Q2 2020 Andersons Inc Earnings Call
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I would now like I hand, the conference over to your first speaker today, So Mr., John Crouse director of Investor Relations. Thank you. Please go ahead.
Thanks.
Good morning, everyone and thank you for joining us for the Anderson second 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 to slides and commentary will be I'm, saying.
This webcast is being recorded on the recording on the supporting slides will be made available on their busters page of our web site at 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 a 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 cold at 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 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 and 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.
Adjusted net income attributable to company adjusted diluted EPS, EBITDA and adjusted EBITDA attributable to the company.
And adjusted.
Active tax rate provide additional information to investors and others about its operations lowering evaluation of underlying operating performance and better period to period comparability.
These measures do not and should not be considered as alternatives to net income for income before income taxes as determined by generally accepted accounting principles.
On the call with me today, or Pat Bowe, President and Chief Executive Officer, and 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 Pat makes his opening comments I want to inform you that weve rescheduled our investor day, we.
We will present it at a virtual format and the morning Tuesday December Eightth 2020.
We look forward to sharing more details about that amount with you soon.
With that pass the floor is yours.
Thank you John and good morning, everyone.
Thank you for joining our call. This morning to review our second quarter results.
We posted solid second quarter results as all four of our business groups generated positive pre tax income.
The plant nutrient group achieved a significant improvement in the second quarter.
So fertilizer distribution volumes and retail farm center application services were both up substantially.
Yes, and all group continued to be affected by reduced gasoline demand, but still earn positive pre tax income attributable to the company.
As margins recovered late in the quarter.
The group's decision to extend normal spring shutdowns allow the plans to quickly reach peak efficiency as we brought them back online.
The trade group earned a small pre tax profit during the quarter.
The story was largely the same as for the first quarter, while the merchandising business stayed strong.
Income earned by the crew groups assets was down significantly due to the small 2019 harvest in the east.
In addition, farmers largely continued to hold onto their grain and ethanol customers demand was lower.
The real group's results were slightly lower as Carlo traffic continued to fall at a record nearly one third of all North American railcars were idle.
Implications of that reduction in rail traffic include softening lease rates.
Lower demand for repair services.
Well, Brian reviews, our second quarter financial results I want to spend a couple of minutes discussing the business structure and organization changes, we announced in our press release last night.
We continue to look for ways to better serve our customers leverage our knowledge base and reduce costs across the company.
With that in mine the company has combined the trade and ethanol groups.
Bill Kruger will lead the combined group as its president.
And Jim probably will continue to lead the ethanol business. It will take on an expanded role within the combined group.
We believe will benefit from having all grain origination pro product training and risk management under one umbrella.
This change will enable us to manage overall risk logistics and arbitrage as one unified business.
Also allow for the management of food feed and fuel products from one end of the supply chain to the other.
Well these strategic benefits drove this combination we also expect to realize cost savings as a two units become further integrated.
The company has also combined the plant nutrient and rail groups under the oversight of Joe Mcneely.
Well the president of the rail group.
Cost savings was the main driver of this combination.
We also expect to identify business synergies.
I'm now going to turn things over to Brian and I'll be back when he's finished to discuss our outlook for the rest of 2020 and into early 2021, Brian.
Thanks, Pat and good morning, everyone.
We're now turning to our second quarter results on slide six.
In the second quarter of 2020, the company reported net income attributable to the andersons of $30.4 million or 92 cents per diluted share.
In adjusted net income of $29.3 million or 88 cents per diluted share.
On revenues of $1.9 billion.
In the second quarter of 2019, we reported net income attributable to the company of $29.9 million or 91 cents per diluted share in adjusted net income of $32.3 million or 98 cents per diluted share on revenues of $2.3 billion.
The benefits of our cost reduction initiatives were evident in the second quarter as operating general and administrative expenses declined 16% year over year.
Pre tax income was almost $33 million lower year over year with the trade group accounting for two thirds of that difference.
This was offset by a significant change in income taxes as we recorded an income tax benefit of $12.2 million in the second quarter 2020.
