Ceres Global Ag Corp. (CRP) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the Ceres Global Ag Conference Call for the 3-month period ended December 31, 2019. [Operator Instructions] I would like to remind everyone that today's discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on Ceres' risks and uncertainties related to these forward-looking statements, please refer to the company's management discussion and analysis, which is available on SEDAR and the company's website. I would now like to turn the call over to Robert Day, CEO of Ceres Global Ag. Please go ahead, Mr. Day.

Thank you, Denise. Good morning, everyone, and thank you for joining us today. With me is our Interim CFO, John Haug. From a financial perspective, quarter 2 marked the best quarter thus far for Ceres. Thanks to strong trading results, positive contributions from soybean crush, efficient operations and diligent cost management, the business performed, meeting expectations set at the beginning of the year. I will provide some commentary about the performance as it relates to our 3 business segments: grain merchandising, supply chain services and seed and processing. And after John presents his financial recap, I will provide more information about our outlook for quarter 3 and some of our growth initiatives. In the core grain business, gross margins were strong, led by durum and spring wheat as quarter 2 trading margins were up $4.5 million versus quarter 2 2019. While late harvest weather negatively impacted quality across much of the crop, yields were high and grain movement over the quarter was robust. Specifically, lower prices triggered demand from Europe for durum, leading to higher than normal exports. In addition, high spring wheat supply and diverse quality has led to wider carries, increased basis volatility and better trading opportunities. In addition, Nature's Organic Grist performed well as it supplied its customers with high-quality products secured during harvest. Supply chain services business, including liquid natural gas and fertilizer, maintained steady volumes and margins, in line with expectations for the quarter. The Gateway Energy Terminal joint venture with Steel Reef continues to make progress, developing new markets and opportunities. Meanwhile, other industrial products increased in volume from the previous quarter and continue to grow at an attractive pace. The seed and processing segment, including soybean crush, birdfeed manufacturing and bagging and soybean and corn seed retail and distribution, performed as expected. The seed business doesn't generate revenue this time of year and birdfeeds contribution is limited until it is able to increase sales and lower fixed cost per unit handled. However, soybean crush was a solid contributor for the quarter. While momentum is very strong, we do expect volumes and margins to be lower in quarter 3 as the Great Lakes and Northern Rivers are closed for the season. Meanwhile, we continue to make solid progress on our growth initiatives, which I will speak about after John has provided a recap of the financial results. Now I will turn the call over to John.

Thank you, Bob, and good morning, everyone. During the quarter ended December 31, 2019, our revenue increased by $34.1 million to $156.9 million, that is up from $122.8 million in the same period last year. This revenue growth was predominantly driven by the increase we experienced in bushels handled and traded during the period. Those volumes totaled 26.9 million bushels compared to 17.8 million bushels for the comparable period last year. Storage and transloading revenue decreased to $120,000 in the quarter compared to the same period last year, primarily as a result of a reduction in propane transloading revenue reported directly in the Ceres financials. Since the formation of the Gateway Energy Terminal in July of 2019, propane transloading revenue has been realized by the Gateway Joint Venture and reported by Ceres as part of the company's share of net income of associates. Net income increased to $2.3 million for the quarter compared with a loss of $5.2 million in the same quarter last year. This increase was driven by increased trade margin in the grain division, and positive contributions from soybean crush, along with the comparable quarter last year being negatively impacted by write-down in the value of the company's investment in Canterra Seeds Holdings Limited and the amortization of intangible assets. Net trading margin increased by $4.5 million for the quarter compared to the same period last year due to increased volume and higher trading margins on cereal grains quarter-over-quarter. Gross profit increased by over 200% to $9.2 million for the quarter compared with $3.0 million for the same period last year. The increase in gross profit was largely attributable to the increase in trading margins during the period. Operating and depreciation expenses increased by $1.1 million for the quarter. This is primarily a result of the acquisition of Delmar this past August, which increased the operating and depreciation expenses of the grain and value-added segments of our business. Expenses were also impacted by an increase in variable costs associated with the volumes handled. General and administrative expenses increased to $5 million compared to $3.4 million for the same quarter in 2019, also due to the addition of Delmar. Income from operations improved from a net loss of $364,000 to a gain of $4.1 million for the comparative quarters ended December 31. EBITDA increased to $5.7 million for the 3 months compared to a loss of $1.2 million for the same period last year. That concludes my review of the financial results, and I'll now turn it back to Bob for his closing remarks.

Thank you, John. With a strong first half of the 2020 fiscal year in the books, Ceres is in position to have the best year since its inception. While we anticipate quarter 3 will slow down for seasonal reasons, we expect the grain business to continue its strong performance throughout the year, we expect supply chain services will generate consistent wins, and we expect a solid contribution from soybean crush in Legend Seeds during the January through June period. We do not expect the second half of the fiscal year to generate the same amount of profit before tax and EBITDA as the first half. However, we expect results overall will be positive, resulting in a strong fiscal year as a whole. Meanwhile, we remain committed to our growth. We are making progress on acquiring assets in grain origination. While it is taking more time than we had hoped, we continue to make progress on the venture referred to in previous quarters with whom we have signed an LOI, and we are closer to several other acquisition targets we have been working on. In addition, we're analyzing whether it makes sense to increase efficiencies and capacity to some of our existing assets, and we should have more to report on that next quarter. In summary, you can expect to see the following from Ceres in the coming quarters. One, leverage our assets to address product quality variances and challenges while serving our customers needs. Two, continue integration and development of our 2 most recent ventures, Delmar Commodities and Gateway Energy Terminal. Three, add grain origination assets and add capacity to existing assets through our business development efforts. And four, develop identity-preserved supply chain solutions for customers looking for traceability and sustainability as they serve their customers downstream. Thank you all for listening. I'd like to now open the call to questions.

[Operator Instructions] Your first question comes from Stewart McCain with -- sorry, an investor.

Bob, give us a little bit more information on the Gateway Joint Venture. I mean, what -- you had to split the -- I guess, it was the propane contract with the joint venture because -- is that all there is? What is Steel Reef putting into this?

Yes. Thanks, Stewart for that. So in the initial stages of this joint venture, Ceres is not sacrificing any revenue that it previously had. So the way this joint venture is structured is that the existing business that Ceres had and continues to have is -- we're getting credit for that, and we're earning all of that. And the joint venture is then only going to be splitting revenues for new business. What Steel Reef is doing right now is really -- it's -- they're focused much more on the development of the future opportunity for the growth of that business. So we're talking -- evaluating infrastructure investments. And we've talked about before, connection by pipe to Northgate. So they're in the process right now of evaluating all those things and making plans for those things, so that we can take volumes to the next level. In the very early stages, however. There isn't a huge difference between prior to the JV until today, but at the same time, Ceres is not sacrificing any short-term revenue as we go through this phase.

Okay. All right. Just second question on the grain prices. I noticed they've been a little bit better. Is that helping the company going forward?

Well, grain prices have -- are a little bit -- probably lower. There's been quite a bit of movement over the last several months, and that's helping the company. I think what's -- the nice thing for us is, we've been in position now of doing the things that we're doing for the last several years. We've established more consistent trade flows, both into the United States and internationally, and so in a year like this, where quality -- there's more quality diversity out there, it's given us an opportunity to leverage those supply chains and increase our margins versus what we've seen in the past.