidden as real volume growth in our Q2 results.

That's great color. Thanks. Maybe just kind of back it up and maybe ask a higher level question on the cost side. A few years back you guys were very acquisitive, now you're making adjustments operationally consolidating several facilities centralizing functions, maybe putting aside the product transfers in the whole organic growth conversation, just for this conversation, so specific again on the cost structure. When do you guys think that you will settle out to the point where you have the cost structure you want because there much more to go?

There is more to go, Michael. I mean to some extent it's still early days from our focus on operational excellence. It's been a key initiative for us for about 12 months. Obviously we got started a little bit before that. But we've really just getting started on operational excellence. So we see opportunities going forward to continue to improve the efficiency and effectiveness of that business. I think our opportunities I could put in two buckets, bucket one would just be ongoing incremental improvements on how we run the business on a day-to-day basis, there still opportunities for us to make progress there. And the other one, Michael is structural step change improvements in our business that might come from facility consolidations or other opportunities as such. That -- those are initiatives that we're still looking at. So net-net, yes there's still opportunities for us to make improvements in our cost structure and then going forward, we'll look at how we fully leverage those improvements whether we capture those as margin gains or leverage -- leverage those to continue to support and drive growth.

Awesome. Great work, guys. Thank you.

Yes. Thanks, Michael.

Our next question comes from Steve Hansen of Raymond James. Please go ahead.

Yeah. Good morning, guys. Thanks for the time. Congrats on a strong performance margin wise. Can you perhaps describe the order book is evolved in Canada through July and August. I'm just struggling to square your comments on how the Canadian order book has been so strong, while the US sounds much more muted on dryness, just looking at the crop conditions across the two regions. Canada's far, far worse from a dryness perspective and that's worsened through the summer period here. So just maybe give us a sense for how that's actually evolving here more in the current quarter as opposed to backward looking and then just maybe describe it with the mix issues, is it perhaps the portable side that's been stronger versus the permanent. Thanks.

Yeah. Thanks, Steve. And as we mentioned in our opening comments, we're certainly keeping very good visibility to the growing conditions both across Canada and the US but one of the reasons we're so excited about our performance both where we are year-to-date, as well as the second half is just the diversification that we have in the business. The strengths that we have in all of our geographies across AGI, just a much stronger business platform than we've had previously. But focusing specific on Canada, our order book is great, that's leading to optimism in the second half of the year, we have had strong order intake as you've noted. If you kind of split that up into mix to give an idea of the strength in portable, the strength in permanent, we have very strong demand for our portable product lines that has been very consistent throughout the year. It's been consistent in Canada and it's been consistent in the US. So our portable product lines obviously a key part of our product portfolio across both Canada Farm as well as US Farm. On the permanent side, we saw strong -- very strong order intake on our permanent side of our business for Canada Farm, late in 2022 and through the first half of 2023 in both Canada Farm and US Farm. We are seeing farmers be a bit more cautious on the permanent side than on the portable side as they evaluate how the crops are going to come in for the full year. So our order book is biased more towards portable than permanent. That said, we still see opportunities on the permanent side. We've seen some improved weather conditions certainly in the US as well as in pockets in Canada. So we'll see how the second half of the year unfolds from a permanent standpoint.

Okay. That's very helpful. And then I just wanted to circle back on the margin question, I think you described earlier in your attribution of the improvements, steel and price and a few variables, but how big of an issue was mix in the quarter. I think even in your remarks last quarter, you described the portable look had been near record and was likely going to benefit the margin profile, but I'm just curious because I'm looking back historically over the last three years, you have had margins spikes in the past on mix, you referenced 2016, for example. I'm just trying to get a sense for -- we still should expect the normal volatility in the margin profile with the 200, I guess, is we can bank on as being more permanent?

Yeah. 100%, Steve, I think you summed it up pretty well there. The 200 basis points we're seeing a structural that is forming the baseline of our margin expansion. Then when you look at that the additional margin performance that we had in Q2, there is a portion of that is directly related to pricing. While it was very strong pricing performance in the quarter, we do see that as an opportunity for us going forward. It's an area that we're focused on. We're going to continue to increase our level of sophistication from a pricing customer segmentation, market segmentation, so we do see continued opportunities going forward for us to drive margins from a pricing standpoint. And then, Steve, as you commented, mix is certainly part of our business. We've got product lines, we have regions that have stronger margin performance than others. So in any given quarter, we have had -- we will continue to see mix have a margin impact. In Q2, it certainly was favorable, strong performance across our global portable product lines is a good tailwind to margins. We have our India business. It is also a very strong tailwind to margins. India continues to perform well. It has a very exciting second half outlook. So opportunities for mix to be supportive going forward as well.