Compared to income tax expense of $11 million in the second quarter of 2019.
Adjusted EBITDA attributable to the company was $70.7 million in the second quarter 2020.
Compared to $90.1 million in the second quarter 2019.
Adjusted Trade group EBITDA was lower by approximately $29 million, which was offset by improvements in ethanol and plant nutrient.
Our effective tax rate could vary considerably each quarter based on the amount of income or loss attributable to the non controlling interest.
As in the first quarter the adjusted rate removes the benefits we expect to receive as a result of the cares Act.
These benefits had an impact of 11 cents per share for the quarter.
And 31 cents per share year to date.
We generated strong cash flows from operations and continued to focus on working capital management and reduced capital spending.
Short term debt of $96 million was approximately $50 million lower than at year end and more than $300 million lower than it was a year ago.
Long term debt has decreased approximately $35 million compared to the beginning of the year as well is at this time last year.
Long term debt reduction remains a priority.
Now, we'll move onto <unk>, a review of each of our four business units beginning with the trade group on slide seven.
The trade group reported pre tax income of $400000 in adjusted pre tax income of $1.4 million compared to pretax income of $22.6 million and adjusted pretax income of $25.8 million in the same period of 29 team.
Income from merchandising grains feed products and other commodities was on par with strong second quarter 2019 results.
The group's efforts to capture synergies from the integration of the legacy Lansing and Thompsons businesses also provided benefits.
Conversely, the groups income from its grain storage assets was lower than in the second quarter of last year as the group owned substantially fewer bushels year over year due to the small 2019 crop in the eastern corn belt.
Corn and wheat basis. Appreciate appreciation was also substantially lower than last year's outsized results.
The trade groups adjusted EBITDA for the quarter was $17.5 million compared to adjusted EBITDA of $46.8 million recorded in the second quarter of 2019.
Moving to slide eight.
The ethanol group recorded second quarter pre tax income attributable to the company of $900000 compared to $3.7 million in the second quarter of 2019.
Margins remained significantly negative in the early part of the quarter until the U.S. economy began to reopen and gasoline demand increased.
As Pat explained earlier, the group extended spring shutdowns until demand in margins improved enough to restart each plant.
As expected the group ran the plants at approximately 15% of total production capacity during the quarter.
By the ended the quarter all five plants were back online and margins had improved significantly.
Results for the quarter also included the reversal of more than half of the first quarters $14.7 million in noncash mark to market adjustments.
The group recorded EBITDA attributable to the company a lot of $11 million in the second quarter of 2020.
Compared to $4.5 million in the second quarter of 2019.
I also want to remind everyone that year over year comparisons are difficult. As 2020 includes the consolidated results of all five ethanol plants, whereas 2019 results included equity earnings for three of those plans.
Turning to slide nine.
The plant nutrient group recorded pre tax income of $19.4 million in the second quarter, which was a 22% improvement over second quarter 2019 results a $15.9 million.
The second quarter marked the group's fifth consecutive year over year quarterly improvement.
AG supply chain volume was up substantially as the group benefited from a strong planting season.
Other lines of business also grew as we expanded into new markets products in sales channels.
Operating expenses continue to move lower year over year due to cost reduction initiatives.
[noise] plant nutrients EBITDA for the quarter was $27.2 million up almost 10% from the $24.9 million. The group recorded in the second quarter of 2019.
Turning to slide 10.
The rail group remained profitable in a week rail market generating $2.6 million of pre tax income in the second quarter of 2020 compared to $3.2 million last year.
The year over year change was almost entirely due to a lack of income from car sales in the current quarter.
Leasing results were unchanged as lower maintenance expenses, partially offset the impact of lower lease rates utilization and cars on lease.
Service and other income was comparable to that of the second quarter of 29 team.
Finally, the rail group recorded $15.3 million of EBITDA for the quarter.
Which was inline with last year's results.
And now I'd like to turn things back over to Pat for some thoughts about the remainder of this year and early thoughts about Twentytwenty one.
Thanks, Brian.
