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

Good morning, everyone. Welcome to the Ceres Global Ag conference call for the 3- and 12-month period ending -- ended June 30, 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's website. I would like to now turn the call over to Robert Day, CEO of Ceres Global Ag. Please go ahead, Mr. Day.

Thank you, Joanne. Good morning, everyone, and thank you for joining us today. With me is our CFO, Jay Bierley. The 2020 fiscal year was exceptional for Ceres on many levels. It was the best year financially in the company's history, validating our strategy and the turnaround that started several years ago, and it was a year in which we made significant progress around our growth. Specifically, we formed the Gateway Energy Terminal operation in Northgate, Saskatchewan with Steel Reef Infrastructure Corp.; we acquired Delmar Commodities, Ltd. in Southern Manitoba; we made significant progress on other projects that have either already closed since the end of the fiscal year or are well on their way; and we added a significant amount of talent to the organization. In addition, we were able to finish the year strong operationally and financially despite the uncertainties and challenges faced from the COVID-19 pandemic. I am proud of my colleagues at Ceres for staying true to our values and working together to overcome this difficult situation. This has been a true test of our culture, and one in which we're far better equipped to handle than we would have been several years ago. Today, I will provide a breakdown of the performance across our 3 business lines: Grain division; Supply Chain Services, which is primarily our non-ag business; and Seed and Processing. Jay will provide financial details about the fourth quarter and annual results, and I will conclude with some comments about our outlook for fiscal year 2021 and growth initiatives going forward. The Grain division led the way in fiscal year 2020 as our core products of durum, spring wheat and oats all increased volumes merchandised and exceeded gross margin expectations for the year. We were able to capitalize on strong international demand for U.S. durum and exports through Duluth. We increased spring wheat volumes handled and delivered to key accounts, and we finished the year strong in oats by positioning well and delivering on identity preserved supply chain solutions for key customers. In addition, the grain assets acquired through the Delmar acquisition added immediate value as they provide a grower origination of oats and spring wheat for the broader Ceres network and access to new products we were able to profitably merchandise such as rye. The Supply Chain Services division performed near expected for the year financially. However, some areas were negatively affected by the change in environment brought on by COVID-19. On the positive side, industrial product volumes increased substantially during the year, albeit from a small starting point, and fertilizer realized incremental growth. NGLs consisting of propane and butane started strong and finished the year with lower volumes than expected due to the drop in crude oil prices globally and the decrease in crude oil and NGL production in Western Canada. The Seed and Processing division also performed well for the year as a whole. In addition to the grain assets previously mentioned, the Delmar acquisition included 3 other business lines that make up this division, all of which are based in Southern Manitoba: soybean crush; specialty crop blending, which is essentially bird feed; and oilseed and corn seed production distribution and sales across Western Canada. Soybean Crush is a mature business and financially, it performed well for the year. Yields were lower than expected due to a lower quality soybean crop. However, we were able to make up for that through good timing of purchases and sales. Specialty blending bird feed was a new business for Delmar and one that is in the early stages of development. Volumes and margins were higher than expected for the year and finished with very good momentum. Meanwhile, the seed business performed slightly lower-than-expected for the year financially, due mainly to late returns of corn and soybean seeds. However, it was profitable for the year. In addition, this business went through significant changes late in the year. We 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. In combination with these new relationships, we rebranded the Legend Seeds Canada trade name to Ceres Global Seeds. Overall, we are very pleased with the results in fiscal year 2020. And shortly, I will provide an outlook for fiscal year 2021 and an update on the growth initiatives underway. Before I do that, I will turn the call over to Jay, so he can speak to our financial results in more detail.