Okay, very good. Thank you.

Yeah. Thanks, Steve.

Our next question comes from Gary Ho of Desjardins Capital Markets. Please go ahead.

Thanks, guys, good morning. I just want to dig into the -- just going back to the topline question, as discussed earlier. So I think you identified the $2 billion revenue target in your Investor Day. Can you provide us a bit of an update on timing and when you think you can achieve that? As well, at $2 billion, what do you think margins could be at those levels?

Yeah, thanks for the question, Gary. And we continue to be very excited about our opportunities to grow our business globally. Commented on the lever that we have from a product transfer. That creates a very exciting opportunity for us. And as well just the fact that we are in some very exciting agriculture markets globally. In Investor Day, we commented on our growth opportunities and suggested that $2 billion was within our planning horizon. And you can think of our planning horizon going out into that two to three year timeframe. That remains both our goal as well as our performance expectation. So we would still set out $2 billion as the revenue target over the next few years. In terms of margins, as we're guiding for this year, we expect margins to be at least 18% EBITDA margins. We have opportunities to continue to improve our cost structure. Going forward, we'll look to balance the improvements that we make there from both a margin gain as well as a revenue gain. So at this point in time, Gary, I would say that there's opportunities for us to improve our cost structure. We like the ability to perform from a margin standpoint in that 18% to 19% range and then lever cost structure to support growth.

Okay, that's great color. And then my second question, just wondering if you can give us an update on the digital side. You've gone through now, it sounds like, two rounds of restructuring. Are you breaking even in terms of EBITDA? And maybe provide a bit of an outlook for that segment.

Yes, thanks, Gary. We have a number of initiatives across the company that are focused on just fundamental improvement in restructuring. We have it at the initiative going on in foods, as we noted earlier and then the one in digital as you pointed out. We can't be happier with the performance of our digital business through the first half of the year. Outstanding performance from our leadership team, outstanding performance from those that are working and supporting that business day in and day out. Significant improvements in aligning our cost structure with our revenue reality that ultimately led to Q2 being the first quarter in which we were EBITDA positive, which is an outstanding accomplishment relative to where we were just a short time ago. And it's ahead of our plan. We were hoping to get to this point by the end of the year. We're now here at Q2. And the acceleration that we've had and that type of performance enables the team to shift from all of that heavy work from a restructuring and cost structure standpoint to now look at how we fundamentally grow that business. We remain excited and bullish on our digital platform, how it complements our core product line, helps us differentiate ourselves in the marketplace, provide enhanced capabilities to our customers. So we're very optimistic that, going forward, now our focus and our opportunity is growing that business while maintaining profitability.

Okay, great. Thanks for the comments. Those are my two.

All right. Thanks, Gary.

Our next question comes from Andrew Wong of RBC Capital Markets. Please go ahead.

Hey, it's Harrison Reynolds on for Andrew Wong. Thanks for taking the question. I'm just wondering if you could talk a little bit about what's driving some of the slowdown in Commercial. How much of that is down to the macro environment? And when do you think business might pick up again?

Yes. Thanks for the question on our Commercial business. When you look at our Commercial business in aggregate, we're quite excited about our Commercial business. If you look at our results and you kind of peel the onion a little bit, very strong Commercial performance down in South America. We've seen very strong performance in our Commercial business over in India. And we've made substantial progress in EMEA, particularly offsetting some of the challenges that we've had with that Russia-Ukraine conflict and our shift to Africa and Middle East. So lots of pockets of great performance in our commercial business. The softness is predominantly in North America. And then more specifically, it's in foods and fertilizer. And to those two points, from a market standpoint, we would suggest that fertilizer structurally is down from a market standpoint. And that's creating the softness that we're seeing there. So in other words, as that market improves and rebounds, which we would expect to happen starting in the second half of the year, we certainly expect to see our fertilizer business improve right along with it. As I made comments at the beginning, we've won some nice projects recently in the fertilizer space, which we would suggest is early leading indicator that market conditions are starting to improve. Foods is a little bit different. I would say that our softness there is a combination of market softness as well as the restructuring that we're going through. So we would anticipate seeing the market improve the second half of this year into 2024. We still have some work to do from our restructuring standpoint. What's kind of puts our outlook on that particular portion of our business improving more into 2024.

