Q3 2019 Earnings Call
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I would now like to have the conference over to director of Investor Relations job growth.
Thanks, Andrew Good morning, everyone and thank you for joining us where the Andersons third quarter 2019 earnings call.
We've provided a slide presentation, there will enhance todays discussion if you're viewing this presentation via our webcast slides on commentary will be and say.
This webcast is being recorded on the recording and the supporting slides will be made available on the investors page of our website at <unk> Anderson <unk> Dot com shortly.
Certain information discussed today constitutes forward looking statements and actual results could differ materially from those presented in the forward looking statements as a result of many factors, including general economic conditions, whether competitive conditions conditions in the company's industries, both in the United States and internationally and additional.
Factors that are described in the company's publicly filed documents, including 34 Act filings and the prospectus his prepared in connection with the company's offerings.
Today's call includes financial information, which the company is independent auditors have not completely review.
Although the company believes that the assumptions upon which the financial information and its forward looking statements are based on a reasonable it can give no assurance that these assumptions will prove to be accurate.
This presentation in today's prepared remarks contain non-GAAP financial measure measures the company believes.
Adjusted pre tax income adjusted pre tax income attributable to the Andersons.
EBITDA and adjusted EBITDA provide additional information to investors and others about its operations, allowing evaluation of underlying operating performance and better period to period comparability.
Adjusted pretax income EBITDA and adjusted EBITDA, I do not and should not be considered as alternatives to net income or income before income taxes as determined by generally accepted accounting principles.
The call with me today, our pet ball BOE, President and Chief Executive Officer, and Brian Valentine, Senior Vice President and Chief Financial Officer.
After our prepared remarks, Pat Brian and I will be happy to take your questions now I'll turn the poor over to Pat for his opening comments.
Thank you John and good morning, everyone.
Thank you for joining our call. This morning to review our third quarter 2019 results.
I'll start by providing some thoughts on each of our four business groups.
After brine presents a business review I'll conclude our prepared remarks with some comments about our outlook for the remainder of the year and give me a brief look into what we're beginning to see for 2020.
Our adjusted third quarter results, roughly 3 million lower than our adjusted third quarter 2018 results, but given the challenging AG markets and weather conditions. The three of our business groups have faced.
We're encouraged by the outcome.
Very proud of our team and what they have accomplished over the past here.
Our ability to manage through those difficult conditions reinforced the strategy to court Lansing trade group.
As many of the business lines, we acquired helped offset a lack of opportunity for our eastern corn belt assets caused by late and reduce planting.
The overall group continue to remain profitable during the third quarter, despite a difficult margin environment when many in the industry incurred significant losses and reduced production or shut down entirely.
Results for plant nutrient group were somewhat improved and the real groups lower results were primarily due to less car sales during the period.
The trade group was profitable on an adjusted basis, improving significantly on the large losses incurred in the third quarter of 2018.
The poor planting weather in our core eastern footprint and the resulting limited farmer engagement during the quarter hurt to performance those assets.
Even as our western assets performed very well.
Market conditions in the spring causes an acceleration of income recognition into the second quarter.
Which contributed to the lower third quarter results.
In fact, we're very pleased with the performance of the group over the second and third quarters combined.
So when I see an acquisition integration continues to go very well and we've now identified in our implemented more than $10 million an expense synergies.
Yeah, a little group achieved several notable successes during the quarter.
Actually began at the element bio refinery in Kansas in August in.
In addition, we announced in early October that the group has emerged for plants. We previously ran in separate entities with different ownership structures with Marathon Petroleum Corporation.
This action will provide many positive outcomes, including more effective use of cash and debt and increased financial transparency for the investing public.
The plant nutrient group performed better than it did in the third quarter last year and what is typically a quiet quarter.
In general the group recovered some volume from earlier in the year that was delayed by protracted spring range, but margins were lower due to product mix.
Railcar market is weak with more cars in storage year over year, and usually railcar loadings down 3%.
Further weakness in some specific markets, such as grain frac sand and ethanol.
Renewal lease rates for railcars that carry these commodities continue to be lower.
Other lease rates are generally flat despite the decrease in railcar loadings.
