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

Good morning, ladies and gentlemen. Welcome to Ceres Global Ag Corp.'s 2022 First Quarter Results Earnings Call. [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 forward-looking statements. For more information on risks and uncertainties related to forward-looking statements, please refer to the company's management's discussion and analysis, which is available on SEDAR and the company's website. I would now like to turn the call over to Robert Day, CEO of Ceres Global Ag Corp. Please go ahead, Mr. Day.

Thank you, Jake. Good morning, everyone. Thank you for joining us this morning. I'm joined by Jay Bierley, CFO at Ceres. This was an excellent quarter and a great start to the fiscal year. So much of what we've worked for over the past several years came together this quarter and have resulted in the best financial performance in company history. Development of customer relationships and trade flows, utilization of existing capacity, acquisition and greenfield development of new assets and businesses and adding the right talent to the business has made this possible and position Ceres for continued success. That's not to say it wasn't challenging. Severe drought conditions in the Northern U.S. Plains and Canadian Prairies negatively affected yields, led to much smaller crops than expected and have created significant volatility in the market. The extent to which supply was affected and demand was strong for some products, came as a surprise to many, but our team was on top of it and proactively secured supply of core products for our valued customers. I'm proud of the entire Ceres team for their contributions to our success this quarter. Their ability to navigate the volatile grain markets was key in driving strong increases in profitability, including records for gross profit, income from operations and EBITDA. In our grain segment, higher volumes handled and merchandise resulted mainly from an increase in company-owned origination, benefiting from our acquisitions of Nicklen Siding in Northern Saskatchewan, Delmar Commodities in Manitoba and from achieving record quarterly volumes through our Northgate, Saskatchewan elevator. Total grain and oilseed bushels handled increased 12% compared to the first quarter a year ago. Looking at our Supply Chain Services segment, industrial product volumes also reached new heights, continuing their upward trend. We benefited from the ongoing strong demand for oriented strand board driven by new homebuilding in the United States. In addition, fertilizer volumes were solid as expected and natural gas liquid volumes through Gateway Energy Terminal were slightly higher than the first quarter of last year. Overall gross margins for the segment were slightly higher than expected. Turning to our seed and processing segment. Demand remains strong for specialty crop blending, including bird feed manufacturing, which maintained its pace from the past several quarters and early purchases of sunflower seeds in a rising market enhanced gross margins. Meanwhile, soybean crush volumes were down versus last year as local supplies were low and we took planned downtime for the expansion to increase the plant's capacity by 50%. However, our run rate near the end of the quarter was near the plant's new capacity as new crop soybeans were harvested and available for purchase, which set us up well for the second quarter. More exciting than that, however, is the progress we're making on our canola crush plant project in Northgate. I will speak about that and our financial outlook for the year in a few minutes. But now I would like to turn things over to Jay to review our financial results for the quarter. Jay?

Thank you, Bob, and good morning, everyone. Before I begin, just a reminder that all dollar amounts expressed in today's calls are in U.S. dollars, unless otherwise stated. We had a very profitable quarter with net income of $8.8 million or $0.28 per share versus a net loss of $936,000 in Q1 of last year. Our income from operations was a record high, $13.7 million for the quarter compared to $42,000 in the same quarter last year. As Bob said earlier, our team's ability to successfully navigate the volatile grain markets was a key to our success in the quarter, resulting in higher merchandising margins and driving a $20 million increase in gross profits, which was $23.9 million for the quarter. Revenue for the quarter continued to grow and was up $36 million or 21% to $208 million. This was largely due to an increase in grain bushels handled, as Bob mentioned, along with higher commodity prices during the quarter. We handled and traded 31.6 million bushels of grain and oilseeds in the quarter compared to 28.2 million bushels for the same quarter last year. The grain segment quarter was characterized by improved trading opportunities across multiple commodities, resulting in record trading margins that increased by $24 million over the prior year quarter. Supply chain services revenue increased by $145,000 for the quarter due to higher third-party grain storage and elevations, higher volumes and increased revenue related to the Gateway Energy Terminal and higher revenue related to the industrial products at Northgate. Our net seed and processing margins were $886,000 for the quarter and down from $1.4 million in Q1 of last year as limited seed supply reduced margin opportunities. Interest expense in Q1 totaled $1.1 million compared to $1 million in the same quarter a year ago as we had significantly higher average daily borrowings on the revolving credit facility due to higher inventory levels that was offset by lower interest rates on our new term loan with the Bank of Montreal, which we entered back in June, along with the lower interest rates on a revolver, which we renewed this past February. Income tax expense was $3.6 million during the quarter compared to a small $115,000 recovery in the prior year quarter. Our income tax expense in the quarter was driven by our earnings and is primarily composed of deferred and noncash tax expenses as we continue to utilize and enjoy our tax net operating loss carryforwards. At quarter end, we had working capital of $51.4 million, which improved $12 million during the quarter, primarily due to our Q1 earnings results. We also had $27 million available on our revolving credit facility at quarter end. This concludes my review of our financials. For additional details on our financial results, please refer to our MD&A. I'll now turn it back to Bob to provide some comments on our outlook for the balance of the year and beyond. Bob?

