Q3 2020 Andersons Inc Earnings Call
Good question during the session you'll need to press star one on your telephone as a reminder, todays program maybe recorded I would now like to introduce your host for today's program John Cross Director of Investor Relations. Please go ahead Sir.
Thanks, Jonathan Good morning, everyone and thank you for joining us for the Andersons third quarter 2020 earnings call.
We have provided a slide presentation that will enhance todays discussion.
If you are viewing this presentation via our webcast the slides and commentary will be and say.
This webcast is being recorded and the recording of a supporting slides will be made available on the investors page of our website at Andersen think 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 weather competitive conditions conditions and the Companys industries, both in the United States and international.
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COVID-19 pandemic and additional factors that are described in the company's publicly filed documents, including its 34 Act filings and the prospectuses prepared in connection with the company's operating.
Today's call includes financial information, which the Companys 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 are reasonable. It can give no assurance that these assumptions will prove to be accurate.
This presentation and todays 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 adjusted.
EBITDA attributable to the company and adjusted effective tax rate provide additional information to investors and others about its operations, allowing an evaluation of underlying operating performance and better period to period comparability.
These measures do not and should not be considered as alternatives for net income or income before income taxes as determined by generally accepted accounting principles.
On the call with me today are 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.
Before Pat makes his opening comments I want to remind you that will present, an investor day and a virtual format on Tuesday December eight 2020, beginning at nine am eastern time.
I want to also let you know that we have just completed a sustainability review.
That document may be found in the investors section of our web site.
With that pad the floor is yours.
Thank you John and good morning, everyone. Thank.
Thank you for joining our call. This morning to review our third quarter results.
Three of our four business segments recorded improved year over year results.
The trade business led the way by earning a much improved third quarter pre tax profit year over year.
It can digest results and grain elevations were strong.
Income earned by the group's assets was positive despite the final lingering effects of the small 2019 harvest in the east.
Seen much improved brain production in the east this harvest.
The overall business recorded pre tax income was slightly better and its third quarter of 2019.
No margins were stronger year over year, the corn futures price rally led to large noncash mark to market charge on our corn and Ddgs, Yeah, we did not face in 2019.
The plant nutrient business achieved its sixth consecutive quarterly year over year improvement in the third quarter.
Margins were up slightly on similar volumes and the business continued to manage expenses and working capital effectively.
Rail reported nearly breakeven results as continued lower rail traffic negatively impacted lease rates.
Cars in service fleet utilization and demand for rail services were all lower.
Our recent strategic combination of those four business segments into two groups is creating the commercial and cost synergies we anticipated.
We also completed the related strategic cost takeout, which should result in run rate savings of approximately $10 million beginning early next year.
We expect that these actions along with the moves made earlier in the year should result in more than $25 million in permanent cost reductions when comparing 2019 and 2021 results.
We're continuing our evolution towards becoming a much leaner company that's poised to grow.
I'm now going to turn things over to Brian and when he's finished I'll be back to discuss our outlook for the rest of 2020 and into 2021 right.
Thanks, Pat and good morning, everyone.
We're now turning to our third quarter results on slide number five.
In the third quarter of 2020, the company reported a net loss attributable to the andersons of $1.1 million or three cents per diluted share.
In an adjusted net loss of $2.4 million or seven cents per diluted share on revenues of $1.9 billion.
In the third quarter of 2019, we reported a net loss attributable to the company of $4.2 million or 13 cents per diluted share and an adjusted net loss of $2.3 million or seven cents per diluted share on revenues of $2 billion.
The benefits of our cost reduction initiatives continued to be evident in the third quarter as operating general and administrative expenses declined $8.9 million or 8% year over year.
Adjusted pre tax income attributable to the company increased $7.3 million year over year.
With the trade group accounting for almost 90% of the improvement.
These operating results were offset by lower income tax benefits as we recorded an adjusted benefit of $200000 in the third quarter of 2020.
Compared to a benefit of $7.2 million in the third quarter of 2019.
Adjusted EBITDA attributable to the company was $46.2 million in the third quarter of 2020 compared.
