Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the end of since 2019 fourth quarter earnings Conference call. At this time, all participants I know listen only mode.
So to speak of presentation that they will be question and answer session.
Good question. During this session you wanted to press Star one on your telephone if you acquire any further assistance. Please press star Zero I would now like to hand, the conference your speaker today, John Crafts Director of Investor Relations. Please go ahead Sir.
Thanks, Joel Good morning, everyone. Thank you for joining us for the Anderson's fourth quarter 2019 earnings call.
We are providing a slide presentation that will enhance today's discussion if you're viewing this presentation via our webcast the slides and commentary will be and saying.
Webcast is being recorded and the recording and the supporting slides will be made available on the investors pays or web site at Anderson zinc dot com shortly.
Certain information discussed today constitute 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 international.
Really an additional factors that are described in the company's publicly filed documents, including a 34 act filings and the prospectuses prepared in connection with the company's offerings.
Today's call includes financial information, which the company is independent auditors have not completely reviewed.
Although the company believes that the assumptions upon which the financial information and its forward looking statements are based or reasonable. It can give no assurance that these assumptions will prove to be accurate.
This presentation at today's prepared remarks contain non-GAAP financial measures. The company believes that adjusted pre tax income adjusted pre tax income attributable to the company EBITDA and adjusted EBITDA provide additional information to investors and others about its operations lowering and evaluate.
And I've underlying operating performance and better period to period comparability.
Adjusted pre tax 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.
On the call with me today, our Pat Bowe, Chief Executive Officer, and Brian Valentine Chief Financial Officer.
After our prepared remarks, Pat Brian and I will be happy to take your questions.
Before Pat makes his opening comments I want to remind everyone that will be holding an investor day, beginning at 830, a on Wednesday April 1st the presentation will also be webcast live on our website.
We invite you to listen and.
With that Pat the floor is yours.
Thank you John and good morning, everyone.
Thank you for joining our call. This morning to review, our fourth quarter and full year 2019 results.
I'll start by providing some high level thoughts on our overall results.
Those of each of our four business groups.
Right well that present, a brief business review and I'll finish our prepared remarks with some comments about our current views on 2020.
Well, our adjusted fourth quarter pretax earnings fell short of those are the fourth quarter of 2018, we drove our adjusted EBITDA higher by more than 20%.
Most of the quarterly earnings shortfall came from the trade group.
Many of its nearly I'm skews me many of its newly acquired product lines performed very well.
But the trade groups lower results were caused a large part by small late and wet harvest and much of its historical eastern corn belt footprint.
Yeah from a group remain profitable and the plant nutrient group's results were slightly improved.
The real group's results were somewhat lower.
We sold some assets during the quarter.
So the Thompsons, Ontario, Agronomy assets at Michigan Farms Center, and a tendency grain elevator.
Most of the proceeds from these sales were used to pay down debt.
For the full year, it's very clear that are Lansing trade group acquisition has been and is expected to be very good one.
Great group adjusted pre tax income nearly doubled year over year and its adjusted EBITDA was over 150% higher.
However, while the ethanol group was consistently profitable.
Tough margin environment drove the groups year over year results significantly lower.
Plant nutrient group was impacted by extremely wet and shorten planting season.
And its core geography is that together with an expected decrease in contract manufacturing sales resulted in lower pre tax income then in 28 team.
Real income was marginally lower as a slight improvement in leasing income was more than offset by lower income from both car sales and railcar repair business.
The trade groups number one priority for 29 team was to integrate Lansing into the former grain group.
Integration is largely complete.
We achieved our goal to identify and implement at least $10 million and run rate expense savings by the end of 2020.
We have exceeded this goal here early with our total run rate expense savings today of approximately $11 million.
Yes, no groups element bio refinery came online in the third quarter.
Well the pace of production ramp up has been slower than planned we began producing ethanol using our new say lasik technology in the fourth quarter.
Also in October you ethanol group merge four separate entities with our partner Marathon Petroleum Corporation.
When the merger was closed we were able to reduce long term debt associated with the ethanol business.
Nearly $50 million and the group's financial results are now consolidated.
Brian will now walk you through more detailed review our financial results.
Thanks, Pat and good morning, everyone.
We're now on slide number five.
In the fourth quarter of 2019, the company reported net income attributable to the andersons of $6.6 million or 19 cents per diluted share.
And adjusted net income of $18.4 million or 55 cents per diluted share on revenues of $1.9 billion.
In the fourth quarter of 2018.
Reported net income of $23.8 million or 84 cents per diluted share and adjusted net income attributable to the company of $26 million or 92 cents per diluted share.