I'm excited about the strategic and cost savings opportunities that should result by combining our for current groups into too.
By the commercial benefits, we anticipate realizing through the combination of the trade and ethanol groups.
These moves will also help us continue to make good progress on reducing expenses.
Our ultimate focus is on generating positive free cash flow. So we can reduce our long term debt all while devoting ourselves to providing extraordinary service to our customers.
All this work will result in a stronger company and enable us to achieve our vision of.
Let me the most nimble and innovative North American egg supply chain company.
Good planting season, followed by ample rains in crop friendly temperatures and most of the grain belt as a set up for what now looks like a plentiful harvest.
That bodes well for the profitability of our grain storage assets and merchandising business.
We're optimistic about what our integrated trading and processing teams can accomplish.
We feel much better about our ethanol business fundamentals, then we did three months ago supply and demand seem to be fairly well balanced at this time.
All five plants are back online and operating efficiently.
And we're producing higher value feed products at two of them.
The results of the business through next year will depend on an increase in gasoline demand with a return to more normal driving Myles.
And early large crop in our core geography in our core geographies excuse me could set up our plant nutrient business for a good fall season.
And work, we've done around controlling costs and improving our operational efficiency in the nutrient space well continue to pay dividends.
However, the outlook for corn prices remains challenged.
Which could continue to be a headwind to profitability at the farm gate into 2021.
As many of you know the rail leasing business is closely linked to changes in GDP.
With almost a third of the North American fleet idle, we see demand for railcars and repair services continuing to be challenged well into 2021.
We will shorten lease terms when appropriate and continue to diligently manage customer credit terms and operating expenses.
And finally, we remain focused on the health and safety of our employees and our thankful for all their efforts.
We also are thankful for a strong customer and supplier relationships and I hope, everyone stay safe and well and these unusual times.
Before I turn it over to Q and a I'd like to make a brief correction.
And Brian was covering the ethanol run rate for the quarter.
Our run rate was 50% five old percent and it sounded like you said 15, one 5%, but just wanted to clarify that we get that number straight was 55% for the quarter.
So with all that completed I'll hand, it back to dual more operator, and we'll be happy to take your questions.
Thank you Sir as a reminder to ask a question you would need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q and a roster.
I sure first question comes from Ken Zaslow from Bank of Montreal. Please go ahead.
Hey, good morning, everyone.
Let me Ken.
First question on me.
You mentioned that there is operating efficiencies as well as cost savings.
Can you put some parameters.
Are you thinking about the cadence of that.
Yes, Kevin I'm glad you brought that up so we've been working on cost savings programs here for a couple of years and especially when we're looking at a DNA reductions in the back office you felt the combination of the four groups into two could help us laying that out and help us to achieve back office Gnh synergies.
Which were well on our way to doing that right now.
We see the combination of ethanol and grain more strategic with aligning our trading.
By products in the front end origination and brain. So I think there's some more strategic benefits that happens and thats out of the business.
Pn and rail don't have quite the same on a combination.
Great and ethanol does but we do see that back office benefits by combining those two and Ken. This is Brian as we get into 2021, I would probably characterize it as an additional savings of about $10 million annually.
I think in 2020 cost to achieve some of that stuff and only being a partial year, we'll make it kind of a minimal impact, but 2021, probably about $10 million.
And it just.
The elevation margins as they start to widen.
Benefit from that.
No. It's more of an export issue, but is there any kind of.
Domino effect that you guys start to begin to enjoy that.
Can you talk about that.
Yes, you hit it right and they had their that so it's been tough right now in our eastern assets as you know Ken coming off a bad 2019 crop year here that will continue to be tough sledding in the third quarter, what pharmas coming on as you mentioned were going up a very big export season in margins are good.
For OCC through Jan and the export market and that backs write up into margins for us. So I think the fourth quarter will will be a very solid one.
Turning off the back of a big crop and and a robust export demand so.
Fourth quarter, I think you'll see some good numbers in the industry in general.
And I know it's early on 2021.
But if 2020 is kind of behind us in a little bit and I know you're still some work to do in 2020, but as I say about 2021.