Compared to $38.2 million in the third quarter of 2019 and increase of 21%.
Adjusted EBITDA for the quarter was higher for the trade ethanol and plant nutrient segments.
Our effective tax rate continues to change considerably each quarter based on the amount of income or loss attributable to the noncontrolling interests.
As in the first two quarters of the year yeah.
The adjusted rate also removes the benefits we expect to receive from the cares Act.
These benefits had an impact of 14 cents per share for the quarter and have had a 45 cents per share impact year to date.
We generated strong cash flow from operations and continued to focus on working capital management.
We have also taken a disciplined approach to capital spending, which we expect it to be about $100 million for the full year.
Long term debt decreased approximately $100 million compared to the beginning of the year long term debt reduction remains a priority.
In late October we refinanced a portion of the debt supporting the rail business.
This decision will reduce borrowing costs going forward.
However, it will result in the recognition of approximately two and a half million dollars of noncash interest charges to the rail business in the fourth quarter relating to interest rate swaps and debt issuance fees on the prior debt agreement.
The refinancing accelerated recognition of these expenses, which would have otherwise been amortized into interest expense through the third quarter of Twentytwenty one.
Now, we'll move on to a review of each of our four business segments, beginning with trade on slide six.
Trade reported pre tax income of $5.9 million and adjusted pre tax income of $6.9 million compared to a pre tax loss of $2.1 million and adjusted pre tax income of $400000 in the same period of 2019.
The difference between reported and adjusted results in both periods was stock compensation expense relating to the Lansing trade group acquisition.
Income from merchandising grains feed products and all other commodities was strong compared to the third quarter 2019 results due to increased market volatility.
Income from the segments asset portfolio was positive due to improved results from our Ohio, and Louisiana assets.
Synergy capture and other cost cutting efforts continued to provide benefits try.
Trades adjusted EBITDA for the quarter was $22.3 million compared to adjusted EBITDA of $20.7 million in the third quarter of 2019.
Moving to slide number seven ethanol third quarter pretax income attributable to the company of $1.1 million was up slightly from the third quarter 2019 result.
Margins were much improved despite increasing corn costs as industry supply and demand remained relatively balanced.
Third party ethanol trading results were also higher year over year.
Offsetting those improvements was a $6.2 million noncash mark to market adjustment as Pat mentioned earlier.
Ethanol recorded EBITDA attributable to the company of <unk> of $11.1 million in the third quarter of 2020 up from $3.9 million in the third quarter of last year.
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 were three of those plants reside.
Results will be more comparable beginning next quarter.
Turning to slide eight the plant nutrient business recorded a pre tax loss of $5.4 million in the third quarter, which was a 2 million dollar improvement from the third quarter 2019 loss of $7.4 million.
The third quarter marked the segment's six consecutive year over year quarterly improvement.
Margins per ton were slightly higher on similar volumes.
Operating and interest expenses continued to move lower year over year due to cost reduction initiatives and effective working capital management.
Nutrients EBITDA for the quarter was $2.2 million, an increase of $1.3 million from the third quarter of 2019.
Turning to slide number nine the rail business was essentially breakeven in the third quarter compared with pre tax earnings of $3.1 million last year.
The year over year change was primarily driven by lower results from its lease fleet.
As lease rates cars on lease and utilization each declined year over year.
Rail generated $12.5 million in EBITDA for the quarter compared with EBITDA of $16.1 million for the third quarter of 2019.
I'd now like to turn things back to Pat for some thoughts about the remainder of this year and some early views about 2021.
Thanks, Brian.
We are very pleased to see the 2020, corn and soybean harvests very much improved from the short crop in the eastern corn belt that hurt us last year.
This puts us in a strong position for a year with robust grain demand.
Nationwide. This year's crop is smaller and drier than we anticipated just three months ago.
Export demand has been very robust, especially from China, which we expect to run well into the first quarter.
These conditions have led to a significant increase in basis strong elevation margins and considerable volatility which creates good merchandising opportunities for the andersons.