Revenues of approximately $800 million.
Adjusted EBITDA attributable to the company increased 21 person from $63 million in the fourth quarter of 2000 $18 million to $76.1 million in the fourth quarter of 2019.
For the full year 2019, net income attributable to the Andersons was $18.3 million or 55 cents per diluted share.
And adjusted net income attributable to the Andersons was $43 million or $1.30 cents per diluted share on revenues of $8.2 billion.
These numbers compared to 2018 reported net income of $41.5 million or $1.46 per diluted share.
And adjusted net income attributable to the company, a $46.4 million or one dollar and 63 cents per diluted share on revenues of $3 billion.
Full year adjusted EBITDA attributable to the company was $246.3 million.
Which was up 39% over our 2018 adjusted EBITDA of $177.2 million.
Our full year 2019 reported effective tax rate was 46.4%.
And our adjusted full year tax rate was 16.7%.
By comparison, our 2018 effective tax rate was 22.4%.
The adjusted 2019 rate account for amounts by which we adjusted pre tax income that are not deductible on our U.S. income tax return.
We currently believe that our 2020 effective tax rate will be in the range of 24% to 26%.
Total long term debt increased slightly compared to last quarter, primarily as a result of the consolidation of the ethanol entities.
However, as Pat mentioned, we were able to utilize cash previously held at these entities to repay almost $50 million of ethanol that when the merger closed.
Next we provide bridge grass the compare 2018 adjusted pre tax income through 2019, adjusted pretax income for both the fourth quarter and the full year.
Slide six shows that a majority of the year over year decrease in income came from the trade group, whose adjusted results fell by $5.7 million in the fourth quarter.
The small late and what harvest in the eastern corn belt accounted for much of that shortfall.
Moving to our full year results on slide number seven.
Trade group results were up by $18.4 million year over year, primarily due to the strong performance of many of the new business lines acquired from Lansing.
Ethanols adjusted pretax income was down by $13.7 million due to the challenging margin environment.
For both the quarter and year to date.
Acquisition related costs were the primary reason that adjusted pretax income was higher than reported pre tax income.
As gains from the ethanol merger and other asset sales essentially offset the sand and other asset impairment charges.
Now, we'll move to really well review of each of our four business units beginning with the trade group on slide number eight.
The trade group reported a pretax loss of $19 million well recorded adjusted pretax income of $18.5 million.
Compared to pretax income of $24.2 million in the same period of 2018.
Current quarter adjusted pre tax income excludes $40.4 million in asset impairment charges, primarily associated with sand trans loading and processing assets acquired as part of that Lansing acquisition.
Solid performance by many of the group's new merchandising lines helped to mitigate the significant reduction in income from eastern corn belt assets as a result of late planting and a small wet harvest.
Strong performance by the group's propane distribution business helped offset lower operating results from the sand trans loading business.
Trade group adjusted EBITDA for the quarter was $38.1 million, an improvement of $7.3 million or 24% over the grain groups fourth quarter 2018 EBITDA.
For the full year, the trade groups adjusted EBITDA improved to $126.3 million, a year over year increase of $76.7 million or more than 150%.
Moving to slide nine the ethanol group turned in another solid quarter, considering the difficult market conditions.
The group earned adjusted fourth quarter pre tax income attributable to the company of $7.2 million up from $6.4 million in the fourth quarter of 2018.
Spot margins rebounded early in the fourth quarter driving increased production and Didnt industry supply later in the quarter.
Increased third party ethanol trading and hedging helped us during the quarter.
However margins continued to be hurt by elevated corn basis for the three eastern plants.
Production continued to ramp up and new technologies continued to be introduced at the element bio refinery during the quarter, though less quickly than originally expected.
As mentioned previously reported pre tax income of $42.2 million included pretax income of $36.3 million from the revaluation of the groups equity interest in entities. The previously previously owned the Albion climbers and Greenville plants.
Those entities along with the wholly owned Denison facility were merged in early October.
One results of the ethanol merger is a full consolidation of the group's operating results, which improves transparency, but we'll make year over year comparisons difficult during twentytwenty.
This change also makes adjusted EBITDA, a more meaningful measure.
The group recorded fourth quarter 2019, adjusted EBITDA attributable to the company of $16.6 million.
Turning to slide 10, the plant nutrient group recorded adjusted pre tax income of $3.9 million in the fourth quarter, which was similar to fourth quarter 2018 results.
Lower operating an interest expenses were mostly offset by a small decrease in gross profit.
Margins per ton, we're much improved for specialty liquid fertilizers lower for primary nutrients.
