Winnipeg, MB, January 16, 2020 – Ag Growth International Inc. (TSX: AFN) (“AGI” or the “Company”) is pleased to announce it has acquired 100% of the shares outstanding of Affinity Management Ltd. (“Affinity”). Affinity was launched in 2007 and currently has 18 employees, with headquarters in Oakville, Ontario. The transaction was funded from the Company’s operating facilities.
Affinity was founded by Neal Dilawri and was developed over 12 years in partnership with one of the world’s largest agricultural inputs manufacturers. Affinity is a provider of software solutions to the agriculture industry under the brand name Compass® and includes a comprehensive Enterprise Resource Planning (“ERP”) system for growers and ag retailers, as well as an agronomy tool. The ERP system provides full accounting functionality, including management of accounts receivable, accounts payable, payroll, and inventory tracking. Additionally, Affinity employs on-staff accountants who provide bookkeeping services to its grower customers. Compass® also acts as a central data repository and portal which allows for the sharing of information with a grower’s trusted advisors, including agronomists, accountants, lenders, and insurance providers.
The Compass® product suite is highly complementary to AGI’s current offering and will be a key component of the full AGI SureTrack platform. Compass® customers include independent growers, agronomy companies and ag retailers, representing over 8,000 individual farmers across North America.
Mr. Dilawri will take on a senior leadership role with the AGI SureTrack platform and will provide vision and guidance to the platform going forward.
“AGI SureTrack is an independent platform bringing together data across the farm, providing our customers with the ability to manage their crop production, manage their overall business, and market their grain based on content and robust traceability,” said Tim Close, President and Chief Executive Officer of AGI . “Compass takes AGI SureTrack to the next level, adding comprehensive ERP capabilities for AGI Dealers and agriculture retailers, and significantly adding to our offering for farmers. I am looking forward to working closely with Neal in his new leadership role with AGI SureTrack as we continue to grow this platform. I also want to welcome the entire Affinity team to the AGI family.”
UPDATE ON Q4 2019 AND OUTLOOK
AGI results in Q4 2019 were mixed as strong demand for portable grain handling and drying equipment, a solid performance in India and significantly improved results in Brazil were offset by a combination of factors that resulted in Q4 2019 results falling below prior year levels. In 2019, AGI demonstrated the success of its AGI SureTrack subscription model as demand exceeded our capacity and we increased retail equivalent sales by 70%, despite the challenges of a soft U.S. ag market. In the fourth quarter of 2019, AGI increased its investment in sales, marketing and technical resources at AGI SureTrack to address capacity and accelerate the future pace of new user additions, thereby increasing our recurring revenue stream and adding significant equipment cross-sell opportunities. The accounting implications of the conversion of AGI SureTrack to a subscription model, particularly in a seasonally weak quarter, coupled with an increased investment in the platform, resulted in negative Q4 2019 adjusted EBITDA of approximately $2.7 million.
AGI will continue to invest in the SureTrack platform in fiscal 2020, however the quarterly amount of negative adjusted EBITDA is expected to be lower than experienced in Q4 2019. Secondly, a very wet and late harvest in the United States and a continuation of the weak macro environment had a greater than anticipated impact on AGI’s grain storage systems business, resulting in lower than expected sales and adjusted EBITDA. Lastly, at the request of our customers, several Commercial projects in Canada and offshore were postponed into Q1 2020, resulting in a deferral of sales and earnings. In sum, management anticipates adjusted EBITDA in the fourth quarter, inclusive of the impact of subscription accounting, will approximate $23 million.
Management retains its positive outlook for 2020. In 2019, AGI demonstrated the success of its AGI SureTrack subscription model by increasing retail equivalent sales by 70%, despite capacity constraints and a challenging U.S. ag market, and in 2020 that growth is expected to continue as AGI builds on existing relationships with processors, merchandisers, grain buyers and producers throughout North America. In addition, management anticipates robust Farm demand with the beginning of the 2020 planting season due to an increase in U.S. planted acres, an improvement in weather conditions compared to historically poor conditions in 2019, and better farmer economics and sentiment should the U.S. and China fully implement Phase 1 of a trade agreement. Offshore, management expects continued growth in India and Brazil, and anticipates an improvement in the global trade environment will result in increased demand in its Commercial business. In sum, Farm and Commercial backlogs have returned to the very strong levels experienced leading into 2019, and management expects sales and adjusted EBITDA in 2020 to significantly exceed 2019 results.