Our utilization rate decrease during the quarter, primarily due to the purchase of a thousand idle cars that we are preparing for service.
Ryman I'll walk you through a more detailed review of our financial results.
Thanks, Pat and good morning, everyone. We're now on slide number five.
In the third quarter of 2019.
The company reported a net loss attributable to the Andersons, a $4.2 million or a loss of 13 cents per diluted share.
And the adjusted net loss of $2.3 million or seven cents per diluted share.
On revenues of $2 billion.
In the third quarter of 2018, we reported a net loss of $2.1 million or seven cents per diluted share.
And adjusted income of $500000 or two cents per diluted share on revenues of $686 million.
It's important to note that those 2018 results included pretax income of $5.1 million or 14 cents per diluted share.
From several mommy ventures investments.
The company recorded an income tax benefit for the third quarter of 2019 at an effective tax rate of 55.1%.
Which was up slightly from the third quarter 2018 rate.
When the company recorded a tax benefit at an effective tax rate of 48.5%.
Both rates were impacted by several discrete tax benefits.
In the current quarter the company recorded $3.9 million, a federal research and development tax credits, primarily associated with the construction of our element bio refinery.
Our long term debt to equity ratio decreased slightly from the prior quarter end 2.96 to one.
And we plan to continue to reduce that measure in the coming quarters.
Our target ratio is 0.8 to one.
We expect a 25 basis point reduction in the borrowing spread on our main credit facility beginning in December as a result of decreasing leverage.
This should result in a reduction of go forward interest expense on the order of $2 million per year.
On a related note our short term borrowings declined by almost $300 million during the quarter, which is consistent with the typical seasonality in our business.
Total company adjusted EBITDA increased from $27.5 million in the third quarter of 2018.
To $42.5 million in the third quarter of 2019.
Next we provide bridge grasp the compare 2018 adjusted pre tax income to 2019 adjusted pretax income for the third quarter and first nine months to the year.
Slide six shows that the trade groups adjusted results improved by 10, and a half million dollars in the third quarter.
The Lansing acquisition accounts for a portion of that improvement.
And the rest can be explained by the fact, the corn and soybean cash markets declined sharply in the third quarter of 2018.
Well the ethanol group remained profitable in the quarter. The results were significantly lower due to a challenging market environment.
The group also incurred startup costs at the element plan.
As mentioned earlier the primary reason for the year over year over year change and net corporate and other expenses related to gains we recorded in 2018 on Mommy ventures investments.
Moving to our nine month results on slide seven.
Trade group results were up by more than $24 million from 2018, primarily due to the Lansing acquisition.
In addition, 2018 results included a second quarter impairment charge on Tennessee assets that were later sold.
Ethanols profit.
Is down by $16.6 million due to the challenging margin environment.
The plant nutrient groups year to date results were lower due to the wet planting season, and an expected decrease in the contract manufacturing of lawn fertilizer.
Now, we'll move onto review of each of our four business units beginning with the trade group on slide eight.
The trade group reported a third quarter pre tax loss of $2 million, but recorded adjusted pretax income of $600000 a.
A significant improvement over the pre tax loss of $9.9 million in the same period of 2018.
Performance of the group's assets was mixed.
As strong results from western assets were more than offset by weather and planting related issues in the eastern footprint.
Merchandising results were strong considering the underlying market conditions.
Trade group adjusted EBITDA for the quarter was $20.9 million, an increase of $24.6 million over the green groups third quarter 2018 EBITDA.
Moving to slide nine.
The ethanol group turned in a solid third quarter, considering the continuing difficult market conditions.
The group remained profitable, earning third quarter pre tax income attributable to the company of $900000.
Margins continued to be stressed by elevated corn basis, particularly for the three eastern plants.
The group continued to concentrate on maximizing production efficiency at each plant and again benefited from increased third party ethanol trading.
Production began at the groups element bio refinery in Kansas during the quarter.
Startup expenses also contributed to the year over year change in pre tax income.
The group completed its merger with marathon of the Albion climbers Greenville, and Dennis in plants at the beginning of October .