Volumes were marginally higher for primary nutrients, but lower for specialty liquid and loan products.
Plant nutrient adjusted EBITDA for the quarter was $11.5 million down about a million dollars from the fourth quarter of 2018.
For the full year, adjusted EBITDA was $42.3 million, which was down 7% from 2018 full year EBITDA of $45.4 million. Despite a difficult planting season, our key geographies and an expected drop in contract manager manufacturing volumes.
From a record year in 2018.
Moving to slide 11, the rail group generated $4.5 million of pre tax income in the fourth quarter compared to $6.7 million last year.
Leasing results reflect lower average lease rates and some credit challenges in the sand and ethanol markets.
Utilization averaged 89.4% for the quarter compared to 90.3% last quarter.
Total cars controlled remained stable at 24800 and average cars on lease fell slightly to 22200 compared to the third quarter.
The group recorded $2.4 million of pre tax income from car sales compared to the $1.2 million a pre tax income it earned in the fourth quarter of 2018.
Service and other income was not entirely comparable due to a $2.4 million gain on the sale of barges recorded in the fourth quarter of 2018.
Repair business results were marginally lower year over year.
The group maintained 26 repair locations during the quarter.
The rail group recorded $17.6 million in EBITDA for the quarter, which was comparable to last year's result.
For the full year 2019 rail had EBITDA of $65.7 million, an increase of 13% from $57.9 million in 2018.
Before I turn things back over to Pat We also wanted to spend a little time discussing some of the adjustments we made to reported pretax and net income during 2019.
On slide 12, we present, a summary of the current quarter and full year adjustments relating to the Lansing acquisition.
We incurred $2.8 million of acquisition related costs in the fourth quarter, bringing the total of those expenses to $17.1 million for the year.
As part of finalizing the purchase accounting for the transaction.
We trued up income tax expenses relating to our adjustments.
The result was a tax benefit of $8 million for the quarter and $4.4 million for the full year.
The impacts of the combined adjustments on earnings per share were 33 cents for the quarter and 65 cents for the year.
We estimate that we will incur acquisition related stock compensation expense of $4.3 million in 2020.
And $1.5 million in 2021.
The earnings per share impacts of these adjustments based on current shares outstanding our 10 cents and three cents per share respectively.
We have not formally adjusted pre tax income for the impact of incremental depreciation and amortization related to the acquisition.
Those expenses were $3 million or seven cents per diluted share for the fourth quarter.
And $10.2 million or 23 cents per share for the full year.
We expect to record $7.4 million of incremental depreciation and amortization in 2020 and 2021.
Which reflects the impact of the fourth quarter 2019, sand transloading asset impairment charge.
The EPS impact of those noncash charges exit is expected to be 17 cents in each of those years.
On slide 13, we present, a similar summary of the adjustments we made relating to the ethanol merger, which we closed in October.
The most significant adjustment we made was to exclude the 30 36.3 million dollar noncash gain recorded on the revaluation of our equity investments in the Albion climbers and Greenville plants.
We also incurred $1.3 million in transaction costs during the quarter relating to this merger.
The net of those two adjustments was pre tax income of $35 million, which equates to diluted earnings per share of 79 cents.
We recorded $2.5 million or six cents per diluted share in incremental depreciation expense in the fourth quarter of 29 team.
We have not formally adjusted pre tax income and earnings per share for this amount.
Currently we anticipate recording about $10 million or 23 cents per share in depreciation relating to the asset step up in each of Twentytwenty and 2021.
And with that I'd like to turn things back over to Pat for some comments on our outlook.
Thanks, Brian.
When we spoke at this time last year, we were optimistic that 2019 results would be better than those of 2018.
Especially as we continued our Lansing integration work.
We saw good early signs from the trade and rail groups, but we're feeling more guarded about the prospects for the ethanol and plant nutrient groups.
We also expressed confidence about hitting our 2020 run rate EBITDA target of $300 million.
No 12 months later, we're continuing to manage through what has been among the worst eastern corn belt harvest on record.
This will negatively impact the earnings of those trade group assets well into 2020, but could also provide some good merchandising opportunities.
The current margin environment has is filling cautious about ethanols prospects, especially in the first half of the year.
We continue to ramp up of the element plant should result in the Industrys lowest carbon score and is anticipated to help improve results late in the year.
Well the resolution of the China Trade war should be a tailwind for both groups. It is unclear when it and by how much that resolution will begin to drive demand.
Well, we're on the topic of China accruing a virus epidemic currently does not have a direct material impact to the andersons.
We think a likely increase in corn planting and 2020 will help the plant nutrient group improved results to a level more in line with recent history.
