Q1 2020 Earnings Call
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I'd now like to turn the conference over to your opposed John Crouse Director of Investor Relations you may begin.
Thanks, Helane good morning, everyone and thank you for joining us for the Anderson's first quarter 2020 earnings call.
We have provided a slide presentation that will enhance today's discussion.
If you're viewing this presentation via our webcast slides and commentary will be in sake.
Webcast is being recorded on the recording and the supporting slides will be made available on the investors page on our website at <unk> Anderson zinc 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 result of many factors, including general economic conditions, whether competitive conditions conditions in the company's industries, both on the United States and internationally.
The cobot 19 pandemic an additional factors that are described in the company is publicly filed documents, including its 34 Act filings and the prospectuses prepared in connection with the company's offerings.
Today's call includes finding what information, what the which the company's independent auditors have not completely reviewed.
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 and today's prepared remarks contain non-GAAP financial measures. The company believes 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, allowing.
Undervaluation of underlying operating performance and better period to period comparability.
Adjusted pre tax income EBITDA, and adjusted EBITDA do not and should not be considered as alternatives to net income.
Income before income taxes as determined by a generally accepted accounting principles.
On the call with me today, our Pat Bowe, President and Chief Executive Officer, Brian Valentine, Executive Vice President and Chief Financial Officer.
After our prepared remarks, Pat Brian and I will be happy to take your questions.
Before making his opening comments I want to reiterate that we were sorry to have to postpone or April one at Investor day.
We still intend to host that presentation. Later this year, we look forward to sharing more details with you about that in the coming weeks with that Pat the floor is yours.
Thank you John and good morning, everyone.
Thank you for during our call. This morning, not only to review our first quarter results, but also so that we can tell you.
More about our company is responding to the cobot 19 pandemic.
And what we think it might mean for us in the coming months.
Before Brian provides the financial details I want to spend a few moments reflecting on the expense over the last couple of months.
We have up more than 70 years with a mission driven focused on serving our customers employees shareholders and communities.
It is a noble purpose.
These fundamental principles serve us well in a time a crisis like this.
We are an important part of a critical infrastructure industry.
We've continued our efforts to provide extraordinary service to our customers, but operating are more than 130 facilities because there are central to the north American agriculture supply chain.
We've been closely monitoring the crisis unfortunate executive level task force to actively manage our response early on.
We've communicated with employees often.
Made sure that we all practice physical system same and good health hygiene.
We have helped our community leaders identified the most pressing needs and help them fund them through both our related private foundations and by matching employee gifts.
We've also promoted no contact volunteer opportunities as a way for our employees and their families to serve their communities.
Brian will discuss our financial response to the crisis momentarily.
I'm very proud of our response to the pandemic thus far.
We've been able to stay responsive to customers and suppliers.
Our employees have shifted seamlessly to the new normal.
Whether it be working from home for in our plants.
I'd like to offer my heartfelt thanks to our operational workers, we show up everyday to support the American egg food supply chain.
And to all our employees kept our business running smoothly.
And finally, I'd like to express our deepest tipping fees.
For all the families and communities who have been affected by covert 19.
Pandemic had a significant impact on our first quarter results.
Yes, all group was the most directly impacted our four business units.
But both the trade and real groups were affected as well.
Fully 90% of the $30 million decrease in year over year adjusted pre tax income attributable to the company came from the ethanol group.
Approximately half of which resulted from non cash charges.
A dramatic decrease in vehicle miles traveled resulted from a stay at home orders throughout most of the country.
Those changes resulted in a significant decline in gasoline demand.
Which in turn decreased ethanol margins and corn basis.
Well I want all production slowed nationally it does not fall as quickly as demanded leading to record stocks that are now beginning to slowly subside.
The real group impacted by Carlo traffic declines that are being exacerbated by the pandemic.
The plant nutrient group's first quarter was much improved from last year.
After Brian discusses our current financial condition and responses to the pandemic.
Quickly review, our first quarter financial results and then I'll be back to discuss what we're doing now to manage through the crisis and what we expect to see for the company going forward.
Now I'll turn the call over to Brian.
Thanks, Pat and good morning, everyone.
Before we review our first quarter results I want to spend a moment discussing how we are responding to the financial implications of the pandemic.
In short, we're reducing expenses and conserving cash wherever practical.
First and foremost we have adequate liquidity.
That assertion is best represented by the approximately $850 million in Undrawn capacity from our primary credit agreement as of March 31st.
Recent stress testing we've performed shows that we have plenty of headroom with our debt covenants, which are tied primarily to working capital and various debt to capital metrics.
As it usually does in the first quarter short term debt rose as we built fertilizer inventories in anticipation of planting season.