This will allow our commercial teams to trade corn ethanol and ddgs freely among the four facilities to achieve optimal profitability.
And our procurement team to leverage the resulting larger purchasing power.
The simplified structure will also allow for more efficient use of cash and debt.
And will result in more transparent financial reporting.
Turning to slide 10.
Plant nutrient group recorded a pretax loss of $7.4 million in the third quarter, which was 7% better than third quarter 2018 results.
Volumes were up four primary nutrients and at the farm centers.
Margins per ton were lower due to product mix.
As expected lawn and contract manufacturing volumes were down year over year, but this was offset in part by improved margins.
Plant nutrient EBITDA for the quarter was $900000 up from $100000 in the third quarter of 2018.
On slide 11, we can see that the rail group generated $3.1 million of pre tax income in the third quarter compared to $5.7 million last year.
Leasing results reflect lower average lease rates lower utilization and certain customer defaults in the sand and ethanol markets.
Utilization average the still healthy 90.3% for the quarter compared to 94.6% last quarter and 92% in the third quarter of 2018.
As Pat previously mentioned, we purchased 1100 idle railcars, which lowered utilization by about 2%.
Excluding the impact of these cars utilization was flat year over year.
Total cars controlled reached a record of approximately 25000.
And cars on lease increased by about 8% year over year.
As expected the group recorded very little income from car sales compared to the $1.9 million of pre tax income earned in the third quarter of 2018.
The group's sold or scrapped fewer than 300 cars during the quarter.
Bringing its nine month total to less than 800 cars.
Repair business results were lower year over year, primarily due to higher labor and benefit expenses. The group opened its 25th location during the quarter.
Finally, the rail group recorded $16.1 million, an EBITDA for the quarter, which was up slightly compared to last year.
On slide 12, we present, a summary of the adjustments relating to the Lansing acquisition.
The net acquisition related costs, we incurred in the third quarter were $2.6 million, bringing the total transaction related expenses recorded through the first nine months of the year to $14.3 million or about 33 cents per diluted share.
We still estimate that we will incur a total of $17 million of such expenses in 2019.
Followed by $4.3 million during 2020.
And $1.5 million during 2021.
The earnings per share impacts of these adjustments based on current shares outstanding our 39 cents.
10 cents and four cents per share respectively.
And with that I'd like to turn things back over to Pat for some comments on our outlook.
Thanks, Brian .
We enter November with some continuing market uncertainties, including global trade and the results of a late harvest.
On the positive side of the ledger, the integration and operation of our more diversified trade group continues to pay great dividends.
In addition, recent improvements and ethanol margins that enabled us to hedge forward into the fourth and first quarters have provided some optimism for that business as well.
We've managed through what was among the worst eastern planting seasons in many years.
Late in ruse planting in several of our core eastern dry areas have resulted in smaller harvests.
This will negatively impact the earnings those eastern grain assets well into 2020.
The unresolved trade war with China is having a lingering detrimental effect on both trade and ethanol groups.
Primarily primary nutrient prices continued to be soft.
Well, we think a likely increase in corn plantings in 2020 will help the plant nutrient group improve.
And for the rail group, while North American railcar loadings remain lower year over year, we expect utilization rates to stay above 90% and cars under lease to continue to increase.
We're more optimistic about our company outlook, then what is reflected by the market in our recent stock price.
We continue to work hard to improve what we can control. Our current initiatives include the following five.
One optimize a trade group performance in this first year since the acquisition, we're capturing synergies ahead of expectations melting our cultures and maximizing the best to both organizations.
We've aligned around if you find profit center driven business model to provide line of sight focus on customers trading opportunities and cash flow.
To identify and implement additional trade group expense synergies and other expense reductions around the company.
We expect to increase Lansing run rate savings from 10 million to $15 million and to carve out another 5 million in total company operating expenses by the end of next year.
Three.
Ramp up more products at our element bio refinery and selectively add some elements technologies at the other for ethanol plants.
Yes on our group as a steady track record for delivering high value ROI projects that improved plant efficiency and at higher margin products to their portfolio.
