Ag Growth International’s (AGI) results for the first quarter of 2020 ended March 31 showed trade sales in the quarter increased $12.7 million or 7% over first quarter 2019 due to strong farm sales in the U.S. and the recent acquisition of Milltec in India. The company’s adjusted EBITDA margin decreased to 11.2% (2019 – 14.2%) in a seasonally weak quarter due to the production, supply chain and delivery inefficiencies caused by COVID-19 as well as the impact of lower commercial sales volumes in the quarter.
“The tail end of our first quarter was impacted by the COVID crisis however first quarter results were resilient after accounting for the COVID impact and the weighting of our backlog toward the second half of 2020,” said Tim Close, President and CEO of AGI. “Following temporary production interruptions in our international locations and a number of short disruptions in the U.S., all operations are currently in production.
“COVID will have an impact on our second quarter and the remainder of the year due to production suspensions and supply chain and delivery disruptions, as well as the impact COVID may have on our customers, but backlogs and new order intake remain solid allowing us to mitigate the impact in the second quarter and into the second half of the year. There has been outstanding work done by the AGI team to respond to the COVID crisis. This work has enabled us to continue to operate, to minimize production disruption and minimize the impact on our business. In North America, the essential services declaration granted us the right to work however the actions of the AGI team allowed us to operate safely, responsibly and to retain the confidence of all team members,” said Close.
Second Quarter 2020
International production suspensions due to COVID-19 lasted between 2-4 weeks and impacted part of the first quarter and into second quarter, according to the company. Manufacturing activity resumed after the suspensions were lifted at different points in April, and AGI is currently manufacturing at 50-80% capacity at these locations. In the United States, internal safety protocols required AGI to temporarily suspend production on several occasions in the second quarter and these plant closures have generally lasted 3-10 days. To date, there have been no production suspensions in Canada, the company said.
Prior to the COVID-19 crisis, management expected adjusted EBITDA in second quarter 2020 to fall slightly below the record results of same period in 2019, for 2020 adjusted EBITDA to be weighted to the second half and for annual growth in fiscal 2020 over 2019. Early in second quarter, with all production facilities currently operating, and a backlog that is 9% over this point in 2019, AGI expects the COVID-19 impact to be significant but relatively contained assuming no additional extended lockdowns are required. The impact on the second half remains subject to COVID-19 impacts on markets and customers.
Farm: Dealer pull through for portable grain handling equipment in 2020 has been very strong and based on current conditions management anticipates robust demand for Farm products to continue as we progress through the 2020 growing season. With AGI’s recent expansion into the U.S., permanent grain storage system space management believes conditions are favorable to grow our relatively small market share in 2020 and going forward. Overall, management anticipates strong demand for Farm products in 2020 based on the following factors, assuming limited additional COVID-19 impact on farm operations:
- Planted corn acres in the United States are expected to approximate 95-97 million acres, a significant increase over the 89 million acres planted in 2019. Importantly, planting conditions are significantly better than in 2019 when widespread and historic flooding severely impacted farming operations.
- In western Canada, cool weather has delayed seeding in most areas. Conditions have recently improved, and the late spring is not expected to significantly impact crop volumes. The timing of order intake for Farm products in Canada has likewise been impacted by the late spring.
- Total Farm new order intake in April 2020 is similar to 2019 levels.
- As at April 30, 2020, our Farm backlog in the United States was 10% higher than at the same time in 2019, while in Canada the backlog is flat to the prior year.
Commercial North America
In the United States, Commercial Grain handling activity has been stable but for the last number of years has been restrained by depressed agricultural markets and international trade disputes. In addition, the emergence of COVID-19 has delayed decisions with respect to capital deployment. Nonetheless, largely due to higher backlogs of Fertilizer and Food projects, our sales order backlog is 27% higher than the relatively low backlog of a year ago.
In Canada, the Commercial market was very active over the last several years due to increased investment in grain infrastructure, however our Canadian Commercial backlog has decreased compared to the high levels of a year ago.
Commercial new order intake is subject to monthly fluctuation as the business is generally comprised of a relatively small number of higher dollar value projects. As at April 30, 2020, our Commercial backlog in North America was 2% lower than at the same time in 2019.
Global trade uncertainties in 2019 created an environment of uncertainty that lasted through much of the year. Capital projects were largely put on hold as our customers paused to assess what facilities they needed by geography to account for the changes in trade flows. This pause in spending started to impact our sales intake in the first quarter of 2019 and persisted until the fourth quarter. The late pickup in project activity in 2019 impacted the timing of our backlog once it did pick up, pushing project deliveries out to the back half of 2020.
The increased pace of new order intake experienced in Q4 2019 continued in 2020 and in the first four months of 2020 new international orders, excluding Milltec (acquired March 29, 2019) increased 21% compared to the prior year. As a result of increased new orders in late 2019 and YTD in 2020, the international sales order backlog at April 30, 2020, excluding Milltec, is 42% higher compared to the same time in 2019. Backlog increases are most significant in EMEA, Southeast Asia (excluding India) and Brazil.
Performance at Milltec, our platform acquisition in India, met expectations in Q1 2020 and is well positioned for long-term growth. New orders and backlog at Milltec in April 2020 have been impacted by the government mandated country-wide closure of businesses, however the impact is expected to be transient and new orders jumped dramatically with a partial reopening of certain businesses late in the month.
As it stands today, planting conditions in North America are substantially better than a year ago, AGI’s farm backlog is higher than it was at this time in 2019 and farm new order intake in April 2020 is consistent with the prior year. Likewise, our commercial backlogs are significantly higher than the prior year, with particular strength internationally. The company’s adjusted EBITDA margin for the balance of 2020 will be influenced by sales product mix and investments in the technology business and internal projects. COVID-19 related production suspensions and related expenses have impacted second quarter 2020 and the company expects continuing impacts as we move through the balance of second quarter and second half of 2020. Commercial order intake for the balance of the year is uncertain as the world continues to respond to the COVID-19 pandemic. Overall, our total sales order backlog is 9% higher than a year ago and we are positive on the resilience of the business in a difficult period.
Capital decisions related to Commercial projects, particularly in international markets, appear to be slowing due to the uncertainty surrounding COVID-19. Management anticipates these delays will impact Commercial sales in Q3 2020 and Q4 2020, however the extent and duration of the crisis will determine the extent of the impact on the pace of project pipeline development and the subsequent timing of revenue recognition.