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

Good morning, everyone. Welcome to the Ceres Global Ag 2021 First Quarter Earnings call for the 3-month period ended September 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 now like to turn the call over to Robert Day, CEO of Ceres Global Ag. Please go ahead, Mr. Day.

Thank you, operator. Good morning, everyone, and thank you for joining us today. With me is our CFO, Jay Bierley. Market conditions during the first quarter were more challenging than normal due to low inventories of some of our core products and high-priced U.S. rail freight caused by strong soybean demand from China, which negatively impacted U.S. wheat and durum export competitiveness. Despite that, efforts over the past several years to develop strong customer relationships and diversify into new revenue-generating opportunities made it possible to offset a significant portion of the negative macro environment and still generate positive income from operations and EBITDA for the quarter. 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 Jay presents his financial recap, I will provide more information about our outlook for the rest of the fiscal year and some of our growth initiatives. In the grain merchandising segment of the business, total volume handled was over 6 million bushels more than the same quarter a year ago, and all product lines except durum generated roughly the same or more gross margins. Despite limited export activity, the wheat and oat product lines performed well through increased sales to U.S. milling customers and solid trading and positioning. Canola, organics and freight also performed well, increasing gross margins from a year ago by merchandising more volume or taking advantage of rising prices. Meanwhile, the durum product line was significantly limited when compared to its exceptionally strong contribution in the first quarter of last year. Overall gross margins were positive for the quarter. However, Ceres was unable to take advantage of strong global demand as U.S. exports were uncompetitive compared to Canada. In the Supply Chain Services segment, industrial products performed well, underpinned by oriented strand board and lumber as new home construction in the U.S. market was strong. Fertilizer also performed well, supported by strong demand for phosphates and urea in Western Canada. Meanwhile, liquid natural gas, NGL, volumes were down due to low crude oil prices and a decrease in production of NGLs overall. The Seed and Processing segment performed slightly better than the same quarter a year ago. Regarding soybean crush, while processing margins were lower than last year and soybean quality was somewhat challenging, timely purchases and sales and running the plant at full capacity made for those challenges. Specialty Crop blending -- the specialty crop blending business, which makes birdfeed, performed better-than-expected due in part to increased demand for birdfeed and apparent change in behavior brought on by COVID-19 and people staying at home. Last, the Seed business is seasonal and doesn't generate gross margins in the July through September period. While we are facing some headwinds that we didn't experience last year, we are optimistic about what the full year will present in terms of opportunities, and we continue to make solid progress on our growth initiatives, both of which, I will speak about later in the call. But for now, I will turn the call over to Jay, who will speak about our financial numbers in more detail.