We consider the current short term debt level to be seasonally normal.
Reducing our long term debt remains a priority.
Our long term debt maturity schedule is laddered, well with no significant amounts coming due before August of next year.
Since 2016, we've been building a culture of expense management.
In the last four years, we've identified more than $40 million in expense reduction opportunities.
More recently, we announced an increase in the expected synergies from the Lansing acquisition from $10 million to $15 million.
And that we plan to reduce other operating expenses by an additional $5 million.
However, the current crisis calls for us to do more.
As a result, we now intend to reduce expenses in 2020 by $20 million exclusive of the amounts mentioned previously.
We began to do that by immediately reducing discretionary spending such as travel.
Use of outside contractors professional fees and various other expenses.
We're also reducing capital spending.
Over the past three years, we spent an average of more than $200 million per year on maintenance and growth capital spending.
In 28, we tend to spend approximately $100 on such projects.
That does not mean, we will not look to grow selectively.
Our recent investment in Roger LLC, a new digital platform for shipping bulk commodities by truck.
It's a good example of such growth.
We're now turning to our first quarter results on slide number seven.
In the first quarter 2020, the company reported a net loss attributable to the Andersons of $37.7 million were one dollar in 15 cents per diluted share.
In an adjusted net loss of $43.2 million or $1.32 cents per diluted share on revenues of $1.9 billion.
In the first quarter of 2019.
Reported a net loss attributable to company a $14 million were 43 cents per diluted share.
In an adjusted net loss of $5.3 million or 16 cents per diluted share on revenues of $2 billion.
Adjusted EBITDA attributable to the company declined to $14.7 million in the first quarter of 2020 from $41.8 million in the first quarter of 2019.
Our reported effective tax rate for the first quarter of 2020 was 2.7%.
And our adjusted rate was a negative 9.7%.
Like comparison to 2019 full year rate was 27.8%.
The adjusted 2020 rate accounts for benefits that we expect to receive under the cares Act that we have excluded from our reported income.
We currently believe that R 22 full year.
Income tax rate will be in the range of 20% to 26%.
But the rate could vary based on the amount of income or loss attributable to non controlling interests.
Long term debt increased year over year, <unk> decreased by a little more than $10 million compared to last quarter.
Now we'll move on to 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 $10 million in an adjusted pre tax loss of $8.7 million.
Compared to a pre tax loss of $17.9 million in an adjusted pre tax loss of $6.3 million in the same period of 2019.
The substantial decrease in ethanol demand result in a significant pop in corn basis, which drove the trade groups return on it storage assets lower than in the first quarter of 2019.
We also increased accounts receivable reserves by approximately $4 million.
The group's food and specialty ingredients businesses performed very well more than doubling 2019 results.
And it's merchandising businesses were solidly profitable.
Current quarter adjusted pre tax income excludes $1.3 million worth three cents per diluted share in stock compensation expenses associated with the Lansing trade group acquisition.
We estimate that we will incur $4.2 million of such stock compensation expense during the full year 2020.
And $1.5 million during 2021.
The full year earnings per share impacts of these adjustments based on current shares outstanding.
Then sense and four cents share effectively.
Trade group adjusted EBITDA for the quarter was $9.9 million compared to the $18.7 million. The group recorded in the first quarter of 2019.
Moving to slide nine the ethanol group recorded a first quarter pre tax loss attributable to the company of $24 million.
Compared to pretax income of $3 million in the first quarter 2019.
I want to remind everyone that first quarter 2020 includes the consolidated results of all five ethanol plants, whereas first quarter 2019 included equity earnings for three of those plans.
After a decent start to the quarter the onset of stay at home orders, resulting from the cobot 19 pandemic caused demand and mark to decline significant.
In what we announce extended me shutdowns facilities.
Fortunately the plants ran in a highly efficient manner before we shut them down late in the month, which limited the amount of variable cost required for first quarter production.
Our results included noncash mark to Mark adjustments, Mark to market adjustments totaling $14.7 million.
This amount roughly two thirds relates to declines and the value of contracts on feedstocks ethanol and co products.
The remainder relates to a lower of cost or net realizable value inventory adjustment.
Due to declining ethanol prices and corn basis.
The group recorded first quarter 2020, EBITDA attributable to the company of negative $14 million.
Compared to EBITDA of $41 million in the first quarter of 2019.
The change in reporting brought about by last October's merger of our ethanol entities makes year over year EBITDA comparisons difficult.
Turning to slide number 10.
The plant nutrient group recorded a pretax loss of $1.2 million in the first quarter, which was a significant improvement over first quarter 2019 results.
Lower operating and interest expenses more than offset by a small decrease in gross profit driven by timing of product movement.
