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

Good morning, ladies and gentlemen. Welcome to Ceres Global Ag's Second Quarter Results Earnings Call for the 3-month period ended December 31, 2020. [Operator Instructions] I'd 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's discussion and analysis, which is available on SEDAR and on the company's website. I'd 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. Joining me today is Jay Bierley, our Chief Financial Officer. Earlier this morning, we released our second quarter financial results. These results reflect the benefits of our efforts to diversify, expand and strengthen our business over the past several years. Second quarter results also reflect the excellent job by our team in executing and taking advantage of opportunities created by market volatility. I would also like to highlight that this was a very solid quarter financially. We realized strong volumes and revenues. And importantly, it was one of our more profitable quarters to date. That being said, the second quarter of last year was a record quarter due in part to exceptionally high vessel exports. By comparison, opportunities to export product by vessel have been limited thus far in fiscal 2021 as the U.S. has been less competitive versus Canada due to higher rail freight prices in the U.S. as a result of strong soybean and corn trade to China off the Pacific Northwest and through the Gulf of Mexico. Again, highlighting our strong execution and the benefits of our ongoing diversification and expansion efforts, the team navigated markets and volatility effectively, and recent acquisitions enabled us to drive volume through our North American supply chains more competitively, offsetting some of the revenue opportunities lost because of the high-priced U.S. rail freight cost that negatively impacted U.S. cereal grain export competitiveness from the Great Lakes. Looking at the contributions from each of our segments. In the grain segment, we handled and traded around 28 million bushels of grain and oilseeds during the quarter, which was a slight increase over the second quarter of last year despite significantly fewer exports by vessel. Read the notes where highlights as the team supplied a significant amount of volume to our customers in the U.S. and Mexico and profited from market volatility by timing purchases and sales effectively. I'm also happy to point out that during the quarter, we successfully completed the integration of the Nicklen Siding grain elevator in Ridgedale, Saskatchewan that was acquired partway through the first quarter, adding to our origination capabilities of core products and allowing us to provide flexibility and solutions to our end-use customers. In our Supply Chain Services segment, industrial product and fertilizer volumes were strong. Demand came largely from the U.S. homebuilding sector for oriented strand board and from Canadian distributors compiling fertilizer inventories ahead of the spring season. Natural gas liquid volumes through Gateway Energy Terminal were lower than a year ago due to low crude oil prices and lower oil production in Western Canada. However, gross margins for the segment came in as expected, although slightly lower than second quarter of last year. And in our Seed and Processing segment, soybean crush margins were up significantly from last quarter due to a slightly better margin environment and well-timed soybean purchases. In addition, this year's soybean crop quality is higher than last year, resulting in better yields and margins. The area of specialty crop blending, including bird feed manufacturing, has been experiencing record volumes due to demand supported by customer behavior changes, spending more time at home due to COVID-19. And the seed business, which benefits from partnerships with Sevita International and Horizon Seeds Canada for the sale and distribution of soybean and corn seed products in Western Canada, respectively, has been actively selling product and will continue to do so over the coming months. We are encouraged by progress made thus far. However, seed sales across Western Canada are slower than normal for this time of year due to minimal snow cover and soil moisture, which is delaying farmer decisions about what to plant. Revenues and gross margins for the seed business will primarily be realized and recognized in the fourth quarter of our fiscal year, which is from April to June. Overall, I'm very proud of the way in which our team performed during the quarter and the results we achieved. I'm also looking forward to sharing some remarks on our outlook for the balance of the year. But first, I would like to turn the call over to Jay to review our financial results. Jay?