For generate positive free cash flow on an annual basis. In addition to producing better operating results. We've increased our focused on managing working capital. We also plan to hold maintenance capital spending well below our annual depreciation and amortization expense level.
And five.
Reduced recently increased long term debt following the Lansing acquisition.
We have recently announced two asset sales one completed in one pending that will give us a start on that effort.
We will continue to evaluate our asset portfolio to identify and reposition any underperforming assets.
In December 2017, we announced a 2020 run rate EBITDA target of $300 million.
We acknowledge them that we would need to engage in some growth projects and have market conditions improved to hit that target.
Since that time, we've acquired Lansing, and built and open the element risk bio refinery.
Despite the market headwinds we faced we currently continued to be confident that we will achieve that target, which is nearly double our 2017 results.
We believe we're building and ever more solid company.
The last four years, we've improved management talent.
Reduced expenses by more than 30 million.
Disposed of the retail business and several other underperforming assets.
And have continued to upgrade an infrastructure that will provide the capacity to allow us to grow.
The AG markets have proved to be very difficult over that time.
Im confident we are focused on the right levers and positioned well when those markets turn.
We continue to operate with a strong commitment to our customers employees shareholders and communities.
That has served us well for more than 70 years.
With that I'd like to hand, the call back to Andrew and we'll be happy to entertain your questions.
Thank you.
Hundreds to ask a question you will need to press star one on your telephone.
Your question first the pound Keith.
Please standby, while we compile the Q and a roster.
Our first question comes from the line of Ken Zaslow with bank of Montreal.
Good morning, guys.
Morning, Ken.
Just two questions.
One is when you're talking about the asset portfolio.
Strategy can you can you talk about the criteria that you're looking to what type assets are still in the.
Yes.
Hentschel to be sold or how do you look at that that's my first question I have another question.
Sure Kevin I think at the very.
I started this three four years ago, we had some assets that were not.
Positive cash and not attractive and those were quite obvious and we took action of those either selling in some cases closing some facilities. We continue to look at that all the time most of those in the areas that have been.
Disappointed us have all been taking care of so we don't see that as a big shift in assets coming into next year, but for example, we announced the pending sale of our fertilizer business in Canada as part of Thompsons. That's still will be closing later, but that was an act an asset there was a solid business, but probably better run by the.
Local Canadian company, Sylvite, whose acquired it and we work and then we optimize that business from that action. So there may be I'd say, maybe smaller things kind of like that.
Second question is you talked about the ethanol industry in a couple terms what is how much capacity you think is permanently taken out because of financing and liquidity issues and where do you think we're going to end.
With.
The EPA on the 15 billion gallons.
Yes. Those are two really good questions I think there's there's been quite a bit of a reduction in production either slowing or shutting that happen that got SSD back into balance in the last two quarters.
We slow production at our plants at times, when we didn't make sense as much as 2020, 5% during the period when we had high basis corn levels at some of our eastern plants. We took all our shutdowns during the period so all of our.
Plants other than the new element plant have had their fall shutdowns completed and we installed new technologies as far as our.
Processing plants that can help us performed more efficiently were up and ready to run full and those plants are in good shape.
What's the status of other plants in the industry, whether they will come back or not I couldn't good ventured against that.
Hi basis levels will be around a little bit for awhile, but the spot margins have improved quite a bit and ethanol here for the fourth quarter and actually even into the first quarter of next year. So there is a little bit brighter outlook than there has been for awhile.
And where do you think the EPA will end up.
How do we trying to handicap that is going to be somewhere between.
14, 15, it will be on higher how do you think about that yes, I would be board to the high side and some of the small refinery exemptions as we get into 2020 may come under more question. The biggest card to be played for next year will be China is there a trade deal does a trade deal include ethanol and how much ethanol accounts could be X.
Reported cuts were at a pace of the one four to one five for this year.
China has potential to by up to a billion gallons and maybe that take time to move into it but any movement of exports to China in 2020 would be a real strong shot the arm for the industry.
Great I really appreciate it. Thank you thanks, Ken.
Thank you. Our next question comes from the line of Ben and venue.
Good morning.
Good morning, Ben.
I wanted to ask about Lansing, and the impact it had on the quarter, particularly with respect.