Great. And maybe just as a follow-up. Does the sales lumpiness in the Commercial segment have an impact on business efficiencies and costs? Are there any ways you could smooth sales in the segment just from a margin standpoint?

Yeah. Thanks for the question. And I would suggest that this is one of the areas where we've made great improvement is our ability to run our business at a higher level of efficiency and effectiveness. So you're absolutely right to note that our Commercial business is lumpy as orders come in as well as orders are executed and shipped out. So our opportunity to make sure that we are adjusting how we're running the business to align well with that variability is one of the reasons why even though in aggregate our commercial revenues were down our profitability was up, clearly demonstrating that we are able to deliver profits in both or throughout that variability.

Great. Thank you very much.

We got it. Thank you.

Our next question comes from Tim Monachello of ATB Capital Markets. Please go ahead.

Hey, good morning, everyone.

Hey, Tim.

I want to talk on the Farm segment margins, in particular very strong 30%, in my model at least, that's the highest on record. I'm not sure if you know internally it's ever been higher. But talking around the margin, it sounds like you had 200 basis points of structural improvement on a consolidated basis, obviously it seems that Farm maybe higher than that, mix I imagine played a role, but is there anything specific to Q2 that's falling off in the back half of the year that might make those Farm margins lower, as we get into the back half of the year? Is there potential with digital now breaking even or contributing positive EBITDA and probably that being one of the higher margin contributors at least on a potential basis? Just help me understand where we might see those margins in the back half of the year?

Yes, great question, Tim. And as you noted, we're extremely pleased with our margin performance in our Farm business. I mean, looking at up 700 basis points is outstanding performance. And when you have margin expansion at that level, there is obviously a number of contributors to the performance. And I think you caught all of them to be candid. We have the core operational excellence that is supporting margin expansion. We commented on those roughly 200 basis point. The improvement that we've made from a digital standpoint, restructuring that business, absolutely has contributed to the margin expansion that we see in Farm. As we've commented at the beginning of this year, we've rolled our digital results into our Farm segment from a reporting standpoint. So that is contributing to our margin expansion. Pricing and mix are other elements that were favorable contributors to that 700 basis points margin expansion. Pricing, a bit of that, as I commented, steel was up 30% comparable to prior year. We've seen now steel come down sequentially this year. That provides us an opportunity to try to capture margin on the opposite end of that cost curve. And then in addition to that just our level of pricing capabilities now. And then mix, very strong performance in portable. That said, our permanent side of our business, particularly in Canada Farm was outstanding in the first half of the year, but a number of areas contributing to that margin expansion. And several of those, we expect to be sustainable or at least opportunities for continued margin performance going forward.

Okay. That's helpful. And then the Brazilian business was remarkably resilient, I thought. And some of your competitors had come out in the Brazilian market with worse results. So can you help me understand your market position, how it's changed in Brazil, and I guess market share within the Commercial segment and the Farm segment?

Yes, I mean, great question, Tim. And I echo your comments. We're very pleased with our performance down in Brazil both on an absolute and a relative basis. There was softness throughout the first half of the year. The team performed extremely well in face of those market conditions, we feel confident that we've gained, we further gained market share across Q2, certainly across the first half of this year. Our market share I would say is and the resiliency of our business is a direct factor of the diversity that we have down in Brazil. We've got a great balance between Farm and Commercial. So when we saw softness in the Farm on the first half of the year, we saw unbelievable strength from the Commercial standpoint and those work to net out and provide overall favorable business results. We remain optimistic that that diversification of our business is going to be a key lever to help Brazil further grow. We are now looking to enter food, fertilizer, feed and rice milling segments down in Brazil. Those are attractive markets. We haven't been very active in those in the past, we're getting more and more active in those in the future. That's just going to add both to our total available -- total addressable market opportunity in Brazil as well as continue to provide excellent diversification in our business, all of which contributing to our optimism on Brazil performance going forward.