No.
What's in the past is in the past.
2021.
We'll take a different.
We have a different crop you have the basis you have all this stuff.
Right.
Is it.
Long term growth target.
Earnings potential it just seems like its framing.
Relatively normal year.
No.
Just helping develop things are actually working can can you frame that maybe maybe I'm overestimating, but kind of get some parameters.
No I think you framed it just right. So we're feeling more optimistic about the grain business in general no coming off a tough storage you're in 19 with a robust crop that's going to help a lot margins look to be improving we like the product lines that we acquired with the Lansing acquisition, they've been performing quite well.
All during this time, so 2021 is shaping up.
To be like you said, a normal or real good year going into next year.
Ethanol, we had a nice turnaround in the second quarter with margins coming back. The ultimate question for 2021 will be related to coal bid how much driving miles come back and thus gasoline demand and what margins will look like and ethanol.
If we manage supply and demand and keep margins a positive this could be very solid for ethanol, so but a lot needs to lot depends on the overall economy and co lid and post election, and all that in 21, so ethanol probably as a little bit more uncertainty in it.
We've made a lot of improvements in our pn business the plant nutrients and we're excited about what the next year holds there relatively sluggish sluggish with rates without somebody cards part. So we think rates are going to stay pretty soft in rail, but overall, we're more optimistic about 21 in general.
And then my final question is just on the ethanol demand can you frame the extent to which recreational driving is actually.
We covered because again used car sales.
Rental car sales are off the charts.
Is that making up for people not driving as much to the supermarket somewhere maybe driving long distances can you frame that at all and I'll leave it there and I. Appreciate it yes, I think thats been the thing that's helped we came from below 50% of previous years.
Gasoline demand earlier in the second quarter, that's a devastating mean, you'd say one or 2% movement in gasoline was a big shift right. So to see that come back up to let's call. It. The mid Seventys is a return of people, making like you said casual driving trips or.
I just want to call it a vacation trip or something instead of commuting to work every day I think the return to work and getting more people driving commuting everyday will make a big difference to gasoline demand going forward. That's still kind of remains to be seen with the second wave of co. What's happened here in the last month, but as you mentioned.
Racial driving its kind of picked up a little bit to help that so right now the balance is pretty good.
And there is margins in the industry and we just hope that could continue and maybe improve.
Great I appreciate it.
Thank you.
Thank you.
Our next question comes from Ben Bienvenu from Stephens. Please go ahead.
Hi, good morning right.
Morning, then.
Continuing the trend from Ken's questions and I don't want to.
Overstated, but it does seem like the set up.
As is shaping up really favourably with the crop.
Recovery the size the crop and to Kens point should linger nicely into 2021 as it relates to storage income.
Can you help us frame up.
It looks as if I mean, this has got to be one of the better set ups on trade group side since you've been at the Andersons.
Any additional color framing you could provide for us would be helpful. And then kind of what are the if I think about the elements elements of variability.
To the upside and downside for that business help us goalpost on things.
Sure I think it's important to note the what's going in third quarter, we're still struggling with eastern assets. Because we just didn't have that crop from last year as you might remember I know.
Ken Falls this week, we benefit from very wide carrying charges in wheat, and making large week carries in previous years and thats not here in the marketplace for US now so we'll be missing that we'd storage income, which we had earned pretty well in the last two three years. That's one part we don't have.
Pharma has been a little bit of reluctance seller with low grain prices when the market rallied a little bit off the government report and we saw.
Corn get up to $9 Im sorry, being to $9 important about 360, we saw some selling but now we've settled back down I think were low three twentys and run 880 on beans right now.
<unk>.
To shut off their selling to some extent, but they're going to need to come to market. This fall with a bigger crop we're excited about the exports.
We've recently sold Chinese Milo and beans, so the export outlook going into the OCC Jan Windows I mentioned earlier looks to be really good.
And with a return of some of the ethanol plants coming back online.
In recent months as cut that demand back a little bit we had a really good.
Results and some of our feed grain businesses.
It's interesting to note on the food grade corn side.
