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

Good morning, ladies and gentlemen, and welcome to the Ceres Global Ag's 2022 Second 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 the forward-looking statements. For more information on the 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 the company's website. I would now like to turn the conference over to Robert Day, CEO of Ceres Global Ag. Please go ahead, Mr. Day.

Thank you, Jess, and good morning, everyone. The business delivered another very strong quarter. Gross profits were up over $9 million compared to the second quarter of last year. We doubled our EBITDA and more than tripled our net income. Combined with our record first quarter, this was the best 6 months in Ceres' history. And importantly, this performance was reflected across all core operations. In the grain segment, key to our success was a combination of solid analysis of the markets as prices and volatility were high and diligent origination and supply to our key customers. Managing risk and securing customer supply can be very challenging in environments where crops are small and inventories across the industry are low. The team initially did a great job positioning ahead of the crop year and have followed that up by successfully navigating through these high prices and supply chain challenges created in this environment. In addition, late in the quarter, railroad performance was negatively affected by extreme weather. And Ceres effectively utilized its freight book and inventories in its terminal asset footprint to ensure that customers receive their product on time. In the supply chain services segment, industrial product volumes were up compared to the second quarter of last year as new home construction in the United States again drove strong demand for lumber and oriented strand board. Fertilizer volumes were solid as expected. And natural gas liquid volumes through our Gateway Energy Terminal continued to increase versus a year ago. Specifically, higher petroleum prices and continued investment in gas gathering and fractionation infrastructure has enabled Steel Reef, our partner in the Gateway Energy business, to increase volumes. In the seed and processing segment, soybean crush volumes were up significantly versus the same quarter a year ago. As you may recall, we completed an expansion project at the Jordan Mills soybean crush plant last summer, increasing the plant's capacity by around 50%. The plant ran at over 90% of its expanded full capacity during the quarter and produced the best financial results in its history. Oilseed crush margins are moderately attractive in North America for soybeans presently. The soybean demand is high and demand for vegetable oil and soybean meal continues to be strong. Meanwhile, in Manitoba, the team has been able to procure enough soybeans to run the plant at capacity. Specialty crop blending, including birdfeed manufacturing, was slightly lower in volume compared to the second quarter of last year but still resilient despite much higher input prices. Meanwhile, gross margins were higher as the team did a great job procuring sunflower seeds and other inputs at harvest time when prices were lower. I will speak about the financial outlook for the rest of the fiscal year and the company's growth in a few minutes. But for now, I'd like to turn things over to Jay to review our financial results for the quarter. Jay?

Thank you, Bob, and good morning, everyone. I'll start with our usual reminder that all dollar amounts expressed in today's call are in U.S. dollars unless otherwise stated. The second quarter was one of our most profitable quarters to date with net income of $4 million or $0.13 per share compared to net income of $1.3 million or $0.04 per share in Q2 of last year. As Bob mentioned, a great team effort in positioning and risk management in a challenging market environment led to excellent results across our core commodities. This drove significant improvements in our income from operations of $7 million, up from $2.7 million for the same time last year, along with our gross profits of $16.1 million versus $6.5 million in Q2 of last year. Revenue for the quarter was $305 million compared to $175 million in the same period last year, representing an increase of $130 million that was driven by significantly higher commodity prices across our core products. In our grain segment, higher trading margins and increased trading opportunities across multiple commodities drove an $8.1 million increase in net trading margins for the period. In supply chain services, revenue was up by $417,000 compared to Q2 of last year. Our grain-related supply chain service revenues increased due to higher third-party storage and elevations. And our non-grain supply chain services revenues increased by $60,000 due to increased revenue related to the Gateway Energy Terminal as well as higher revenue related to industrial products at Northgate. Net seed and processing margins for the quarter was $3.5 million compared to $1.7 million a year ago. Early season purchases of sunflower seed helped drive improved birdfeed margins and our soy crush expansion helped drive higher soybean crush volumes and margins. General and admin expenses increased by $5.2 million in Q2 compared to the prior year and was due to higher legal expenses related to the regulatory investigation, increasing business development and project activities, along with increased employee costs and incentive accruals due to higher financial performance. Interest expense was flat for the quarter at $1.3 million, although our average daily borrowings in Q2 were up $10.2 million compared to the prior year quarter. Lower interest rates from our revolver renewal last February along with the term loan we entered into with the Bank of Montreal in June kept interest cost flat. As we announced this morning, we amended our credit facility that will result in a reduction in borrowing cost by 25 basis points along with an increase in our borrowing capacity to $150 million, with the potential to access an accordion feature that could provide an additional $20 million. This is a $50 million increase in the size of our facility that will give us room to further grow our business. At the end of Q2, we had working capital of $57.4 million that improved by $6 million during the quarter due to a strong financial performance in the quarter. This concludes my review of the financials. For additional details, please refer to our MD&A. I'll now turn it back to Bob to discuss our outlook for the back half of the year. Bob?