Okay. That's really helpful. And then just follow-up on some other questions were asked, but just around your I guess progress in operational excellence. It wasn't that long ago that you had your Investor Day sort of rolled this out and I mean the margin expansion has been pretty swift and then pairing that against the comment that you're early days. Where would you think realistically you could see margin expansion go over the next year or so?

Yeah. Thanks for that comment and question. Tim, we have made, the team has made tremendous progress from the operational excellence standpoint and we just couldn't be happier with the team's performance. They've embraced it, a lot of outstanding work achievements and results have already been realized. But we do think it's early days, we do see opportunities going forward, maybe I'll take this in a different direction and turn it over to Jim on some of our ongoing opportunities for operational excellence. Yeah, we continue to make investments in processes and systems to enhance our capabilities in that area, that's investments that we're making today that are going to contribute to operational improvements going forward.

Yeah. And Tim just to build on that a bit. As we look forward, where we can go, I think we've got opportunity to continually improve our margins quite significantly, but as mentioned a couple of times earlier as well, it's a balancing act. You got to make sure that you are not just focused on just driving improved margins. You'll be able to leverage some of that improvement to continue to drive sales growth. And that's something that we're getting a lot more sophisticated in as we continue to adopt better processes, better systems, we have better visibility to our customers, to our pricing capabilities, to our costs by customer, by specific job. That allows us to better manage the balance between increased margin and sales growth. So what do we think, we think that, definitely, we guided to 18% this year, up from 17%. We feel very good about that. We do feel opportunities to go well beyond 18%, but how that pans out will be a decision that we'll make by quarter based on opportunities that we see to continue our sales growth.

Okay. That's helpful. I'll turn it back guys.

Thanks, Tim.

Thanks, Tim.

Our next question comes from Michael Tupholme of TD Securities. Please go ahead.

Thanks. Good morning.

Hi. Michael.

Hi. First question is maybe touches on some of the things you've already talked about a little bit. But just on the margin performance, obviously very strong in the quarter. And just as it relates to the higher margin guidance, can you talk a little bit more about what's changed since you put out your initial 2023 margin guidance of 17%? I think you touched on the digital reorganization a couple minutes ago and how that's progressed. But wondering is this really driven by operational excellence initiatives coming through more quickly than you expected sort of that acceleration you touched on in terms of digital or have there been other areas in terms of efficiencies that have also contributed that weren't really contemplated at this stage of the margin evolution?

Yes, thanks for the question, Michael. Yes, when we look at our margin performance at a high level, the fact that we're raising guidance is largely attributed that we're just ahead of plan. We are ahead of where we expected to be. And as you noted, certainly, a portion of that is the outstanding performance that we've had in restructuring our digital business. But we're ahead in other areas as well. So I wouldn't suggest that it's areas that we weren't expecting. It's more we were expecting it, it's just coming even faster than we were expecting. So other areas is certainly on the manufacturing side, as we look to drive manufacturing efficiency improvements. There's a number of buckets within manufacturing such as enhanced insourcing, improving our cost structure, and driving higher manufacturing throughput. On the supply chain, and our supplier base, the team continues to do an outstanding job of working and partnering with our suppliers to understand how we can drive our input costs lower. And as the team makes progress with both of those, they're directly partnered up with our pricing team to ensure that as we make those cost improvements, we have the opportunity to understand how we can lever that through price to drive margins as well as price to drive revenues. So there's a number of areas in which we've outlined opportunities from the beginning and we've just made faster progress than we expected.

Okay. That's helpful. Thank you. And then just a follow on to that as we think about the back half of this year. Obviously, there is still seasonality in the business. So when we look at the margins, can you talk at all about how to think about sort of the distribution between Q3 and Q4. Now that we have this higher guidance?

Yeah. Great question. Q2 outstanding EBITDA margin performance, obviously a significant increase sequentially from Q1 and is one of the things that's important to understand about AGI business is -- there -- it does vary throughout the year with Q1 being our softer quarter stepping up substantially for Q2 and then we typically see Q3 similar to Q2 and Q4 slightly lower. The reason I make that note is to some extent, that's how we see our margin profile moving throughout the year as well. So we stepped up margins significantly sequentially from Q1. As you look at Q3 and Q4 we would expect margins to be slightly lower than Q2 sequentially, but in aggregate, second half margins very, very comparable to first half margins.