Restaurant demand is is soft, but consumer demand is high at retail stores. So it's kind of a shift and that is little bit of different outlook for grain. So in general we're optimistic, especially starting with fourth quarter as a new new crops coming in as we had about Sunday going into 21.
Okay fair enough.
On the ethanol business.
Yes, I might've missed it did you guys talk about the mark to market unwinding did that unwind into Q.
And then.
If you think about what you're seeing with industry SMB.
The level of restraint, you think we might or might not see as we progress through.
The back end of this summer and into the fall.
And kind of help us get our bearings on what was reasonable to expect there and what you guys are thinking.
Yes, Ben this is Brian Yeah, we did see roughly half of the first quarter Mark to market come back in the second quarter, and then maybe I'll comment a little bit about the some of the SMB. Yes. So that was pretty much whipsaw kind of go first to second quarter. When we took the plant down. The good news was we had scheduled spring shutdowns at all of our facilities.
Yes, we did the most of the work ourselves.
Plants highly tuned.
And then they came up really well when we return one of the challenges for our new plant element was right. The middle of startup when we did the shutdown. So the timing of that wasn't ideal for our new Kansas plant, but thats up running and running well.
You mentioned earlier, we have two plants now, making high protein feed which is encouraging for us and the outlook for expanding our feed products as we plan to an ethanol. So that's a good sign.
The macro question you asked is a good one is like we have a little balance right now in SSD with some assets down and ethanol production and demand holding in there at this time as we talked about with Ken.
We haven't had a big boom and exports, it's been relatively stable so little bit of increase in exports little bit increase in driving demand then we'll could see margins appreciate and maybe some more capacity come back online, but in general right now it's steady as she goes and that's a good thing.
We hope that that can continue through the balance of year, we should have reasonable corn prices, which is going to helped ethanol industry.
And as we've said a few times and win without trying to sound arrogant. Our plants are really well built or high scale are highly efficient we've put in a lot of new technology in the last several years and new investments. So we think we're running in the top deco the industry. So we should be plants that should be running and running at high efficiency and make.
Margins during this period, so we feel pretty comfortable about that.
Okay, Thanks, and best thought.
Thank you.
Thank you.
Our next question comes from Eric Larson from Seaport Global. Please go ahead.
Thank you good morning, everyone. Thanks for taking my question.
Two questions related to ethanol.
So.
Yes.
Ethanol in or out of the.
The new government funding proposals that are in front of house and Senate right now is.
And if its and how much per gallon could you get it seems like this is on off like a light switch sometimes it's in some times itself. So I'd be curious on your thoughts of where we sit with.
Well, maybe some help for the ethanol industry in the in the new funding program potential funding here for right.
For the first question. The answer is we don't know for sure. So just what you said, Eric and first of all Eric welcome back to coverage in US now with a different companies glad to have you.
Covering us on the ethanol funding getting some.
In the new government below kind of the.
Only support going it came out of the Jack name of the title or calling it now.
Let me Oh heels. So as there has been a lot of discussion by some of the form state Senators and the names you had no that have been supported ethanol. We're past the have ethanol included into that period when the industry suffered.
That would be encouraging and I'd be really good for the industry, it's not clear either clear whether that will be both in the house and Senate bills, Phil So it's been discussed.
On both sides right now so simple answer is we don't know for sure. It's something that's been proposed but not a clear path to say that that can happen for sure.
Yes.
And any rates.
Thank you for a welcome you back it's a pleasure to be back as well.
Mentioned any potential range of rates of benefit that you could get on a gallon basis or is that kind of known as shown on North Dakota all over the back so it's too early to comment on that.
Okay, then one more ethanol question here.
A lot of your competitors have been out.
Hi, great.
Alcohol for Sanitizers and all those other stuff have you have you folks.
Participated in some of the higher value add stuff I mean, it looks like even margins. If they came back kind of late in the quarter. It looks like you really had.
Hi, good second half of the quarter to be kind of profitable if only about half of your MTM gains came around so.
