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 March 31, 2020. [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 on the company 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, Mariam. Good morning, everyone, and thank you for joining us today. With me is our CFO, Jay Bierley. I would like to begin by thanking all my colleagues for their commitment and resilience as they have allowed Ceres to successfully navigate in the challenging environment created by COVID-19. Ceres is an essential business, providing food, energy and industrial products to customers around the world. We have not shut or slowed down any facility, and our IT team has enabled office staff to work remotely by continuing to demonstrate commitment and ingenuity to keep the rest of our business running smoothly. Just 1.5 months ago, we were discussing whether we should take the full 45-day reporting extension allowed by the Toronto Stock Exchange. To be prudent, we took 15 days, and thanks to our IT and financial teams, we closed the books, and we're having this call with you today. In addition, the Ceres leadership team is doing everything it can to support our colleagues. Since early February, we formed a cross-functional pandemic response team that was meeting daily in the early stages and today maintains a cadence needed to stay ahead of the changing environment. We put in place strict guidelines across all locations, amended travel policies and established action plans should anyone become infected with COVID-19. To date, no Ceres employee has tested positive for coronavirus. While a positive test wouldn't necessarily suggest the company or anyone had done anything wrong, the fact that there hasn't been a positive test indicates that our processes are working, and that Ceres employees are taking necessary precautions to keep themselves safe. I'm proud of them for that. Under the circumstances, we are pleased with our financial performance for the quarter. Initially, we got off to a slow start as the Great Lakes in Upper Mississippi River closed for the season and COVID-19 negatively impacted demand, both export demand as European import logistics were halted due to fears that products could carry the virus and into the United States as buyers paused to better understand the impacts of what was happening. Later in the quarter, the environment changed as stay-at-home orders were implemented and retail demand for longer shelf life products increased. This led to an increase in demand for Ceres core products: durum, oats and wheat. Meanwhile, animal production and slaughtering operations in Canada have not been affected similar to those in the United States, which has allowed our soybean crush plant in Manitoba to run at full capacity. With the drop in crude oil prices, however, we are seeing lower propane production and volumes, and we expect that to last into the foreseeable future. Overall, we recovered well by the end of the quarter, and we entered quarter 4 with strong momentum. I will speak more about what to expect in the fourth quarter and our growth-based initiatives in just a few minutes. Now I will turn the call over to Jay.

Thank you, Bob, and good morning, everyone. For the quarter, we had a small net loss of $281,000 and a strong EBITDA of $2.7 million, and both were improved in our quarter ended March 31, 2020, compared to prior year results. This brings our year-to-date net income to $3.8 million and year-to-date EBITDA to $12.8 million, both of which were significantly improved over the prior year. Driving our improved results is directly related to our strategy and continued growth in our core grain division business, along with the year 1 contributions from our recently acquired businesses of Delmar. During the quarter ended in March, our revenues increased by $30 million to $120.6 million compared to $90.6 million in the same period last year. This increase largely resulted from 19.1 million bushels handled in our grain division, which is 19% more than the 16 million handled in the prior year. On a year-to-date basis, our revenues have increased over $100 million as we have handled 67.7 million bushels, which is 30% higher than the 52 million handled in the prior year. Our seed and processing revenues of $7.8 million that came from our Delmar acquisition in August 2019 also drove increased revenues for the quarter over prior year results. Supply chain service revenues were marginally lower by $153,000 for the quarter and primarily related to revenues in our propane transloading business that are now recorded through our Ceres investment in Gateway Energy Terminal that became effective in July 2019. Gross profits were $4.2 million for our quarter ending March and were much improved and 31% higher than our year-to-date results -- than our prior year results of $3.2 million. This improvement was driven by our grain division that accounted for $546,000 of the increase. Despite the marketing -- despite the challenging market environment as described by Bob, we had improved merchandising and risk management results that were realized in our core product lines of wheat, oats and durum. $288,000 in incremental profit, gross profits in seed and processing from the Delmar acquisition, along with more bushels handled that benefited supply chain services were the remaining drivers of improved gross profit in the quarter compared to prior year results. On a year-to-date basis, gross profits are $19.8 million, which is $8.4 million higher than the prior year results of $11.4 million. Our core grain division activities are driving these improvements and are a reflection of our focused execution of our strategy. Our general and administrative expenses increased to $4.1 million for the quarter ended March compared to $2.7 million in the prior year and is largely due to the addition of Delmar. We also revalued the estimated payout related to the earn-out provisions from our NOG acquisition to $0 and recognized $917,000 into earnings in the quarter ending March 31, 2020. Interest expense for the quarter totaled $1.5 million compared to $1.3 million in the prior year. This increase is primarily related to the Delmar acquisition, along with market opportunities to carry grains at the end of the quarter compared to a year ago. Our revolving credit indebtedness is $59.6 million at March 31, 2020, and has increased from $33.7 million at June 30, 2019. This increase is primarily seasonal and is due to carrying 3.4 million more bushels of grain compared to June 30, 2019, year-end inventory level. Although our debt levels are higher, our liquidity remains strong with over $30 million of excess liquidity at the end of March 2020. Our term loan, including both short term and long term, is $29.6 million at March quarter end compared to $19.6 million at the end of June 2019 and has increased due to the acquisition of Delmar. However, due to our strong financial results, we did prepay $5 million in term debt in February, which wasn't due until November 2020. Overall, our results are improved for the quarter, are improved on a year-to-date basis, and we expect a strong finish for the year. This concludes my review of the financial results, and I'll now turn it back to Bob for his closing remarks.