Thank you, Jay. Although the drought conditions earlier this year will continue to impact markets and limit supply over the next several quarters, our team has Ceres in a good position. We expect to handle reasonably high volumes over the second quarter and results to be strong. And then we anticipate volumes and activity to level off later in the year as customers will have obtained coverage and farm held inventories are expected to be at historically low levels. All this creates the possibility for a volatile start to next crop year, but for now, we're focused on the next several months. While I'm excited about our strong start to fiscal year 2022, I'm even more excited about what is yet to come. This is a very different Ceres than a few years ago, and our transformation is far from over. Our diverse network enables us to navigate through many different types of market environments and the different businesses we participate in, provide more ways to generate revenue than before. Specifically in our core grain business, we have more different direct access to growers, and we are able to consistently supply our customers with products and solutions that enable their businesses to thrive. Our now expanded soybean crush plant in Jordan Manitoba is benefiting from the recent harvest and attractive oilseed crush margins. We have access to locally grown soybean supply, while demand for both soybean meal and oil remains strong. Specifically, food demand for vegetable oil remains consistent, while we're seeing an uptick in demand from the energy sector as low-carbon fuel standards in California and other U.S. states has encouraged investment in renewable diesel capacity, increasing overall demand for vegetable oil. While our expanded soybean crush operations helped position us to capitalize on the long-term growth expected in renewable fuels, our planned canola processing facility in Northgate will allow us to capitalize on this growth on a much larger scale. This state-of-the-art facility will have capacity to process approximately 1 million metric tons of canola and refine over 500,000 metric tons of canola oil for both food and renewable fuels annually. We recently made deposits with major equipment suppliers. We've advanced in the areas of design and engineering. And shortly, we will begin to evaluate proposals from potential strategic partners, keeping us on target to have the plant built and operational by summer of 2024. We will provide more updates on this and other projects in the near future, and we will cover our plans for the year in more detail at our Annual General Meeting next Monday, which will be held virtually at 11:00 a.m. Eastern Time, 10:00 a.m. Central. Please go to Ceres' website for details, and I hope you are all able to attend. On that note, I would like to open the call for questions. Jake?

[Operator Instructions] And we have our first question that will come from John Green, TD Wealth.

Congratulations on a terrific quarter. Just a quick question with regards to the canola crush plant and some of the other pre-announced ones in the province. Just wondering if you have any idea on how fast those are progressing? And if the timing of what you just mentioned here is similar, behind or in front of where that is? That would be Question 1. And then Question 2 would be, if we do have a drought that carries on into next year, what impact does that actually have in terms of revenues and potential, what that does to the bottom line? Is this something that you can plan ahead for?

Thanks, John. This is Bob. I will try to take these. So as far as the timing of our project, our canola crush project relative to the others that have been announced, it's hard to say exactly. We'll hear things in the market about how others are advancing. I think what we believe to be true is that we're at least on a similar time line to the fastest of the other projects that are out there. Certainly the ones that are closer in proximity to ourselves. And as far as our project goes, we have -- we're very much staying on target, which is not always an easy thing to do with projects of this size with so many different moving parts to them. I think the good news for us and for our shareholders is that thus far, we have not run across any obstacles that have delayed the project since we've made the announcement. And I don't know where the others stand on that. Regarding the other question about droughts and if we have a drought next year, how that might affect our business, it's always hard to say. I think a drought almost never means a drought everywhere. Usually, it might generally mean that, but there are pockets of areas that do better than others. Fortunately, for us, this year, the areas around which we have assets did relatively better than some of the other areas. So the growers around us had better yields and more production, and that's definitely benefiting our footprint. Next year, I think what I would say is our teams do make a huge effort to understand what's happening on the ground and anticipate price direction, quality and try -- get out in front of those things so that, a, we're taking care of our customers; and then b, we're taking care of Ceres' bottom line.

That's great. Thanks for the update.

[Operator Instructions] With no additional questions in our queue, I'll turn the call back over to Mr. Day for closing remarks.

Okay. Thank you, and thanks, everyone, for joining us today. I just want to remind everyone again that next Monday, November 15, we do have our Annual General Meeting. It is held virtually. So it's easy to attend. Again, that's at 11:00 a.m. Eastern and 10:00 a.m. Central. We'll go through expectations for the year and have a bit more to say about the company. So if you're available we would appreciate you attending, and we look forward to it. Thank you very much.

Ladies and gentlemen, this will conclude your conference for today. We do thank you for your participation and you may now disconnect.