Did you are you getting any benefit from those types of products are you producing them. Yes. Good question. So so we run fuel grade ethanol plants as does almost everyone in the industry thats really for different grades of ethanol with the fuel grade for the motor fuel market second one is for U.S.P. greater.
You asked Pharmacopeia grade, which allows for some food grade and sanitation purposes. Then there was a higher grade called FCC, which sounds are under food and chemical codecs and then the highest one is rain neutral spirits, which is portable all call. We are in the end the gasoline market with a fuel grade.
We have had discussions with major players in the industry potentially looking at exploring options in this space, but havent made a decision at this time.
But it could be something that could be of interest.
It's interesting to note having the right quality. We these people won't have the really high end quality.
Of grain neutral spirits are really good food grade they can depend on there has been some.
So poor quality ethanol, that's been put out and that's not good thing we wouldn't do that we just want to do a very high quality product. If we should do that so at this point, it's just something we're exploring.
Okay sounds good.
One quick.
Follow up on plant nutrient.
I had really been anticipating a pretty good second quarter, new did deliver that and volumes were probably really strong we're able to hold margins in the quarter or.
What's kind of the affordability index still under some pressure on margins under pressure. It looks like you. Obviously you had a really good year over year dollar increase in pre tax profits, but how did the components break out on that.
Yes, that's a fair question. So we had a good year.
On the spring season, mainly driven by no big push for more acres in corn. So our wholesale distribution volume was up under under decent margins margins Elbe. They didnt really go up or down much during the quarter, it's still tough, though as you know well as a farmer Eric on the specialties, we havent had margin increases in that.
Segment, because it's tough given the corn prices at this time, so I'd say the specialty margins are harder to get those to widen in other parts of our business and sort of interesting that.
While we did well with home lawn care products as people working on their lawns and gardens. The export market was tougher just with challenges with ports and stuff turn the time of coven. Some of those shipments we make a professional products for golf course was were down but domestic golf course demand was up so it kind of the tale of two cities in our specialty businesses.
So in general across the board all aspects of the fertilizer business were better a lot of that on the back of better productivity and cost efficiencies not on the back of Oh, a price increase across the board. So I'd say the pricing is relatively stable and our volume was good and low lower costs.
Good that's that's very helpful. Pat and then ill just finish up with one other question.
I applaud your your reorganization efforts here I think simplifying your model is really going to benefit you.
Ill.
Little to this already.
The the strategic benefit of of emerging.
And ethanol together makes lot of fat Theres Theres Cross obviously, there is cross origination issues that can be beneficial for you you can really see the benefit there.
Thank you kind of alluded to the nutrient.
Rail consolidation more as maybe up.
Maybe as a SGN a expense benefit but.
Thank you thinking out loud, what could potentially be any strategic benefits with that as well.
Any thoughts on that that you could share with us that would be helpful. Sure sure.
As we were been working on.
Cost reduction over the last couple of years I mentioned that we're trying to tackle gionee across the company and we felt this combination could allow us to do that with a more back office synergies.
Ryan mentioned, we've targeted a 10 million dollar reduction on run rate for next year no. We have some cost to achieve this year with severance et cetera, that's happening.
But it's a natural fit of grain and ethanol. It was they were together originally when the Anderson's first got in the ethanol business. So we see a lot of like you mentioned strategic benefits on Ddgs granted origination et cetera.
The case of rail and Pn, they're really two different markets that don't overlap much.
And it's really a back office cost savings move and we think Thats where were going to see the benefits there.
Okay perfect. Thank you all have passed.
Thank you Eric Thanks.
Thank you I should have further questions in the queue at this time I'd like to turn the call back over to Mr., John Crouse direct of Investor Relations for closing remarks.
Mr Gross.
Thanks to them. So we want to thank you all for joining US. This morning I also want to mentioned again that this presentation slides with additional supporting information are available on the investors page of our website and Anderson zinc Dot Com. Our next earnings call is scheduled for Wednesday November 4th.
2020.
At 11 am Eastern time, when we will review our third quarter 2020 results. We hope you can join US again at this 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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