Thank you, Bob, and good morning, everyone. As Bob mentioned, we had a good quarter 4 results of $527,000, which were much improved over prior year quarter losses of $1.9 million. This brings our full year net income to $4.3 million compared to prior year losses of $16.8 million. This $21.1 million in improved results is due to income from operations that increased $8.3 million year-over-year, along with the prior year results that included $9.5 million in litigation expense and $1.9 million in revaluation of portfolio investments. Improved income from operations is directly related to our strategy and continued growth in our core Grain segment, along with 11 months of contribution from our recently acquired businesses of Delmar that closed in August 2019. Revenues year-over-year increased by 33% to $582 million compared to $438 million in the prior year. This growth largely resulted from 93 million bushels handled, which was 29% more than the 72 million handled in the prior year. Of this 21 million bushel increase, approximately 3/4 came from organic growth in our core commodities, with the balance coming from the grain operations acquired with Delmar. Our Seed and Processing segment revenues of $39 million that came from Delmar also drove increased and incremental revenues for the year. Gross profits were $27.3 million for the year and almost double and were higher than our prior year results of $14.3 million. This improvement was driven by our Grain segment that finished the year with gross profits of $24.5 million, which were $10.2 million higher than the prior year. Despite a challenging market environment, improved merchandising and risk management results on the back of growth in bushels handled and shipped helped drive great results across our core product lines, spring wheat, oats and durum. Feed and Processing segment gross profits of $2.7 million that came from Delmar helped us further expand and diversify our geographical footprint and product offerings in complementary businesses. Gross profits and supply chain services were $154,000, and slightly improved over relatively breakeven results in the prior year. Our general and admin expenses of $17.7 million were $4.7 million higher than the prior year. Half of this increase was due to the acquisition of Delmar that resulted in incremental expenses and stepped up asset depreciation, with the other half related to additional integration and compensation expense as our business has grown in size and in profits. Interest expense for the year totaled $5.9 million compared to $4.6 million in the prior year. This increase is primarily related to an increase in our term loan in relation to the funding of Delmar, along with the additional market opportunities to handle and store more grains than a year ago. Due to our strong financial results, which included $16.9 million in EBITDA for the year, we did pay early $5 million in term debt in February, which isn't due until November 2020, and we're able to keep our revolving indebtedness in line and slightly lower than the prior year despite the acquisition of Delmar and its related working capital. Our liquidity remains strong with over $40 million of excess liquidity at the end of the year, which gives us flexibility as we look for opportunities to profitably invest in working capital and growth opportunities that may arise. Income tax expense for the year was only $150,000, as we continue to benefit from deferred tax assets that are fully reserved and not recognized on our balance sheet. For the year ended -- ending June 30, 2020, we have unrecognized deferred tax assets of $25.2 million that will continue to benefit our earnings and minimize the cash taxes we pay in future years. In summary, our earnings and balance sheet strength improved significantly over the prior year, and we have a solid foundation to continue to build and grow our business. This concludes my review of the financials. I'll now turn it back over to Bob for his closing remarks.

Thank you, Jay. Due to changes made over the past several years, Ceres is in the best position it has ever been to serve customer needs and maximize opportunities the market offers. Meanwhile, the 2021 fiscal year will have its share of challenges and obstacles to overcome. Specifically, stronger-than-expected Chinese demand for U.S. soybeans and corn has driven U.S. rail freight values higher, making it difficult for companies like Ceres to remain competitive, exporting durum and spring wheat to the world market. In addition, farmer subsidies and COVID-19 are making it difficult to predict what will happen and how Ceres should position accordingly. In the non-ag side of our business, we expect a downturn in NGL volume and lower gross margins due to the low price of crude oil and decrease in production of NGLs. On the positive side, the core products we merchandise have yielded large crops, which can lead to increased merchandising opportunities, wider carries and better crush margins. Overall, we are optimistic about our prospects for the year. However, we expect the first 2 quarters to be more challenging than normal. And the last 2 quarters is the time period where better opportunities are likely to emerge. Regarding our growth plans, we expect fiscal year 2021 to be just as active as fiscal year 2020. At the start of fiscal year 2021, we closed on the acquisition of the Nicklen Siding elevator in Northern Saskatchewan announced several weeks ago. We are working on and expect to complete an expansion of our soybean crush plant in Jordan, Manitoba by summer of 2021. We are well down the path towards another acquisition that will provide access to more origination of our core products directly from growers. And we have several other projects in the pipeline that our business development team is working on. To learn more about our results and growth plans, please join us for our virtual Annual General Meeting in November. Details about the meeting will be forthcoming and will be posted on our website at ceresglobalagcorp.com. Thank you all for listening. I'd like to now open the call to questions.

[Operator Instructions] There are no questions at this time. I will turn the call back over to Robert Day.

Okay. Thank you, Joanne, and thank you, everyone, for listening today. We hope to see you at the Annual General Meeting in November and look forward to communicating with everyone at that time. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.