As of the beginning of the year the group reorganized itself into three subsets egg supply chain specialty liquids and engineered granules.
This new structure integrate several related businesses to enable the group to better align with the markets we serve.
Plant nutrient adjusted EBITDA for the quarter $6.9 million up from $5 million in the first quarter of 2019.
Turning to slide 11.
The rail group generated a million dollars of pre tax income in the first quarter compared to $4.3 million last year.
Leasing results reflect lower average lease rates fewer cars on lease and some credit challenges and the sand and ethanol markets.
Utilization remained relatively flat at 89%.
Total cars controlled fell to 24400 as a result of scrapping 400 cars and average cars on lease fell slightly to 21900 compared to the fourth quarter.
Average lease rates fell 7% year over year.
Service and other income was comparable to the first quarter 2019 ammo.
Repair business results were originally lower year over year.
Fine the group in 14 $4 million, an EBITDA for the quarter, which was 11% lower than last year's results.
And with that I will turn things back over to Pat.
Thanks, Brian.
When we last spoke February 13th we said that the Corona virus epidemic had not yet had a direct material impact to the company.
We also from the implementation timeline for the Phase one trade agreement with China would be a positive business driver for our trade and ethanol groups in 2020.
Well, we continue to learn more each day about the potential economic implications of these unusual times much more remains unknown unknown.
We will continue control what is in our power to control.
We are part of the essential us AG food supply chain.
Which is operated up the Christ.
We remain focused on the safety of please.
From an exceptional threats to our cost.
Strong start to the spring point in season, which should be a positive for our plant nutrient group.
A large corn crop should be beneficial for the trade group beginning with the 2020 fall harvest and well into 2021.
We expect ethanol demand to improve as the U.S. economy. It reopens.
We operate highly efficient plants and are well positioned to benefit from that when it happens.
For the rail group the year over year decrease in North American railcar loadings has widened even further over the last 12 weeks.
I would suggest that both leasing and repair income could trend lower end 2020 than we originally thought.
On last quarter's call. We shared that we thought we would remain on pace to hit our 300 million dollar run rate adjusted EBITDA target by the end of this year with a move towards a more normal market condition.
Well Unfortunately as a result of the cobot 19 pandemic, we do not have normal market conditions. So we do not expect to reach that goal this year.
In summary, I'm immensely proud of the whole Andy team for its efforts to work together effectively under difficult circumstances.
And provide great service to our customers during this unprecedented time.
Well economic challenges may continue for a bit longer our company is in a good position to emerge stronger from this difficult time.
We believe in the future of American Agriculture, and our long term future Enett is strong.
With that I'd like to hand, the call back to say lean the operator, and we'll be happy to entertain your questions.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchstone telephone. If your question has been answered or you wish to remove yourself from the Q. Please press the pound Q.
Your first question comes from the line of Kenneth Zaslow from BMO capital markets. Your line is open.
Hey, good morning, everyone.
Good morning, Ken.
So just a couple of questions, let me start up Big picture.
I think that covert 19 will change.
This is earnings power.
Is the business our their businesses that you think are structurally impaired.
What do you think it's just a matter of returning how do you think about that into longer term questioned sure no. It's it's a good question Ken So we have talked a portfolio. So.
Good news is our plant nutrient business, having a very strong spring as you remember we had a very wet spring last year that hurt our volumes, we're having a really good start to the year. So our plant nutrient business is in a very good position and running well.
The rail business has been impacted with the general economic slowdowns due to coded and we think lease rates and maybe even volume of repairs will slow as we continue in the year, but that's usually a slower decline number not a big rapid drop off.
The Green business, we're more optimistic because we see trade out in the future improving work, we see a very big corn crop, which could give a return to more normal storage income for us as you know we had a bad crop in the east and suffered from not having that volume, we normally would see and a return.
To a bigger corn crop is a good thing for the Andersons.
And then the big unknown, probably Ken is the ethanol business well.
We had.
Shutdown all five of our plants in the month to March I think were early to do so we got all our maintenance done with our own employees, we didnt want to bring to many contractors to the site at the time of the pandemic. So they're all in great shape to run.
We've now brought up tumor plants and Albion, Michigan and also in Denison, Iowa.
So were.
Less than half rate, but but the plants are running well and we took some mark to market impacts and ethanol last quarter that we see some of that coming back as the ethanol market returns as gas demand increases we just today numbers route on gasoline demand.
We went from down 50% to down.
40% reset a nice increase on the week.
So that's a little bit optimism on the recovery in gasoline demand a long ways to go at the beginning of this recovery, but I think the key thing is what will economic conditions be for driving miles, thus driving demand for ethanol that's our big.
