The Andersons (NASDAQ:ANDE) Q1 2020 Earnings Call

0:00 Good morning, ladies and gentlemen, and welcome to the 2020 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touchtone telephone. I would now like to turn the conference over to your host, John Krause, Director of Investor Relations. You may begin.

0:29 Thanks, Celine. Good morning, everyone, and thank you for joining us for the Anderson's First Quarter 2020 Earnings Call. We've provided a slide presentation that will enhance today's discussion. If you're viewing this presentation via our webcast, the slides and commentary will be in sync. This webcast is being recorded, and the recording and the supporting slides will be made available on the Investors page of our website at andersonsinc.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 in the company's industries, both in the United States and internationally, the 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 offerings.

1:34 Today's call includes financial information which the company's 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 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 an evaluation of underlying operating performance and better period-to-period comparability.

2:20 Adjusted pre-tax income, EBITDA, and adjusted EBITDA 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 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 making his opening comments, I want to reiterate that we were sorry to have to postpone our April 1 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.

3:08 Thank you, John, and good morning, everyone.

3:12 Thank you for joining our call this morning, not only to review our first quarter results, but also so that we can tell you All more about how our company is responding to the COVID-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 experience of the last couple months. We have operated for more than 70 years with a mission-driven focus on serving our customers, employees, shareholders, and communities. It is a noble purpose. These fundamental principles serve us well in a time of crisis like this. We are an important part of a critical infrastructure industry.

4:01 We've continued our efforts to provide extraordinary service to our customers by operating our more than 130 facilities because they are central to the North American agriculture supply chain. We've been closely monitoring the crisis and formed an executive-level task force that actively manage our response early on. We've communicated with employees often and made sure that we all practice physical distancing and good health hygiene. We've helped our community leaders identify 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.

4:53 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 or in our plants. I'd like to offer my heartfelt thanks to our operational workers who show up every day to support the American ag food supply chain and to all our employees who have kept our business running smoothly. And finally, I'd like to express our deepest sympathies for all the families and communities who have been affected by COVID-19.

5:41 The pandemic had a significant impact on our first quarter results. Thank you very much. A dramatic decrease in vehicle miles traveled resulted from the 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 bases.

6:28 While ethanol production slowed nationally, it did not fall as quickly as demand did, leading to record stocks that are now beginning to slowly subside. the rail group impacted by Kalu 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, he'll 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.

7:11 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.

7:59 As it usually does in the first quarter, short-term debt rose Thank you. Thank you. Thank you. Thank you. Thank you. We are also reducing capital spending.

9:30 Over the past three years, we've spent an average of more than $200 million per year on maintenance and growth capital spending. In 2020, we intend to spend approximately $100 million 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, is a good example of such growth. We're now turning to our first quarter results on slide number seven. In the first quarter of 2020, the company reported a net loss attributable to the Andersons of $37.7 million or $1.15 per diluted share and an adjusted net loss of $43.2 million or $1.32 per diluted share on revenues of $1.9 billion.

10:33 In the first quarter of 2019, we reported a net loss attributable to the company of $14 million or 43 cents per diluted share and 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%. By comparison, the 2019 full-year rate was 27.8%. Thank you for joining us.

11:58 but decreased by a little more than $10 million compared to last quarter. Now we'll move on to a review of each of our four business units, beginning with the trade group on slide number eight. The trade group reported a pre-tax loss of $10 million and an adjusted pre-tax loss of $8.7 million compared to a pre-tax loss of $17.9 million and a significant drop in corn bases, which drove the trade group's return on its 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 its merchandising businesses were solidly profitable.

13:07 Current quarter adjusted pre-tax income excludes $1.3 million, or three cents per diluted share, in stock compensation expenses associated with the Lansing Trade Group acquisitions. 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 are $0.07 and $0.04 per share respectively. Trade group adjusted EBITDA for the quarter was $9.9 million Thank you for joining us.

14:17 includes the consolidated results of all five ethanol plants, whereas first quarter 2019 included equity earnings for three of those plants. After a decent start to the quarter, the onset of stay-at-home orders resulting from the COVID-19 pandemic caused demand and margins to decline significantly. In March, we announced extended maintenance shutdowns of 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 costs required for first quarter production. Our results included non-cash mark-to-market adjustments totaling $14.7 million.

15:06 Of this amount, roughly two-thirds relates to declines in the value of contracts on feedstocks, ethanol, and coproducts. 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 pre-tax loss of $1.2 million in the first quarter, which was a significant improvement over first quarter 2019 results.

16:03 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, ag supply chain, specialty liquids, and engineered granules. This new structure integrates several related businesses to enable the group to better align with the markets we serve. Plant Nutrient adjusted EBITDA for the quarter to $6.9 million, up from $5 million in the first quarter of 2019. Turning to slide 11, the rail group generated $1 million of pre-tax income in the first quarter compared to $4.3 million last year.

16:57 Leasing results reflect lower average lease rates, fewer cars on lease, and some credit challenges in the sand and ethanol markets. Utilization remained relatively flat at 89%. Total cars controlled Thank you. Thank you. Thank you for joining us.