Thank you, Jay. After 3 quarters, Ceres is in position to have its best financial performance since it became an operating company in 2010. While some areas of our business are facing challenges from the environment created by COVID-19, our strategy is working, and we continue to build on past successes. In quarter 4, we expect to be profitable and to see the following outcomes: strong volumes and margins from core and complementary product lines: durum, oats, wheat, canola and organics; strong volumes and steady performance from our processing product lines: soybean crush and bird feed; steady volumes and performance from fertilizer and industrial product transloading; a drop in propane volumes and margins, but making up for some of that through higher railcar storage fees; strong margins from Ceres global seeds, nearly all revenue from this business is realized in the fourth quarter. And overall, we are expecting a profitable quarter and improvement versus quarter 4 of 2019. I would like to take some time here to explain changes in our seed business in the press release issued earlier this week. Specifically, Ceres has entered into agreements to partner with 2 highly specialized seed companies, Sevita International Corporation and Horizon Seeds Canada Inc. to distribute soybean and corn seed products in Western Canada, respectively. As a result of these changes, we will be rebranding the Legend Seeds Canada trade name to Ceres Global Seeds and will no longer be distributing Legend Seeds Inc. corn or soybean products. The trigger for this change comes from Legend Seeds U.S.A. losing its license to grow and distribute Bayer seed traits, which made up nearly all of the traits used by Delmar. Fortunately, and in short order, we were able to identify and partner with 2 companies that will allow us to more effectively diversify our seed business and develop high-quality products for long-term success in Canada. In addition, we continue to make progress on other growth-related initiatives and projects. Specifically, we are working on 2 investments that will provide direct access to farmer origination, both of which have signed agreements, allowing us to work exclusively with the counter parties and 1 investment to increase capacity in existing facility. In total, we estimate these investments will cost around USD 20 million, for which we have the capital today. Beyond that, we have several more attractive projects in the pipeline, and those opportunities -- as those opportunities materialize, we will need to raise additional capital. Lastly, I would like to talk about our stock price and the disconnect we've seen versus continued improvement in financial results. Several years ago, the opportunity and attractiveness in owning Ceres was based on potential in the future. We had unique and valuable assets, a solid strategy, and we were attracting talent and developing relationships with customers. Much of that story is still the case. There is still more value to glean from our terminal assets, customer relationships and trade flows as we add farmer origination and invest in technology to enable more sophisticated supply chain solutions for our customers. However, we are now at a point whereby our earnings on their own justify a much higher stock price than where we are today. Our 12-month trailing EBITDA is over USD 14 million. And after quarter 4, we expect EBITDA for the 2020 fiscal year to be notably better than that. In addition, there are other items we don't believe the market is recognizing. For example, our balance sheet is very strong. Ceres uses more of its own equity to finance inventories in its supply chains than other companies in the industry. Total working capital used for leverage is 1 to 1.5x long-term debt. And we have over $150 million in tax loss carryforwards that will allow us to earn profits without paying taxes in the future. This has potential value of up to USD 30 million and is valued at $0 on our balance sheet. Meanwhile, our market cap today is trading at a significant discount versus financial metrics typically used to value companies in our industry, perhaps half. It is our belief that this will not last as long as we continue to execute on growth-related initiatives and maintaining the existing trajectory of improved financial results. This is where management is focusing its efforts today, and we are committed to a successful outcome. We will provide more detail about our plans around growth and development after quarter 4 and the end of the fiscal year. Thank you all for listening. I'd like to now open the call to questions.

[Operator Instructions] You have a question from the line of [ Stuart McKean ].

Just a question to Jay. He came from a bigger ag company, I believe, what attracted you to Ceres?

Yes. Thank you. I think when I was looking for the next opportunity, I think I was looking for a company with good people that had a good business. And the more I talked with the Ceres team, I discovered that the outlook in some of the businesses that we're dealing with are actually very globally competitive than some of the tops in the world. And I would say that when I look at our Ceres and our go-forward model and stuff, it's very clear that the management team has a clear direction of where we want to get to. And those are some of the things that are important to me. So this is a company with good people that has the right focus, the right strategy. And I think those are the things that make Ceres a good place. And after my 6 weeks or so here at Ceres, I would say that these things still hold very true from when I first got introduced to the team. So I think we've got a good future, and it's one I'm very happy to be a part of and looking forward to help contribute in whatever way I can.

All right. Bob, just in Canadian, what's the -- what's your projection on the final quarter as far as earnings per share for the year? What would it be in Canadian money?

So in terms of projecting total annual profits and then what that looks like in earnings per share?

Yes.

Is that the question?

And I know you don't do that, but...

Yes. I mean I guess we're not providing specific guidance around what we think fourth quarter profits are going to be in earnings per share. I mean I could tell you at year-to-date, we're -- let's see, I can -- I think it's a -- I can give you a number here pretty quickly. So year-to-date, we're at USD 3.8 million, that's CAD 5 million. Just give me one second. So it's approximately CAD 0.17 a share. And that's year-to-date. So I did say we expect we will be profitable in the fourth quarter, so something better than that.

There are no further questions at this time. I will now turn the call back over to Robert Day for closing remarks.

Thank you, Mariam, and thank you, everyone, for attending the call today. I hope everyone is safe and healthy in this environment, and look forward to talking to you again after the end of the fiscal year.

This concludes today's conference call. Thank you for participating. You may now disconnect.