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

Good morning, ladies and gentlemen, welcome to Ceres Global Ag's Third Quarter Results Earnings Call for the 3-month period ended March 31, 2021. [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's 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.

Good morning, everyone. I'm glad you could join us this morning. With me today is Jay Bierley, our Chief Financial Officer. We're pleased with our third quarter results as gross profits and income from operations significantly increased from the same quarter a year ago. From a seasonality standpoint, the January to March period is typically a weaker quarter as the Great Lakes and Upper Mississippi River freeze and Ceres' volumes decrease. Against this backdrop, our team did a great job managing higher than usual market volatility and capitalizing on the high-priced environment caused by strong global demand for U.S. and Canadian agricultural commodities. In the Grain segment, we handle over 30 million bushels, 11 more than the same quarter a year ago, and performed well across nearly all P&Ls. Oats, wheat, canola and organics did particularly well moving more volume and generating more gross margins than estimated. Meanwhile, durum performed better than the previous quarter and developed positive momentum moving into the fourth quarter. In addition, we formed our grain merchandising joint venture with the Farmer's Co-op Grain and Seed Association at Thief River Falls, Minnesota. The formation of Farmers Grain, LLC marks a meaningful step in our strategy as we increased grower origination in the region and partner with hundreds of growers to deliver value-added solutions to our downstream customers. We have already begun an expansion project, whereby we are adding 1.2 million bushels of storage and unit train loading capabilities to the grain elevator at Thief River Falls. Construction is ahead of schedule and expected to be completed by late summer of next year ahead of the 2022 harvest. The Supply Chain Services segment performed as expected. Agricultural product volumes in Port Colborne have trended higher than expected, while Minneapolis volumes have been slightly lower. Non-agricultural products were mixed as lumber and oriented strand board continue to exceed expected volumes due to strong demand from the U.S. housing sector, while fertilizer remained stable and natural gas liquid products remained below a year ago. In our Seed and Processing segment, specialty crop blending continued to realize better than expected demand. Birdfeed sales in Canada continued to reach record levels as people spend more time at home as a result of the COVID-19 pandemic. Demand is expected to remain strong going forward, however, the primary input for birdfeed, sunflower seeds is in high demand from the oilseed crush sector. This is resulting in an increase in the price of sunflower seeds and subsequently the price of birdfeed. This may lead to volumes contracting slightly as the retail price of birdfeed increases. Soybean crush margins were lower in the quarter due to a significant increase in the price of soybeans and a slow market reaction to increases in soybean oil prices. Tight supplies and rising demand, especially from the renewable diesel sector have been pushing up prices of a broad range of vegetable oils, especially soy and canola, the most widely consumed edible oils in North America. Overall, we are pleased with the consistency in volumes and margins during a seasonally slower quarter and our ability to find ways to get products to our customers, despite traditional channels being closed. I will talk more about our soybean crush expansion and growth in general later in the call 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 third quarter financial performance and then provide an update on our balance sheet and our liquidity. Before we get started, just a reminder that our -- that all dollar amounts expressed in today's call are in U.S. dollars, unless otherwise stated. As Bob mentioned, we had a solid third quarter with volumes and profitability much improved compared to the third quarter of 2020 with strong increases in gross profits, income from operations and EBITDA, as well as an improved bottom line. Gross profit increased 36% to $5.9 million from $4.3 million in quarter 3 of 2020. This increase was attributable to higher volumes in merchandising margins in our Grain segment with improvements in all core commodities and risk management activities compared to the third quarter of 2020. Our improved gross profits in the quarter were the key driver in our EBITDA that also improved to $3.5 million compared to $2.8 million in the prior year quarter. Our net loss for the quarter narrowed to $78,000 from a net loss $281,000 in Q3 of last year. Significant improvements in income from operations of $2.2 million, up nearly $2 million from the same quarter of last year was partially offset by an increase to loss on revaluation of stock appreciation rights due to the increase in our stock price along with a onetime $917,000 gain on a revaluation of a contingent consideration that took place in the prior year quarter. Revenue for the quarter was up 69% to $204 million compared to $121 million in Q3 of 2020. The higher revenue was attributable to 30 million bushels handled and merchandised compared to 19 million bushels in the prior year quarter, along with higher commodity prices in the current quarter compared to last year. Increases in bushels handled benefited from our purchase of our Nicklen grain facility in September 2020 that has been fully integrated and producing