Nearby grain futures prices have rallied created an inverse in corn and soybean and wheat markets.
If those conditions persist they will impact the opportunity turn storage income through the first part of 2021.
As a result of those conditions, our current outlook for the trading business in the next four quarters is strong overall with solid merchandising opportunities you had a softer outlook on income from carrying grains, and we thought it'd be 90 days ago.
We expect the results in 2021 to exceed 2020 and the trade group.
Spot ethanol crush margins continue to be very positive, but similar to grain markets are inverted.
We completed all planned fall maintenance outages on schedule at the four plants owned by the Andersons marathon ethanol and they're all running well.
We continue to line out some of the new technologies, we are using in the element plant and are excited about a new high protein feed products that were already producing both better and at our Denison, Iowa facility.
While spot margins are strong how we finished 2020 and begin 2021 will depend on the balance between gasoline demand and the ethanol industry supply.
We expect our plant nutrient business to finish the year well, we appear to be having a good fall application season, and we expect improvement in 2021, assuming continued higher commodity prices and another strong planting season.
Well railcar demand has been soft and as we look into 2021 without any significant shutdowns. We think the bottom of the trough in railcar demand at least prices may be behind us. However.
However, we continue to see a challenging demand picture for railcars and rail repair services through much of 21, and the result should remain flat going into next year.
So in summary, we have made good progress on reducing long term debt put in place a more effective cost structure and we're seeing the benefits of the Lansing acquisition and a stronger trading platform.
US AG fundamentals have dramatically improved which bodes well for us pharma and for the Andersons.
I'm very encouraged by the resilience of our workforce this past year we.
We feel we have a leaner and stronger company going into 2021 and are excited about our future prospects.
With that I'd like to hand, the call back to Jonathan well be happy to entertain your questions.
Certainly ladies and gentlemen, once again, if you have a question at this time. Please press Star then one on your Touchtone telephone. Our first question comes from the line of Ken Zaslow from Bank of Montreal. Your question. Please.
Everyone.
Ken.
I wanted to touch base on the bigger picture first.
The $300 million EBITDA target can you talk about that in where that kind of stands for 2021 and how everything plays out.
Sure and thanks for asking that question Ken. We're we're currently working on our long term strategy and our budgets for 21, and we'll be sharing in more detail at our Investor day about that outlook in December.
We have had in place that long term goal of $300 million EBITDA for 21, and we're encouraged by the improvement we've seen in AG markets, especially here. The last 90 days going into next year.
Okay, and then on top of that when you think about the crop being restored in the eastern corn belt, how do you frame how that would actually impact.
The interesting it seems like you were talking about crops, Convenio 20, 25% bigger than year ago levels remains in strong can can you talk about what that actually translates to and is that something that you would expect to see in 2021.
Yes, sure Ken and it will be a year ago EBITDA.
Really wet planting season will turn RPM business, and then going to grain harvest was really low volumes in the east a lot of those crops tributary to our eastern assets those tough that 19 harvest coming into the current harvest here. We're just wrapping up maybe 20% of corn still to finish we had a beautiful sunny 70 agreed.
Outlook here for the next five days, so harvest will finish really strong in the east production has been restored we've been taking in really good volumes of grain.
All of our facilities again, a strong basis strong export market strong elevations.
So it's been a much improved outlook and so we're on a level playing field in fact, maybe eastern crops in some cases have been better than some of the western crops into the improvement year to year. So we're in a much better position than we were last year.
At the harvest time.
And then my last question on cost savings I.
I think you mentioned that you.
$25 million from 19 to 21.
Would it be just incremental from 20 to 21 and.
Assuming that there is still that does contribute to your $200 million.
Yes, Ken this is Bryan I think Thats fair I'd put it into kind of three buckets.
At the at the beginning of the year, we talked about an incremental 10 coming from a combination of synergies and productivity improvements and then when we were talking Cove it and some of the actions. We are taking on cost containment, we talked about another another 20 ish at the call. It in the May timeframe, and we said about.
