Commercial To Drive Y/Y Profitability – Q2/24 Review Our Conclusion
Q2/24 was weaker than expected, reflecting a temporary manufacturing
outage in Canada, softness across Brazil, U.S. and Australia Farm markets,
and Commercial margins. Optimism is growing for the Farm segment for
H2/24 with large crops expected in both Canada and U.S. (which should drive
grain storage and in-season higher-margin portable demand). Q2/24
Commercial segment revenue was flat Y/Y as ongoing softness in Canada
offset consistent performance from the U.S. and International. International
Commercial continues to successfully execute a sizable order book, with
many key projects progressing well and on pace to deliver accelerated results
throughout H2/24 and continued momentum into 2025. We have lowered our
estimates to reflect slightly lower revenue growth assumptions. Our price
target reduces from $82 to $78 and we maintain our Outperformer rating.
Key Points
Trimming 2024 Guidance: EBITDA guidance now calls for a range of
$300MM to $310MM (previously >$310MM). Consistent with previous
messaging, AFN sees significant strength in the Commercial segment which
is expected to drive strong H2/24 results with several key projects
progressing well. AFN expects full-year margin levels to stabilize above
19% as further incremental operational excellence gains accrue to margins
to offset a shift in mix towards relatively lower-margin Commercial.
Farm Outlook Improving: The U.S. Farm segment was particularly slow in
Q2/24 (sales down 22% Y/Y) due to cautious purchasing behavior and
higher dealer inventories. Several notable actions were taken across Q2/24
to manage costs, capacity, and manufacturing utilization through the
slowdown. These actions supported both the right-sizing of business
operations relative to Q2/24 market conditions, as well as structural
changes that will serve as an operational excellence tailwind going forward.
The outlook for the upcoming crop has improved and appears to be tracking
towards a strong harvest. As with Canada Farm, this potential for large crop
volumes should support demand, particularly for grain storage. Another
positive signal is that dealer turnover for portable equipment has improved
towards the end of Q2/24, and now early into Q3/24.
Strong International Commercial Business: AFN notes that a robust
order book (up >60% Y/Y) will continue to be a key driver towards an overall
record H2/24. EMEA will be a bright spot, with a focus on the Middle East
and Africa. Business development activities in Southeast Asia remain
strong, with the order book up 144% Y/Y. The Brazil Commercial segment
is showing strong signs of ramping activity, with extremely high order intake
contributing to an overall Brazil Commercial order book now up 83% Y/Y.
Demand in India for rice milling products remains robust, and progress with
key product transfer projects is on schedule (storage bins and permanent
material handling). With a favourable monsoon season and an all-time
record order book, the business is positioned extremely well going forward.