UPDATE ON PROJECT REWORK
In the third quarter of 2019 AGI recognized a pre-tax charge of $7 million for estimated rework costs on specific projects. Planning and related rework have advanced significantly since AGI announced the preliminary estimate on October 16, 2019, and the Company now estimates total costs will be in the range of $8.5 - $10 million. AGI is incurring this increased charge to continue to stand behind its customer partnerships and to ensure the projects meet AGI’s high standard for quality.
AGI is a leading provider of equipment solutions for agriculture bulk commodities including seed, fertilizer, grain, and feed systems with a growing platform in providing equipment and solutions for food processing facilities. AGI has manufacturing facilities in Canada, the United States, the United Kingdom, Brazil, France, Italy, and India and distributes its product globally.
Further information can be found in the disclosure documents filed by AGI with the securities regulatory authorities, available at www.sedar.com and on AGI's website www.aggrowth.com.
Preliminary Unaudited Financial Information
The estimated pre-tax charge to be taken in AGI's financial results for the year ended December, 2019 and our expectations for company and AGI SureTrack adjusted EBITDA in the fourth quarter of 2019 are based on, among other things, the anticipated costs of the rework of the related equipment, including the additional time, material, services and other costs required to ensure the applicable projects meet AGI’s high standard for quality and customer satisfaction, and AGI's financial results for the three months and year ended December 31, 2019. The actual rework costs and AGI's financial results for the three months and year ended December 31, 2019, have not yet been finalized or approved and as such, such estimates and guidance are subject to the same limitations and risks as discussed under Forward-Looking Information set out below. Accordingly, the amount of the pre-tax charge and AGI's guidance for three months and year ended December 31, 2019 may change upon the completion, audit and approval of the financial statements for the three months and year ended December 31, 2019 and the changes could be material.
This press release contains forward-looking statements and information (collectively, "forward-looking information") within the meaning of applicable securities laws that reflect our expectations regarding the future growth, results of operations, performance, business prospects, and opportunities of AGI. All information and statements contained herein that are not clearly historical in nature constitute forward-looking information, and the words “anticipate”, “believe”, “continue”, “could”, “estimate”, "expect”, “intend”, “plans”, "postulates", "predict", “should”, “will” or similar expressions suggesting future conditions or events or the negative of these terms are generally intended to identify forward-looking information. Forward-looking information involves known or unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information. Undue reliance should not be placed on forward-looking information, as there can be no assurance that the plans, intentions or expectations upon which it is based will occur. In particular, the forward-looking information in this press release includes information relating to our business and strategy, including: our preliminary estimate of the pre-tax charge related to the estimated cost of rework for equipment supplied to certain projects; our expectations for company and AGI SureTrack adjusted EBITDA in the fourth quarter of 2019; and our outlook for our financial and operating performance in 2020 including our expectations for our future financial results including sales and adjusted EBITDA, industry demand and market conditions. Such forward-looking information reflects our current beliefs and is based on information currently available to us, including certain key expectations and assumptions concerning: anticipated grain production in our market areas; financial performance; the financial and operating attributes of recently acquired businesses and the anticipated future performance thereof and contributions therefrom; business prospects; strategies; product and input pricing; regulatory developments; tax laws; the sufficiency of budgeted capital expenditures in carrying out planned activities; political events; currency exchange and interest rates; the cost of materials; labour and services; the value of businesses and assets and liabilities assumed pursuant to recent acquisitions; the impact of competition; the general stability of the economic and regulatory environment in which AGI operates; the timely receipt of any required regulatory and third party approvals; the ability of AGI to obtain and retain qualified staff and services in a timely and cost efficient manner; the timing and payment of dividends; the ability of AGI to obtain financing on acceptable terms; the regulatory framework in the jurisdictions in which AGI operates; the ability of AGI to successfully market its products and services; the estimated costs associated with the equipment supplied including the total cost of the rework and any additional associated costs; and AGI's ability to achieve the expected benefits of the acquisition of Affinity, and the anticipated impact of the acquisition of Affinity on AGI's business. Forward-looking information involves significant risks and uncertainties. A number of factors could cause actual results to differ materially from results discussed in the forward-looking information, including changes in international, national and local macroeconomic and business conditions, as