Half of that was sustainable and then probably another 10 for some of the actions that we took with the Reorg and some of the Gionee side that gave us kind of a 40 number in total about 30 of which we thought was sustainable and there was some offsets for for cost to achieve so as we enter next year probably.
Think about an incremental five to 10 is probably hard frame it.
Often 20.
Thank you guys.
Thank you. Our next question comes from the line of Ben revenue from Stephens. Your question. Please.
Hey, Thanks morning, guys.
Good morning, Ben.
I want to ask with respect to the commentary around the Kerry.
Yes, we can see what's going on in core across the corn soybeans wheat carries.
Historically, when you've had outsized carry opportunities and we've given you.
An opportunity to capture.
Hi storage income.
When you think across.
Those three primary crane categories.
In oilseeds.
I guess, we historically has been most important.
How would you rank order if there is a rank order today, which matters most to you in terms of having a carrier in the market.
I'm glad you brought up the comment of Carrington and the reason we pointed out was just really because of the big change in 90 days. So I mean 90 days ago.
The markets are that a remarkable rally so we're up a dollar in corn to $4 and a dollar and wheat, the $6 and $2 and beans that 10, 50 10 75. So we've had a really big Bull run here, often aggressive China export program, which is fantastic and we're starting to hear some early.
Signs of dryness in Argentina, and Brazil at planting so if that were to continue or to persist does bull run could could continue to move up. So farmers are now in a much stronger position, having received some government payments and now getting the benefit of higher commodity prices. So that's kind of a macro backdrop.
With that ball move all corn bean and weak markets inverted. So carries went out of those markets and that's true for everybody I mean, there's not an Anderson's thing that's for everybody in the grain business farmer elevator processor exporter. So the reason we provided that pointed that out with just this has occurred.
Additionally, the market those can change spreads move.
Quite dramatically, sometimes it's just unusual teva crop harvest with a big crop and have such a bull rally and inverted markets and high premiums harvest time. So this is 2020 is an unusual year for lots of things in this country and AG is no different.
So now specifically to US as you mentioned, Ben we tend to historically you've made.
Steady wheat carries on soft red wheat, storing it mostly in the Toledo area.
This year, the wheat crop was good quality, but not big in size, we're optimistic about plantings with good fall conditions. The Ed good high prices for we will see a bigger crop next year in wheat, so thats encouraging.
It comes to wheat.
But corn overall is going to be say corn is king corn total volume of corn is the biggest impact to everyone. In AG. So when you have big carries in corn that generates probably the most income when it comes to total dollars and probably has probably will more volatility to what the corn spread. So answer. Your question is has seen.
Carries returning corn will be good for storage income across the AG sector and right now no pharma has been selling beans at high prices and sitting on corn, it's not good to sit on corn. When you don't have much of a carried it right. So it's going to be an interesting market as we go into the first quarter.
The second quarter of next year and see how spreads play out.
Okay, Great really helpful color. Thank you for that.
The detail.
Switching to the ethanol business.
Industry SMB is much improved.
You guys have always run.
Assets I'm curious.
In addition to that kind of SMB on the traditional ethanol.
All product cornerstone product and breathing.
On a number of producers about a shot in the arm on U.S.P. grade alcohol.
I just don't know to what extent you guys participate in that market today at all and if not is there an avenue by which you think there is not sustainable demand to enter that market with the assets that you have.
No.
Yes, I think you pointed out the good comments Ben that the ethanol margins when it comes to crush.
With the corn market rally and soybean and soybean meal rally Ddgs really improved as well also corn oil outlook, especially in the long term is attractive with the renewable biodiesel demand for Corning. So the co products in the long term and ethanol looked pretty pretty friendly. We're also see.
In our ability to make high protein new feed streams and create much higher margins and values on our feed products. We are now selling those out of.
Our Iowa plant at our Kansas plant. So those are encouraging across the whole product side.
We've looked at the U.S.P. grade market and to invest the capital necessary to build a true portable alcohol plant and didn't feel the returns are having the contracts in place with users were there for us I think some people have that capability today are enjoying that margin, but we didn't see that as a good.
A place to deploy capital today for our company.