And Michael just want to add on to build on that as you think about the rest of this year. Now if you look back historically, I think, what we're noticing now with the diversification across the globe particularly the international businesses that are very strong in the back half of the year. What we're noticing is that what historically was a lower Q1 strong Q2, Q3 and then a lower Q4. We're starting to see Q4 balance out. Q4 will be more in line with Q3 now is what we're seeing. And so as you think through, so that would mean that our business now has evolved where instead of just two quarters are very strong, we're now being able to balance it out where there's Q2, Q3, Q4 seem to be more similar in nature. The margins will be a little lighter in the back half of the year than Q2 primarily because of mix but you -- but the operational excellence initiatives that we've driven through will be sustained. And then we will manage the pricing appropriately to determine how much of the pricing benefit will keep or not based on the sales opportunities.

All right. I appreciate all the detail and I'll leave it there. Thank you.

Yes. Thanks, Michael.

Our next question comes from Maxim Sytchev of National Bank Financial. Please go ahead.

Hi. Good morning, gentlemen.

How are you doing, Max?

Good, good. Lots of questions obviously answered, but maybe just one last one. In terms of kind of working capital efficiency, do you mind maybe providing a bit more color in terms of what exactly that entails in terms of sort of changed processes. I believe there was a change in sort of that working capital efficiency is part of the compensation packages and so forth. But do you mind maybe just delving a little bit into that one? And that's it for me. Thanks.

Yes. Hi, Max. And thanks for the question. Yes. So as we -- one of the things that we've talked about for the past several quarters now is our ability to more effectively manage our working capital which, specifically, the focus has been on accounts receivable management and inventory management and, to a lesser extent, payables management. We've made great progress, the metric that we use as an efficiency metric is working capital as a percentage of sales. And as you saw in the quarter, we dropped to about 14% of annualized sales. Historically, it's been as high as 25%, and it's consistently trended downward quite significantly. We see a number of specific things that are sustainable, specifically in inventory areas. That's our biggest opportunity still where we use a metric called DSI, day sales in inventory. And it still hovers, it's come down from last year. But it still has much more significant room for improvement. The things that we've done from a supply chain perspective have given us confidence that we're able to identify specific ways to reduce the need for inventory, move it more to not adjust in time, but closer to that based on various lead times and supplier conditions around the world. The enhancement of our systems and our processes allows us to get the data more quickly to enable us to effectively manage that. So inventory will continue to be a focus of ours. We'll be able to sustain the working capital levels and actually continue to improve them throughout the rest of this year.

Okay. Excellent. Thank you so much. And, yes, excellent quarter. Thank you.

Thanks, Max.

Thanks, Max.

Our next question comes from Michael Doumet of Scotiabank. Please go ahead.

Hey, guys. I know we're getting long here, so I appreciate you taking the follow-up. So for, Jim, just on the net debt target for the end of the year, to get to the three turns of net debt using the adjusted EBITDA of 290, effectively implies no debt repayments in the second half. I understand there's the -- the bin settlement that will come out in Q3, but talked about favorable seasonality for working cap in the second half. So I'm just wondering if it's conservatism or if it's something else that we should consider?

You're right. So the three times would have us being relatively flat from a total debt perspective, we do still expect some small amount of debt repayments, net of the -- the bin incident that we will fund in Q3. The reasoning here, the logic here is as we think through our business and I mentioned earlier about the seasonality, the cyclicality of our business changing a bit where Q4 will be strong, that pushes a little bit more need for a little higher working capital investment in Q4 than what have traditionally may have happened. And so our planning now so would suggest that improvement in working capital but because of the growth in Q4, less so than we may have in the previous year. So maybe you'd argue a little bit more on the conservative side, still are working towards improving that. But based on how we're seeing the sales trend out now and earnings trend out, just being a little bit more cautious on that, but very comfortable with that three times level by the end of the year.

That makes sense. Thanks, Jim.

Thanks, Michael.

This concludes the question-and-answer session. I would like to turn the conference back over to Paul Householder for any closing remarks.

Thanks, everyone for joining AGI's Q2 results call. Just want to comment congratulations and thanks to the global AGI team, outstanding work, outstanding performance.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.