It should be helpful for the three other business groups as well.
For the rail group so year over year decrease in North American railcar loadings continues to widen.
I would suggest that both leasing and repair income could trend lower in 2020.
We continue to feel more upbeat about our longer term company outlook, then what we reflected.
What is reflected in the market.
Our current stock price.
On our last call we introduced the following initiatives.
One optimize the trade group performance.
In 2020, the group will focus on maximizing the Lansing acquisition growing organically and making opportunistic investments.
To identify and implement additional trade group expense synergies and other expense reductions around the company.
We remain confident that we will increase run rate integration and cost savings to $15 million and carve out another $5 million in total company operated expenses by the end of this year.
Three ramp up new products at our element bio refinery and commission technology upgrades at the other for ethanol plants.
We now expect that will be operating the full suite of new technologies at element and obtain what we expect to be an industry, leading carbon score sometime late this year.
For generate positive free cash flow on an annual basis. In addition to producing better operating results. We will continue to refine our focus on managing working capital.
We also plan to hold maintenance capital spending well below our annual depreciation and amortization expense.
And five.
Reduce recently increased long term debt following the Lansing acquisition.
We will focus on reducing debt in 2020, but not at the expense of solid growth projects. We will continue to evaluate our asset portfolio to identify potential sources of cash.
In late 2017, we announced a 2020 run rate adjusted EBITDA target of $300 million.
Yesterday, we reported 2019, adjusted EBITDA of $246 million, which is nearly 90 million higher so just two years ago.
And wizard and less than ideal market conditions.
We think that with a move toward more normal market conditions, we remain on pace to hit the 300 million dollar run rate EBITDA target on time by the end of 2020.
In summary, we added significant horsepower to both the trade group and the ethanol group in 2019.
We will continue to tune our business operations, and our balance sheet and expect to generate more cash in 2020 and to produce better results.
With that I'd like to hand, the call back over to dwell and we'll be happy to entertain your questions.
Thank you as a reminder to ask a question you'll need to press star one on your telephone.
Switching to your question <unk> key please standby we've compiled agenda avastin.
Our first question comes from Ben Bienvenu with Stephens, Inc. Your line is now open.
Hi, Thanks.
Good morning, Ben.
Good question.
Trade group.
Continues to deliver better than what would be expected.
Yeah.
Challenging operating environment.
I Wonder if you can help us think about.
There's a general rule.
When you identify merchandising opportunities to freelancing.
How much of an offset relative to traditional origination.
Yes.
Can we expect Lansing offset in times of challenges.
And then when you're making decisions.
Balancing those two businesses can you help us think about.
On a dollar of revenue.
Origination side as it does for from a volume perspective versus.
Lansing trade group kind of the margin trade off that you make.
Maybe an overnight overly simplified question.
The answer but any guidance you can help with there would be helpful.
Sure Ben I think I know you're coming from it is overly simplistic simplify but yet very complicated question. So what we've done as you know the anderson's footprint of grain assets.
Our elevators were predominantly eastern corn belt.
Where we had assets in Illinois, Indiana, Ohio, Michigan, and just a couple further west.
But the Lantheus assets are little more diversified with.
Elevators in Idaho in Louisiana, but landscape has really been more of a point to point trading business and not so much focused on physical space, where the Anderson's has had a legacy of physical grain storage and handling blending in shipping to export ethanol or protein markets. So.
We had had a difficult planting season in harvest in the eastern grain belt that.
In some cases or what harvest was good we made some drying margins, but our production was definitely down hurting what would potentially be normal storage margins in the east as well as a carries in we'd have narrowed so we don't make as much money as we had in recent years on storing wheat software suite in the east but.
The good news is with the breadth of the Lansing trading opportunities.
As broad as from pet food to propane, we have lots of businesses that have performed very well.
We'll take advantage of regional disparities in the grain markets and in spite of what is has been a relatively sluggish futures market and not pretty damn export pace, especially for corn, there has been quite a vibrant domestic demand and opportunities to trade domestically and thats worked quite well.
Well for our trading team and we continue to see that to be the case in 2020.
Thank you. Our next question comes from Ken Zaslow with Bank of Montreal. Your line is now open.
Hey, good morning, everyone.
Morning, Ken.
A couple of questions. One is can you talk about ethanol outlook what is your expectation for China.
Separately.
Your news, so I think plant.
What was the margin structure be relative to the rest of your plan that's out there.
Sure good questions I think the whole world that now has been focused on trying to for some time and we've all been talking about the trade deal.
And now that the trade deal has happened.