Question for for the company.
I was surprised by the grade results.
Other grain based companies did not have as much on that side of the issue there was issues obviously an ethanol.
What do you.
The weakness there was was greater than I would've expected can you give a little color maybe why it was a little bit more than that.
We are larger peers in terms of just the green operations not not the ethanol.
Yes.
Yes, Thats very very good question, Ken and.
So several parts of our business of our trade group are doing quite well so our our feed ingredients pet foods several of our trading business had a very good quarter.
Ethanol impacts a lot of our business because we supply a lot of corn to ethanol plants. Besides our own so that decline in demand for ethanol and the weakness of the corn basis, especially being a company that has a large eastern footprint in corn that really hurt us during the quarter on the corn basis, and that's really the pro.
Particular.
Okay.
Yes first quarter.
And then my last question is are the ethanol business.
How does this eight in terms of the industry get restructured does there again permanent closures does it just end up as a long very long you until things get better how does this.
Thanks Brent.
That's a crystal ball is difficult you out you outlined three potential plays right and.
I think that the key thing to weed control is that we have very highly efficient plants. So we want to be the part of the industry, that's running and that fills that demand that comes back for gasoline for ethanol additive.
I think there will be some plants it could be permanently closed just due to a very tough economic environment.
And I think the key thing for US it's just to make sure. We're in a very smart position on those plants and run them tight inefficient and bring them up at the right time when the market asphalt.
Okay I appreciate it thank you.
Thanks, Ken.
Your next question comes from the line of Ben Bienvenu from Stephens. Your line is open.
Hey, good morning, everyone.
Turning Ben.
I want to follow up on the ethanol business, you said, you're running at 50% in April.
And when we think about.
The demand recovery and gasoline should we think about you all.
Matching that demand.
Lock step or are you.
Are you looking at gasoline demand in China, you want to see Afirma recovery before you really ramped production back up.
Yep.
Yeah.
Versus aggressive do you want to be in light of how efficient your plans are.
Understood I understand but first of all I, if I said, 50% for April I Didnt need at that as we said, 50% order. We've just start up two of our plants Albion and Denison.
The economics dictate that at those locations. So as you know.
Ben its combination of corn based ethanol price all the co products et cetera, Ddgs have rallied back quite a bit so that dictates that those plants makes sense to run on a cash basis. So we're watching it could be very smart economically.
I really just to maximize profitability of each location. That's the way we look at it we don't want to be early we were early bringing the plants down we don't want to be early leaving the volume backup want to be smart and stay in tune with the market I think the question, we don't knows how much gasoline demand will be each month as the economy.
Begins to recover so.
Well just stay in tune with with that market and react accordingly, each plant by the time.
Okay, Great and I'd love to get your out your impressions of trade flow outlook, we had good.
March export numbers and some of the key kind of.
Four categories to China, like pork that than buying soybeans.
Currently.
How you think about.
The actions that we've seen in the market and what that could mean for later this year in the context of covered which obviously cast some uncertainty into what would be.
Control recovery or normal normalization of trade flows this year, but market you're saying.
Yes.
It's nice to see China back for Us and commodities a they've also bought some hard wheat and sorghum from the us.
As you know that Brazil, Argentina had a good year end the devaluation of their currencies have caused them to be very competitive.
We're more optimistic.
About exports to China, and the latter half a year so any.
Saber rattling with trade disputes with we welcome the U.S. pharma or the entity because we like to see.
The volume of there.
We were partially answered yet each into domestically dairy chicken.
Those swine and beef all have some different challenges related to the pandemic.
In early on those markets look to be solid, but I think we'll have to kind of see as those go.
Okay and I'll be in the biggest demand decline in turn so going into big corn crop I think we'll feel good about whitening corn basis, and capturing corn carries in the TG group.
Okay.
And my phone was cutting up out of that I apologize. If you talked about this already but just where in your ethanol business at all your head through the rest of the year and what kind of coverage you guys have heading into Q3 Q.
Yeah, we really don't have fourg coverage, there hasn't been an opportunity to do anything.
That's attractive.
We do.
Those are finished.
On that.
So it just there hasn't been afford book.
Opportunity to put on this year.
Okay. Thanks, so much.
There are no further questions at this time I will now turn the call back over to John crowds.
Thanks, Helane, we want to thank you all for joining US. This morning I also want to mentioned again that this presentation on slides with additional supporting information are available on the investors page or web site at Anderson zinc dot com.
Our next earnings conference call is scheduled for Wednesday August five 2020 at 11 am Eastern time, when we will review our second quarter 2020 results. We hope you can join US again at that time until then be well.
This concludes today's teleconference. You may now disconnect.
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