well as sociopolitical conditions in certain local or regional markets, weather patterns, crop planting, crop yields, crop conditions, the timing of harvest and conditions during harvest, the ability of management to execute AGI’s business plan, seasonality, industry cyclicality, volatility of production costs, agricultural commodity prices, the cost and availability of capital, currency exchange and interest rates, the availability of credit for customers, competition, AGI’s failure to achieve the expected benefits of recent acquisitions including to realize anticipated synergies and margin improvements; changes in trade relations between the countries in which AGI does business and elsewhere including between Canada and the United States and between the United States and China; changes in our estimate of the costs associated with the rework of equipment supplied including the potential for additional associated or incidental costs and liabilities; the failure to realize some or all of the anticipated benefits of the acquisition of Affinity; and the finalization of our financial statements for the three months and year ended December 31, 2019. These risks and uncertainties are described under “Risks and Uncertainties” in our Q3 MD&A, our annual MD&A and in our most recently filed Annual Information Form, all of which are available under AGI's profile on SEDAR [www.sedar.com]. These factors should be considered carefully, and readers should not place undue reliance on AGI’s forward-looking information. We cannot assure readers that actual results will be consistent with this forward-looking information. Readers are further cautioned that the preparation of financial statements in accordance with IFRS requires management to make certain judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent liabilities. These estimates may change, having either a negative or positive effect on profit and other financial information, as further information becomes available and as the economic environment changes. The forward-looking information contained herein is expressly qualified in its entirety by this cautionary statement. The forward-looking information included in this press release is made as of the date of this press release and AGI undertakes no obligation to publicly update such forward-looking information to reflect new information, subsequent events or otherwise unless so required by applicable securities laws.
In analyzing our results, we supplement our use of financial measures that are calculated and presented in accordance with International Financial Reporting Standards ("IFRS") with a number of non-IFRS financial measures including “EBITDA” and “adjusted EBITDA”. A non-IFRS financial measure is a numerical measure of a company's historical performance, financial position or cash flow that excludes [includes] amounts, or is subject to adjustments that have the effect of excluding [including] amounts, that are included [excluded] in the most directly comparable measures calculated and presented in accordance with IFRS. Non-IFRS financial measures are not standardized; therefore, it may not be possible to compare these financial measures with other companies' non-IFRS financial measures having the same or similar businesses. We strongly encourage investors to review our consolidated financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.
We use these non-IFRS financial measures in addition to, and in conjunction with, results presented in accordance with IFRS. These non-IFRS financial measures reflect an additional way of viewing aspects of our operations that, when viewed with our IFRS results and the accompanying reconciliations to corresponding IFRS financial measures, may provide a more complete understanding of factors and trends affecting our business.
Management believes that the Company's financial results may provide a more complete understanding of factors and trends affecting our business and be more meaningful to management, investors, analysts and other interested parties when certain aspects of our financial results are adjusted for the gain (loss) on foreign exchange and other operating expenses and income. These measurements are non-IFRS measurements. Management uses the non-IFRS adjusted financial results and non-IFRS financial measures to measure and evaluate the performance of the business and when discussing results with the Board of Directors, analysts, investors, banks and other interested parties. Reconciliations of historical non-IFRS financial measures to the most directly comparable historical IFRS financial measures are contained in our previously filed management’s discussion and analysis.
References to “EBITDA” are to profit before income taxes, finance costs, depreciation, amortization and AGI’s share of Associate’s net income (loss). References to “adjusted EBITDA” are to EBITDA before the gain or loss on foreign exchange, non-cash share based compensation expenses, gain or loss on financial instruments, M&A expenses, other transaction and transitional costs, gain or loss on the sale of property, plant & equipment, gain or loss on disposal of assets held for sale, fair value of inventory from acquisitions, impairment and equipment rework. Management believes that, in addition to profit or loss, EBITDA and adjusted EBITDA are useful supplemental measures in evaluating the Company’s performance. Management cautions investors that EBITDA and adjusted EBITDA should not replace profit or loss as indicators of performance, or cash flows from operating, investing, and financing activities as a measure of the Company’s liquidity and cash flows.
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