The Gulf and opportunities between eastern and western corn belt.
Make to help.
Okay.
And then.
Commentary on the synergy capture.
The 15 million.
Where do those incremental synergies come from.
Thank you Ben So it's been an interesting period and agriculture here the last couple of quarters.
I think the acquisition of Lansing that has really helped us. The most is really there point to point trading and being very nimble in domestic markets on truck freight and positioning.
Grain and having those long term relationships with key end users, whether it's been crushers flower millers into Mexico et cetera.
They've done a really nice job positioning the basis and no putting our our grain positions in the right shape. It's been a tougher time for what would have been traditional Andy elevators in the east because we don't have the big carry on wheat that we were starting wheat in years past Andy.
Crop size has been lower the planting problems that incurred in.
Indiana, Ohio, Michigan kind of the backyard of our assets discuss farmers to hold little firmer to the stocks. They have waiting to see how harvest is going to position with that arbitrage basis and regional differentiation that's happened that.
Bill Crooker in his whole team and overland Park have done a great job positioning.
The grain markets and putting us in a better position.
The assets in the west have done very well, we have harvest in Louisiana was fantastic at those assets in crop conditions in west in the general are pretty solid so.
The trade group is stronger definitely with the acquisition of Lansing.
Okay great.
Second question comments, but yet the second maybe Brian and for the second part of your question, but I would think when we think about when we think about the synergy capture I would say, it's just it's a combination of things that we continue to.
Uncover is the collective teams as we really try to bring together the best of both in the organizations whether its people processes.
Systems, and so there's places where we have some just natural efficiencies on the people side, but then there's a variety of other areas when we think about.
Some of our trading and trade clearing and insurance and.
Just a variety of other other areas as we continue to to combine the collective group.
Maybe I'll build on that this is Pat on the on the synergies on the topline and one thing that showed up right away as Lansing had a long standing.
Group that traded ethanol and Ddgs and combining those teams with our ethanol team has really paid good benefits. So it's opened up more markets did maybe we hadn't reached previously and just interaction between those traders and maximizing the assets we have as paid good dividends.
Okay great.
You talked about this higher basis, particularly.
Sure.
Last.
Again.
Perhaps early next year.
I'd be curious your thoughts.
Randy.
Moderate.
With that we've seen backend ethanol production to what extent.
That's helpful.
Okay.
And then any comments.
Right and elaborating on hedging you might have done.
Yeah.
Sure Thats its good point, that's really critical in the market right now so it's it's hard to know the outlook of certain plants that are closed or have some production idle than their timing of startup with delayed harvest timing.
We actually did a really nice job.
We ran our plants right into shutdown and almost run them out of corn or have very little inventories during that time and got our shutdowns done ran a little lower pace in the quarter ended some really effective hedging and selling around that.
Coming into the fourth quarter at the start of October we had about 40% hedged for the quarter and about 10% hedged into the first quarter of.
2020, and worked a little more on that since that time as margins have nice little pop here for fourth and into first quarter, usually at a time when the markets quite a bit weaker so that's a pretty good sign.
And like you mentioned.
Can we keep this Sunday and balance and what will production rates do how much will ramp up the impact of stocks that remains to be seen but we feel.
Our ethanol plants are in good shape right now we're pretty much excited about getting into next year, starting out in a little better position.
Alright congratulations.
Challenging environment.
Appreciate that thank you.
Thank you. Our next question comes from a lot of Eric Larson with Buckingham Research.
Yes, good morning, everybody. Thanks for taking my question.
I just wanted to dive in a little further I think it was probably been that asked a question but.
The.
Now that you've got 100% of lansing's earnings in that western.
Western corn belt.
That.
Obviously complements what the legacy Anderson businesses on the eastern corn belt.
If we were traditionally looking at how.
You were formed for now.
With the really difficult conditions, and maybe you probably quite a bit lower crop production for corn in the eastern corn belt.
We would probably have a.
Our outlook on your total grain earnings for 2020, because you wouldn't normally.
You'd need another crop year, you need another harvest to really get the benefit of that eastern corn belt with Lansing.