Thank you, Bob, and good morning, everyone. I'll discuss our second quarter financial performance and then provide an update on our balance sheet and liquidity. Before I get started, just a reminder that all dollar amounts expressed in today's call are in U.S. dollars, unless otherwise stated. Also, I would like to point out that the second quarter was the first full quarter of contributions from the Nicklen Siding facility acquired back in September. We had a solid profitable quarter with EBITDA of $4.3 million and net income of $1.3 million. Although our results were lower than prior year quarter EBITDA of $5.8 million and net income of $2.3 million, we had strong results in one of our better quarters. Our results for Q2 of this year were impacted by lower export merchandising and margin opportunities compared to Q2 of last year. But stronger results across most product lines and business segments, along with lower costs, helped to deliver good results for the quarter. Revenue for the quarter was $175 million, which was $18 million higher than the second quarter of last year. This growth was largely due to an increase in bushels handled and merchandise as well as higher commodity prices compared to the 3 months ended December 31, 2019. As Bob mentioned, our bushels handled and traded in the quarter were 700,000 bushels higher than the quarter a year ago. Gross profit for the second quarter was $6.5 million, which was a decrease of $2.8 million compared to Q2 of last year. The year-over-year decrease was driven by a $3.2 million decrease in net trading margin, resulting from the reduced export trading opportunities, as Bob described, which were partially offset by an increase in North America trading volumes and margins. The Seed and Processing segment contributed $933,000 in gross profit, which is an increase of $588,000 from Q2 of last year. This increase was mainly due to higher bird food and soybean crush volumes and margins that were significantly better in the quarter than a year ago. Supply chain services had a negative gross profit of $69,000 compared to breakeven results a year ago. Lower natural gas liquid volumes transloaded through the Gateway Energy Terminal JV compared to the same quarter a year ago, was the primary driver of lower results. Our general and admin expenses for the quarter were $3.8 million compared to $5 million in Q2 of last year. The $1.2 million reduction was largely due to lower incentive accruals in the current period. Interest expense of $1.3 million was down from $1.8 million in Q2 of last year. The daily average borrowings on our revolving credit facility were slightly higher year-over-year. However, the average interest rate on borrowings decreased as LIBOR rates were significantly lower during the period ended December 31, 2020. In addition to the lower LIBOR rates, we also had a smaller outstanding balance on our term loan. Turning to the balance sheet. At the end of the second quarter, we had working capital of $42 million compared to $51 million at June 30, 2020, and debt outstanding on our revolving credit facility was $68.9 million compared to $31.7 million at fiscal year-end. This reduction in working capital is primarily related to the cash purchase of the Nicklen facility that closed in Q1, along with our accrual this quarter of the current portion of term debt due in November 2021. Revolving debt increased with the accumulation of harvest inventories and higher grain prices compared to preharvest inventories at June 30, 2020. Earlier this week, on February 10, we amended our revolving credit facility, resulting in an approximate 50 basis point reduction in interest rates with similar covenants and terms in line with our previous facility. This improved in more competitive credit facility was a testament to the execution of our strategy that is driving improvements in our business and results. This concludes my review of the financials. For additional detail on our financial results, please refer to our MD&A. I'll now turn it back to Bob to discuss our outlook for the balance of the year. Bob?

Thank you, Jay. The second quarter represented a solid rebound from the start of the fiscal year. While our volumes are usually lower in the third quarter due to seasonal shutdowns in the Great Lakes and Upper Mississippi River, we expect volumes to maintain something closer to our current pace and for markets to continue to be volatile through the fiscal year. One thing we will do to maintain volumes is export product through third-party assets, and we are well positioned to take advantage of price distortions caused by market volatility. We see commodity values generally remaining strong and volatility high as increased demand and low ending inventories from the 2020-'21 crop year will likely heighten market reactions to changes in weather as spring planning gets underway. The high rail freight prices we have seen these past several months in the U.S. should subside in spring and summer as China shifts its purchasing activity in South America, likely increasing the competitiveness of U.S. products and serious ability to export to the world market. Overall, we don't expect the environment to be particularly predictable or straightforward over the next several months. However, we do believe there will be opportunities. Importantly, we remain focused on diversifying, expanding and strengthening our business. As you may have seen from yesterday's press release, on Wednesday of this week, we completed the formation of a grain merchandising joint venture with Farmer's Cooperative Grain and Seed Association in Thief River Falls, Minnesota. This JV now owns the co-op's existing grain elevator and related grain merchandising assets at Thief River Falls and has already started the process of adding storage and unit train loading capabilities, which are expected to be completed in the summer of 2022. The formation of Farmers Grain, LLC marks a meaningful step in our strategy and effort to increase grower origination in the upper Midwest part of the U.S., specifically of high-protein wheat and partner with hundreds of growers to deliver value-added solutions to our downstream customers, to capitalize on the solid fundamentals of the soybean crush business in Southern Manitoba. And as we discussed on our last 2 quarterly calls, we are expanding our soybean crush plant in the town of Jordan, Manitoba. The project will increase the plant's capacity by 50%, and we remain on track to complete that expansion during the upcoming summer. In addition, I'm sure everyone has seen the headlines about the Biden administration canceling the Keystone pipeline project through executive order. Despite that, this is a very fluid situation. The U.S. Senate is split 50-50 between Democrats and Republicans, and the new Chairman of the Senate Energy Committee, Senator Joe Manchin, a moderate Democrat, has asked President Biden to reconsider his executive order. Joe Manchin has a tremendous amount of leverage if he wishes to use it since his vote is needed to pass any budget legislation to secure 50 votes in the Senate by Democrats and allow Vice President Kamala Harris to decide a tiebreaker. At this point in time, it is not clear whether Senator Manchin will stand strong on his Keystone pipeline position. If he does not, cancellation of the pipeline is more positive for Northgate's long-term prospects around handling and loading crude oil by rail. However, more things still need to go our way before this becomes an opportunity at Northgate. Finally, our business development team remains active, and we continue to have a robust pipeline of other growth-based opportunities that we expect to have more to say about in the coming quarters. Thanks to everyone for listening today. I would like to open the call for questions. Operator?

[Operator Instructions] Our first question comes from the line of [ Nicole James ] with [ K&S Global. ]