Perfect. Thanks for the color and best of luck.
Q.
Thank you. Our next question comes from the line of Eric Larson from Seaport Global Your question. Please.
Yes. Good morning, Thanks for the question guys.
I wanted to just focus a few minutes on rail I mean that was.
I think.
Breakeven quarter, I think that was probably one of your.
Oh poor performance, if I thinking that rail division in some time so.
I think Brian you mentioned that theres going to be I think a onetime.
Interest charge adjustment in four into Q in Q4, but you earned.
I think on adjusted basis, four and a half million pre tax profits in the fourth quarter a year ago.
Can you talk about what the impact is on fourth quarter, given the current environment and.
Thanks, Pat you said that.
Flattish Fourq 2021, I may have Miss heard that so can you help us with the rail side of it.
Yes, I think it is as we think about 2021, I think you're right thinking about it on a flattish on kind of an EBITDA basis makes sense.
I think if we think about our rail business on the whole for the kind of the full year of this year.
I would think of it in the context of.
A few million dollars positive, but before that non cash before that noncash charge. John anything you look like you want to add some John Yes, I think you said flattish on an EBITDA basis, I think we wanted to say MVP basis, yes.
And Eric I think on a macro level as you know that so lonely loadings utilization uneven shot volumes that have really been weak so with that the real economy has continued to struggle all year.
And we're no different than anyone else, we have seen some pickups in some types of cars grain cars. For example are starting to look a little better.
Intermodal has been good in the industry, but still lot of segments are really pretty tough and a lot of cars part so.
Question is what's the kind of begin to look like could there be other Coleman shutdowns next year that impact.
So what drives the rail traffic.
We'll have to see how that plays out we think this might be the bottom but to get excited about a real robust turnaround in rail demand, we don't see that the cards for next year.
Okay. So as part of our four business groups Thats. The one thats flat. The other three are all going to be improved and 21.
Okay.
So when you kind of look at just the very near term.
Yes.
You said in the eastern corn belt, you've got about 20% of the harvest I think left in corn.
We are having fantastic weather right now we're just unusual of course, it was pretty poor October though too.
With with what could come to the market.
Pretty rapid fashion for let's say the remaining 20% of harvest.
Give you may be an opportunity on a more favorable basis on a near term is there some of that supply comes in pretty quickly.
Yes, I think you're laying it out pretty well, Eric I mean, we've been buying beans are aggressively all through harvest farmer liking the high level of flat price and beans over $10, So and we've been putting through those beans, just as fast with with robust demand for export. So it's been a really good season for being elevations corn.
Farmers have been holding a little bit that's been early harvested. So we'll see at the end of harvest, if they're going to be moving more corn, we expect to see more corn movement here. The next few weeks. So overall, we've been pleased with harvest progress and quality of harvest as well as quantity at our facilities.
Feeling very good about harvest in general.
So it's been a good season for everybody so far so really pleased.
So just my final question, Pat and this is more of a.
Kind of a general.
Observation, but it's a question that I get all the time and I think in the investment community it lingers as.
Thats kind of one of the overall, maybe overhanging debate. So we talk about the sustainability of this particular.
AG recovery as you know we've had several sort of false starts over the past.
Several years right.
But but this terminal does seem a lot different I'm just curious how you are looking at.
Yes, sustainability, what could be the driving factors that have changed that across the sector. As you participate most of those sectors. So can you just.
On the other side.
We've seen some pretty disappointing fertile well, we've seen just pointing fertilizer results overall looking backwards not forward obviously rob.
Yes. It is.
The sentiment here is trying to find.
And the answer to what the outlook might be sustainability of this particular egg recovery.
Yes, and I think the best part.
About an AG recovery is being demand led right so China coming in for just record uptake. This year is super encouraging to everyone. So sure it to the exports at the Gulf the BMW, but Texas Gulf even stuff, we're doing on the lakes I mean, the whole export program impacts everybody. So.
That's a really good sign when is the demand pull if you couple that with some domestic demand lift, which probably would come from ethanol. So ethanol, let's call. It 90% right now of driving starts to pick up as we get the new year and we get past a covert situation were.