Maybe we need to readjust, how we kind of think about the total mix and how that might look for 2020.
Yes, I think you're right on it Eric so.
Pre acquisition Lansing, our traditional eastern grain assets would be in tough shape because of basis levels are high farmer hasn't sold that much. We did have a early book of stuff that we bought from farmers quite a long time ago, but right now they are kind of holding tight down to see how their crops come in there is a very important.
WASDE report I think as you know coming on Friday, what kind of see what yields will do.
Some in the west have been quite strong in Nebraska, and Iowa, Ben really good.
Yields around here or spotty it kind of depends on when things were planted will likely have a little bit more moisture in corn in some drying income that will help somewhere assets, but the key point, you're making is we're a much broader more diversified grain company.
With Lansing, not only geographically, but also the product mix and the customers and the focus on different byproducts and theyve been doing a great job positioning those businesses and we feel good about that domestic flows and how we're positioned so.
Hard to compare we don't like to talk about legacy Andy or legacy Lansing anymore were one trade group going forward and it's really working well, we're really pleased with the acquisition.
Okay. Thanks, and so when you where you kind of look at the again kind of the near term environment fourth quarter is going to provide some.
Theres. So many moving parts here that is really kind of difficult to try to.
Put it all together.
You've obviously got a you've got a stronger basis. So.
Maybe you're getting some basis income in the fourth quarter and probably does.
Offset all of the negative basis implications for ethanol, but.
How do we look at at the transition from the fourth quarter and first quarter into the kind of final nine month of 20, right. I think you positioned well that others have comment on this as well with a delayed harvests, it's kind of a staggered period. So the pharma is quite a bit.
Grain stored on farm, it's kind of just wanted to see how the yields and how production comes with Dolby grain is going to come to market right and we're already seeing that some parts of the country as I mentioned earlier, when we entered a phenomenal crop and had really good run of procurement in Louisiana different conditions appear in the east, but we're still comp.
What about our trading opportunities and we think that.
We have a very weak export market right now.
We have kind of a different position than we've had in years past, but thats, just maybe create some more volatility going into WASDE and going into what potentially people are calling this phase one of our China deal that could be signed as early as this month. So I think thats a big thing that the market is anxious to see what will a trade.
Deal B and what will the final crop production be that's the two big items on the demand side and the production side right now.
Okay, and just one final question I'll pass it on so obviously farmers are trying to get the crops off the field right now which is.
Priority number one and we're not really thinking about.
Fall nutrient let alone, having probably either the weather or the soil conditions to do it.
Does that does that will you take more risk on inventory into the second quarter next year.
Obviously, you're going to have to have some makeup of volume to kind of compensate for not having fall nutrient so.
How should we think about your your nutrient numbers for next year, particularly second quarter.
It's really good question, Eric So fourth quarter as you mentioned, we have some pretty sloppy field conditions that might inhibit some application and fourth quarter. If we had a really nice fall beautiful weather you probably get a little more put down here in the fourth quarter not so sure how thats going to shake out the weather is predicted to be.
Colder and dry here for the rest a month so thats a good thing for most harp harvest and some applications I think going into next year, it's really more of an outlook on corn planting. So we think we'll see nice increase in corn acres and.
I can't comment on how well positioned our fertilizer inventory, but we've been keeping fertilizer inventories very hand to mouth for the last couple of years during falling or weak markets. So it's like the fertilizer markets have been soft it probably will stabilize going into maybe an enhanced planting outlook for next year and so we're kind of encouraged not run away.
Bullish, but we could see a better position for fertilizer next year.
Okay. Thanks, I'll pass it up.
Thank you.
I'm showing no further questions at this time.
Now I'll turn the call back over to director of Investor Relations John crops for closing remarks.
Thanks, Andrew we want to thank you all for joining US. This morning, I also want to mention again that this presentation on slides with additional supporting information are available on the investors page of our web site Anderson Zika Inc. Dot Com. Our next earnings conference call is scheduled for Thursday February 13 2000.
20 at 11 am Eastern time, when we will review, our fourth quarter and full year 2019 results.
I hope you can join US again at that time until then be well.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.