Thank you, Jay. We are now well into our third quarter of fiscal 2022. And while we expect conditions to become more challenging as market inventory is diminishing and, on paper, there is less supply to merchandise, we expect opportunities will continue to present themselves. Thanks to our loyal customer base and the ability to trade and position as we manage our supply chains, we are confident in our ability to continue producing solid results. Our grain business is well positioned to maximize sales to North American customers as export volume decreases. And through solid analysis, we expect to continue successfully navigating through market volatility. As we look to the fourth quarter and next year, special attention will be given to moisture received across the growing areas late in the winter and during the spring as this will be critical ahead of the planting season. In our supply chain services segment, we expect protein and butane volumes to continue increasing as petroleum values remain elevated and Canadian drilling continues to increase. And we expect fertilizer and industrial product volumes to remain steady. On the oilseed side, soybean supply is presently tight but sufficient in Manitoba to run Jordan crush at capacity. And demand for vegetable oil and soybean meal remains very strong. Therefore, we expect positive crush margins and results over the third quarter and for that to last as long as we are able to buy local soybeans. Regarding growth and development, we are pursuing several initiatives that I expect to be able to say more about over the coming weeks. As the market is well aware, we have begun the process of building a canola crush facility in Northgate, Saskatchewan that 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 fuel annually. We have made down payments for major equipment. And we've engaged project management and design firms to develop the construction and design for the project, keeping us on track to begin operations in the summer of 2024. We also announced some time ago that we hired Ascendant Partners to assist with finding a strategic partner for the project, and that process is going very well. Meanwhile, our business development team continues to look for acquisition opportunities for our core green business, specifically to add grower origination assets for spring wheat, durum and oats to our footprint. We are working on an exciting project in that area as well and look forward to sharing more information about that in the near future. With that, I would like to open up the call for questions.

[Operator Instructions] Our first question comes from [ Stuart McKean. ]

Bob, great quarter. Just wanted to ask you a question on your supply chain services segment. And I noticed it got better this quarter, but it's still a drag on the company. Is there any -- do you see a better future for that segment?

Thanks, [ Stuart. ] Yes. I think with that segment, there are a number of things going on where we see some growth opportunity. I mean, certainly, the largest area of gross margin generation today is in our grain segment. And that is a focus of a lot of our growth. But as -- the supply chain services is kind of more of a complement and largely a way that we monetize value of the Northgate location. That being said, specific to the Gateway Energy Terminal, there's some interesting things going on there that -- where we see some real growth potential. And we'll be able to say more about that in the coming months. But I would say that by far and large, that is more of a complementary segment to the business, whereas the grain segment and the oilseed crush part of the business is much more front and center and core with respect to our growth.

You're hinting at something coming up with Steel Reef?

Well, they're a partner at Northgate and we -- they've continued to help us grow there. And the market has changed quite a bit from what it used to be. They continue investing in the region and they have invested in assets around us. So we're just looking at ways that we can leverage their growth to increase our volumes and the size of our business at Northgate. And so yes, I think that we'll be able to say more about that effort as we go forward.

Okay. Just another question on as the Fed is increasing rates, are you positioned to absorb that kind of rate increases?

Jay, do you want to answer that?

Yes. I can take that, Bob. So I would say on a good part of our debt on -- specifically on the term debt side, we do have hedges in place to lock in our rates on the term debt side. And then on the revolver side, we did renew our revolver with a 25-basis point reduction, which, in effect, puts us much closer and competitive with a lot of our competitors. And in our industries, the financing cost becomes sort of a variable cost component as we sell products to customers and stuff. So typically, as interest rates rise, that cost ultimately gets factored into the pricing that we sell to the customers. So we're pretty confident that we won't have a significant impact on increasing interest rates in our business.

[Operator Instructions] And I currently do not have any other questions holding. I'll turn the conference back to management for any additional or closing comments.

Okay. Thank you. Thanks, everyone, for joining us. Please stay tuned for upcoming announcements and we look forward to connecting with everyone again after the third quarter.

Thank you, ladies and gentlemen, for joining. This concludes today's call. You may now disconnect.