We have a.
South American harvest, that's been very strong.
Brazilian real that set an all time low so just cash markets would favor south American supplied to China. So we havent seen Chinese come to the U.S. market in real strong.
Buying pattern.
Or that first purchase of ethanol. So the question is about trying to win and then how big that will be and when will that will happen and I guess, we don't know that I think a lot of focus has shifted from the impact of African swine fever domestic hog production in China now to more Corona virus and what that means.
As for domestic food consumption in China, and how those things shift.
We will have to watch that closely but I think there your question about what that impact to ethanol I think it won't have an impact of ddgs are ethanol till we actually see shipset the water.
On the rumor of a trade deal margins went up a little bit.
But not seen that come through with actual orders, it's kinda dissipated to some extent so the ethanol market in the first half a year is kind of sluggish oh from a margin standpoint.
We expect that to pick up later in the year.
When you switch focus back to our element plant, we were delayed with a really what a construction season. So we're literally behind schedule than we originally planned and we're in the ramp up phase. The good news is our new technologies that we've introduced there are working well, but I'd say, we're still up in the ramp up phase.
On that plant when it's completed and we get certification of the carbon score in California will be very.
Very.
A good position for us at the time of the project, we talked about a 10 to 15 cents.
Premium to California market for sales in the market still looks to me that case, if not a little bit higher than that so we're still optimistic about what the ultimate.
Marketplace will be for that element output that hasn't changed if anything it's slightly firmer than when we started the project.
Okay. Then are you surprised by the ramp up of ethanol production and I'll leave the ethanol questions about that.
Yeah.
I think we've seen this for years right. When we slow down production comes off and then the market comes out of shutdowns and then starts to ramp up a little bit. So now we've built stocks as an industry and some production ramp up has occurred which keeps a damper on margin structure. So.
It's somewhat expected because that's been what the past.
Behavior has been so we'll have to see really how the demand pace continues as we get out of these the winter doldrums and into more the spring summer driving season.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
Next question comes from Eric Larson with Buckingham Research. Your line is now open.
Good morning, everyone, how you doing.
Good morning, Eric are you.
Thanks, So much not my first question is.
You are great earnings have actually kind of came in where I thought they would they were pretty good your ethanol margins were battery or plant nutrient was quite a bit better.
So I guess the first question as you know if we're expecting significant increase in corn acres, which I would would expect this spring the set up for two Q4 plant nutrient looks pretty good but.
Yes, so you're still drag on margins Hardy or how do how do the industry inventories look and volumes should be good but can you can you get the margin and the into second quarter, if we get the acreage.
Yes, good question, Eric and we're probably our estimates are for 93 million planted acres, which is probably close to what the industry averages, which will be a nice pickup and that'll be good for overall fertilizer demand we had a relatively good fall weather the gave farmers and retailers good opportunity late in the year to get.
Some applications.
Our outlook for the spring is kind of return to normal weather normal planting season, and it has some upside with these additional corn acres. As you said, we especially like that we've had a relatively mild winter across most of the Midwest and so were pretty good shape that way be great for some starters could be applied.
Early and that would be upside potential on margin for us so fertilizer prices have been relatively stable.
During this period and there's ample supplies available. So I think we'll have a good solid spring that's what we're looking forward to.
Okay then.
A quick question on the trade group you are struggling.
All year and I think you did struggle again in the fourth quarter I think the comps get better you still struggle against some very high.
Oh, you know we profitability in your.
Yes, you are grain storage numbers I believe also on the fourth quarter.
Was that a factor in Q4 significantly again and have we lapped well Q1 start lapsing bat.
It's difficult comps for grain, yes, I think you got about right. So as you remember the last three years, we had outsized storage income on soft wheat.
And that was a factor also in the fourth quarter I know fault kohut struggling I think it's just that that opportunity wasn't here that was here in one year in two or three years ago, where we enjoyed that we'd carrie.
And that that's where the market works, sometimes we are using that opportunity to move more corn and beans through that space and in handle that so.
In fact, when one market changes it gives creates an opportunity and another one so our trade opportunities, especially into the southeast which has been a strong market here with a protein demand is good. So I think we'll have an active.
Eastern rail market. So the other markets, where we trade in and we've done quite well in those spaces.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to John pass for closing remarks.
Thanks, Joel we want to thank you for 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 at Anderson Zig Dot com.
Before we sign off I also want to remind everyone again of our upcoming Investor day on Wednesday April 1st.
Our next earnings call is scheduled for Wednesday may six at 11 am Eastern time, when will review our first quarter 2020 results.
We 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 you may now disconnect.
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