year 1 benefits above our expectations that has improved both volumes and gross margins. Overall, the Grain segment contributed gross profits of $6.1 million, which is up 39.6% from a year ago that helped offset small gross losses of $114,000 in our supply chain services and a small gross loss of $42,000, in our Seed and Processing segment. As a reminder, our Seed and Processing segment includes our seed business that will realize most of its annual revenues in quarter 4. Our general and admin expenses were well managed and were $3.6 million for the quarter compared to $4.1 million in Q3 of 2020. Interest expense for the quarter was $1.3 million down from $1.5 million for the same quarter last year. While our daily average borrowings on our revolving line of credit were higher quarter-over-quarter, the average interest rate on the borrowings decreased. During the quarter, we renewed our revolving credit facility, resulting in an approximate 50 basis point reduction in our borrowing rates. In addition, LIBOR rates were lower during the quarter compared to a year ago that benefited both our revolving and term loan interest rates. Looking at our balance sheet, at the end of the third quarter, we had working capital of $36 million compared to $51 million at June 30, 2020. This reduction is due to the purchase of Nicklen, our investment in Farmers Grain, LLC, along with the short-term portion of long-term debt that is due in November 2021. Debt outstanding on our revolving credit facility, along with repurchase obligations was $89 million compared to $32 million on June 30 of last year. This increase is due to increased inventories and higher commodity prices at quarter ending March 31, 2021 compared to seasonally low pre-harvest inventories at June 30, 2020. This concludes my review of the financials. For additional details on our financial results, please refer to our financials and 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. We are pleased with the consistent performance from our third quarter and we're optimistic about the fourth quarter and fiscal year 2022. While we are dealing with short crops, tight supply and demand scenarios for most products and increased price volatility, we believe opportunities will continue to be there. And while some of the products we handle and merchandise are having supply challenges, demand is underpinning all of this as exports to China have significantly increased and overall exports are expected to remain robust for most U.S. and Canadian agricultural products. Perhaps the best example of this today is soybean oil futures and vegetable oil prices in North America, which have experienced an unprecedented increase over the past several months. While there are multiple drivers behind this increase, including harvest delays in South America and continued global supply uncertainty due to weather, the most important from a long-term standpoint is due to an increase in demand for vegetable oils as feedstock for the production of renewable diesel. Unlike biodiesel, renewable diesel can power vehicle engines without being blended with diesel derived from crude oil. This makes it attractive for states looking to lower greenhouse gas emissions, and for refiners aiming to serve their needs. The main problem, however, is that one of the primary ingredients needed for the production of renewable diesel is vegetable oil, which is in relatively short supply when compared to current incoming demand. Production capacity for renewable diesel is expected to grow exponentially over the next few years. In fact, according to a recent report by BMO Capital Markets, by 2023, U.S. vegetable oil demand could outstrip U.S. production by up to 8 billion pounds annually and that is if only half the proposed new renewable diesel capacity comes online. A significant amount of capacity is being added in this sector and it promises to support vegetable oil prices over the next several years. Our expectation is that higher prices will incentivize more soybean and canola crush plants to be built and more acres to be planted in U.S. and Canada. Put simply, North America doesn't have enough oilseed crush capacity to supply the upcoming needs of the renewable diesel industry. Looking at Ceres' operations, the outlook for soybean crush and overall margins in Southern Manitoba remains attractive for the 2021, '22 oilseed crop year and beyond. The expansion project underway at our soybean crush plant in Jordan, Manitoba will allow us to better capitalize on the solid fundamentals of this business. The project will increase the plant's capacity by 50% and we are on track to complete construction by the end of this month and commission in June, despite the challenges brought on by COVID-19. Scheduled shutdown periods in April and May to install and bring additional equipment online will result in lesser volumes crushed than the normal for the fourth quarter, however, we estimate that the additional capacity will have a meaningful impact on results starting with the coming crop year. In summary, the expansion of our Jordan crush plant is an exciting development for Ceres and there are several other projects in the pipeline that I look forward to sharing more about in the coming months. On that note, I would like to open the call for questions. Operator?

[Operator Instructions] I'm showing no questions at this time. I will now turn the call to Robert Day for closing remarks.

Thank you, operator, and thank you everyone for joining us today. We look forward to speaking with you again at -- in September, 2021. Take care.

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