Demand for gasoline improves we'll see a pickup in ethanol already.
Protein demand is solid so demand side of AG is good.
Farmers balance.
Balance sheets are better now getting some government payments as well as having higher commodity prices. So people are in a much better position.
Looking forward to the conditions of South America, if we had some dryness in South America were really going to kind of a bullish environment for commodity prices.
And that's a little bit why am I was surprised candidly this morning to see that reaction in our stock price because we had a beat on the quarter and solid earnings for the quarter and our outlook is good as part of a stronger AG.
Market I think maybe our comments about Kerry.
Might have concern people at that applies to everybody. So we just kind of pointing it out what changed in the last 90 days and market's inverted in the last 90 days has been a big factor in AG. So the reason we brought that up but.
Your answer to your long term question as an AG recovery being driven by Asian demand and specifically, China can be sustainable and that's encouraging.
Okay, and then you mentioned.
It looks like it looks like.
To have new sources of demand for oil you mentioned in your corner I will comment.
We have pretty significant.
The increase is coming in renewable diesel.
And that could be more than a one one your benefit to the to the egg industry is that would that be part of your sustainable recovery comments as well.
Yes, yes renewable diesel is this another lift to the veg oil complex here in the us.
That's a good thing for our corn oil production business, but also we we trade those feedstocks. So it's an opportunity that I think is going to be good for the AG sector in general.
Thank you.
Thank you. Our next question comes from the line of Ben Klieve from National Securities. Your question. Please.
All right. Thanks for taking my questions I really just have one question here on that within the ethanol segment on the element plan. Specifically can you just kind of give us an update here really where where this facility stands.
In terms of ramping towards full production, both either from utilization rate from the integration of new technology perspective.
And kind of upcoming milestones.
Relating to getting getting final approval for tax credits, where really do we stand in the the ramp of that of that facility overall.
Great Great question, Ben So we hope pre covance that we were going to be a much better position than we were now given the impact of the ethanol plant shutdowns that happened earlier this year right. When we are in the middle of kind of a ramp up in the start of the startup of the element facility kind of delayed our prospects.
For that plant so put us behind the trajectory we wanted to be on so plant has been running at full capacity and producing ethanol. We don't have our California CCAR approval, yet because we're waiting to have our gasifier systems. Our front end wood burning system will be certified we had.
A big maintenance shutdown, we are doing here.
This fall and then when we bring the plant back up we'll be working on getting that California Carb approval you have to have a 90 day run.
To get the proper certification of your carbon score we feel really good about their carbon score we've been producing our high pro Ddgs and having really good market acceptance of our feed products. So really we're just behind schedule and I think we're talking about Brian when we put an account has anything been I would think of that as kind of.
Second half 21.
Type impact.
Impact starting to have an impact of the California approval.
Got it and sorry can I ask a clarifying question on the said that kind of the timeline here that the 90 day.
The 90 day.
Track record is is how has that 90 day process started yet or is that does that still is that still.
Waiting as you bring up solidly back after the.
After the maintenance.
Just to clarify no we haven't done that we're bringing up the new orders back online and then we'll plan to make the 90 day run submitted to carve you guys are going to pull more and we're talking about.
Brian said mid year.
Summer of 21 for having full approval in shipments to California, gaining the California now the plants running running full we're just not getting that additional California premium at this time.
Roger that okay, very good well thanks for the clarification and I appreciate that appreciate that I'll get back in queue now.
Okay.
Thank you once again, if you have a question at this time. Please press Star then one.
And this does conclude the question and answer session of today's program I'd like to hand, the program back to John for any further remarks.
Thank you Jonathan we want to thank you all for joining US. This morning, I also want to mention again that this presentation slides with additional supporting information are available on the investors page of our website at Andersons Inc. dot com or.
Our next earnings conference call is scheduled for Wednesday February 17th 2021 at 11 am Eastern time, when we will review our fourth quarter 2020 results. We hope you can join US again at that time until then be well.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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Yes.