Thank you, Bob, and good morning, everyone. Although we had good gross margins across all of our commodity and business lines, the opportunities in the market this year were lower than a year ago, and this was the primary driver for first quarter loss of $936,000 that we reported this morning compared to net income of $1.8 million for the same period a year ago. Our revenues for the quarter were $172 million, representing a 35% increase over Q1 of last year. This growth in revenue was a result of 28 million bushels handled in the quarter, which was 28% more than a year ago. The growth was attributable to a good harvest in terms of yields and weather, along with the full quarter of Delmar and the addition of our Nicklen Facility, which closed and we began to operate in September. Gross profits were $3.8 million for the quarter, down from $6.7 million in Q1 of last year. The biggest driver of the decrease was the lower contributions from our grain segment, which posted gross profits of $3.3 million for the quarter compared to $6.1 million for the same time last year. Although revenues in bushels handled were higher than a year ago, margin opportunities to carry durum, were limited in the quarter, and as a result, our inventory levels and returns were lower. In addition, the tight freight markets, as Bob described, from the China demand for soybeans, reduced our competitiveness of our core commodity export programs and pressured margins on our flows in the U.S. milling markets. Gross profits from our Seed and Processing segment were $571,000 for the quarter, up from $471,000 in Q1 of last year. This year, we had a full 3 months of contributions from Delmar compared to 2 in quarter 1 of last year. But this increase was partially offset by the slightly lower margins as we process lower quality seed from the previous harvest. Current year harvest and quality are improved, and we expect margins to strengthen going forward. Our Supply Chain Services generated gross profits of $13,000, which was down from $141,000 in the comparable quarter, as our Gateway Energy Terminal JV has been impacted by global energy markets that remain subdued. Fertilizer and Industrial services were both in line with the same time a year ago. General and admin expenses of $3.8 million were slightly higher than the $3.7 million in Q1 of last year. Inflation in labor and the additional month of operating Delmar was partially offset by lower exposures on bad debts and less travel compared to the prior year. Interest expense for the quarter totaled $1 million and was lower than the $1.4 million in the prior year. This decrease was driven by lower inventories carried in the quarter compared to the prior year, along with lower LIBOR rates that remain subdued during the COVID-19 pandemic and the related weakness in global markets. Our term debt was $29.8 million and relatively unchanged during the quarter, our $5 million term debt installment due this month was paid early this past February. Our next $5 million payment is not due until November next year. Our revolving bank of debates at quarter end was $57.8 million and higher than our debt at year-end June 30 of $31.7 million. This increase was primarily related to normal and seasonal harvest increases in working capital, along with $7 million and company purchases of Property, Plants and Equipment, that included our Nicklen Facility purchase in the quarter. At the end of the first quarter, we had $37.7 million available on our revolving credit line, which gives us both liquidity and flexibility as we look for opportunities to profitably invest in working capital and growth opportunities that may arise. Income tax expense for the quarter was a benefit of $115,000 as we continue to benefit from approximately $25 million in deferred tax assets that are fully reserved and not recognized on our balance sheet. Overall, we had a soft start to the year due to the competitive events in the market, but the core fundamentals of our business remain strong, and we are well positioned to capitalize going forward. This concludes my review of the financials. I'll now turn it back over to Bob for his closing remarks.

Thank you, Jay. While market conditions resulted in a slower start than normal in the first quarter, we do not believe this will be the case for the entire year. The grain business will continue to be affected in the near-term by high-priced rail freight, however, we expect that to change from March forward when China pivots to South America for its soybean and corn needs. This could open the door for the U.S. to export wheat and durum in the spring, and after Canada has exported much of its surpluses. In addition, we expect to continue to benefit by added volumes brought on in part by recent acquisitions such as Delmar, Nicklen Siding and eventually an origination joint venture in the U.S. that we will be announcing soon. Supply Chain Services are expected to perform similar to what we saw in the first quarter. Oriented strand board and lumber demand is strong, and we're expecting modest growth as we have added a key customer recently. We expect fertilizer demand to remain consistent and NGL volumes are expected to remain lower than normal until Brent and WTI prices increased to $50 a barrel or higher. The seed and processing business is expected to improve from what we saw in the first quarter. Soybean crush margins have already improved. And as we crush new crop soybeans, yields are improving as well. Specialty Crop Blending, birdfeed is expected to see strong demand through the year, and the seed business will generate gross margins in the fourth quarter when we invoice customers. Overall, we expect that 2021 fiscal year to be more challenging overall, however, with better talent and more ways to generate gross margins than before, we are optimistic about the year as a whole. Meanwhile, we remain committed to our growth. The acquisition of the Nicklen Siding elevator in Northern Saskatchewan has generated meaningful gross margins already. And as I mentioned a moment ago, very soon, we will make an announcement about an origination joint venture in the U.S. that will provide critical spring wheat origination. Meanwhile, we have a full pipeline of projects, and we are working on arranging funding to be able to pursue those opportunities. To learn more about our results, strategy and growth plans, please join us for the Annual General Meeting of Shareholders at 11:00 a.m. Eastern Time today. Due to COVID-19, the meeting will be held virtually and details about how to attend have been sent via a press release, and they are posted on our website at ceresglobalagcorp.com. Thank you all for listening. I'd like to now open the call to questions.

[Operator Instructions] And your first question comes from Robert Tattersall, Individual Investor.

I have 2 questions. One, relates to an event after the end of the quarter, I think it was October 3, when the standstill agreement for the major shareholder was essentially terminated. I mainly have 2 shareholders that represent 67% of the shares outstanding. So that doesn't leave much of a flow to begin with. What's the context that made this desirable from the company's viewpoint?