18:14 for our trade and ethanol groups in 2020. While we continue to learn more each day about the potential economic implications of these unusual times, much more remains unknown than known. We will continue to control what is in our power to control. We are part of the essential U.S. ag food supply chain, which has operated throughout the crisis. We remain focused on the health and safety of our employees Thank you for joining us. and are well positioned to benefit from that when it happens.

19:18 For the rail group, the year-over-year decrease in North American rail car loadings has widened even further over the last 12 weeks, which suggests that both leasing and repair income could trim lower in 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 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 COVID-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.

20:15 While economic challenges may continue for a bit longer, our company is in a good position to merge stronger from this difficult time. We believe in the future of American agriculture, and our long-term future in it is strong. With that, I'd like to hand the call back to Celine, 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 queue, please press the pound key. Your first question comes from the line of Ken Exaflo from BMO Capital Markets. Your line is open.

20:59 Hey, good morning, everyone. Morning, Ken. So just a couple of questions. Let me start off big picture. Do you think that COVID-19 will change Anderson's earnings power. Are there businesses that you think are structurally impaired, or do you think it's just a matter of returning? How do you think about that? That's a longer-term question.

21:25 Sure. No, it's a good question, Ken. So we have to look at the portfolio. So good news is our plant nutrient business is having a very strong spring. As you remember, we had a very wet spring last year, and that hurt our volumes significantly. Thank you very much. The grain business, we're more optimistic because we see trade out in the future improving. 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.

22:24 and then the big unknown probably, Ken, is the ethanol business. Well, we had shut down all five of our plants in the month of March. I think we were early to do so. We got all our maintenance done with our own employees. We didn't want to bring too 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 two of our plants in Albany, Michigan and also in Denison, Iowa. So we're, you know, less than half rate, but the plants are running well. And we took some mark-to-market impacts in ethanol last quarter that we see some of that coming back as the ethanol market returns as gas demand increases. Just today, numbers were out on gasoline demand.

23:09 You know, we went from down 50% to down, you know, 40% which is a nice increase on the week. So that's a little bit of optimism on a 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 the company.

23:34 Okay. I was surprised by the grain results. You know, other grain-based companies did not have as much on that side of the issue. There was issues, obviously, on ethanol. The weakness there was greater than I would have expected. Can you give a little color of maybe why it was a little bit more than some of your larger peers in terms of just the grain operations, not the ethanol?

24:02 Yeah, that's a very good question, Ken. And so several parts of our business, of our trade group, are doing quite well. So 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 particular part that was difficult for us in the first quarter.

24:42 Okay, and then my last question is, on the ethanol business, How does this end? Does the industry get restructured? Does there get permanent closures? Does it just end up as a very long year until things get better? How does the picture end?

25:04 That's a crystal ball that's difficult. You outlined three potential plays, right? The key thing that we 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 that could be permanently closed just due to a very tough economic environment. And I think the key thing for us is just to make sure we're in a very smart position on those plants and run them tight and efficient and bring them up at the right time when the market asks for them.

25:42 Great. I appreciate it. Thank you.

25:44 Thanks, Kev. Your next question comes from the line of Ben Bienvenu from Stephens. Your line is open.

25:55 Hey, good morning, everyone. Morning, Ben. Good morning. 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 in gasoline, should we think about you all matching that demand in lockstep, or are you looking at gasoline demand and saying you want to see a firmer recovery before you really ramp production back up? Yeah. How tepid versus aggressive do you want to be in light of how efficient your plants are?

26:32 I understand. But first of all, if I said 50% for April, I didn't mean it that way. We said 50% for the quarter. We've just stuffed up two of our plants, Albion and Denison, because the economics dictate that at those locations. So as you know, Ben, it's a combination of and many more. We were early bringing the plants down. We don't want to be early leading the volume back up. We want to be smart and stay in tune with the market.

27:20 I think the question we don't know is how much gasoline demand will be each month as the economy begins to recover. So we'll just stay in tune with that market and react accordingly each plant at a time.

27:37 Okay, great. And I'd love to get your impressions of trade flow outlook. We have good March export numbers in some of the key kind of export categories to China, like pork. They've been buying soybeans here more recently. Just 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 COVID, which obviously cast some uncertainty into what would be potential recovery or normalization of trade flows. Just your impression of the market that you're seeing.

28:12 Yeah, you know, it's nice to see China back for some commodities. They've also bought some hard wheat and sorghum from the U.S. As you know, Brazil and Argentina had a good year, and the devaluation of their currencies has caused them to be very competitive. We're more optimistic. about exports to China in the latter half of the year. We're a little cautious, and yet each industry domestically, dairy, chicken, swine and beef, all have some different challenges related to the pandemic.

28:57 And early on, those markets look to be solid, but I think we'll have to kind of see as those go. Ethanol being the biggest demand decline in corn, so going into a big corn crop, I think we'll feel good about widening corn bases and capturing corn carries in the ATG group.

29:16 Okay. And my phone was cutting out a bit, so I apologize if you talked about this already. But just where in your ethanol business, if at all, are your hedges through the rest of the year and what kind of coverage you guys have heading into 2Q, 3Q?

29:30 Yeah, we really don't have forward coverage. There hasn't been an opportunity to do anything that's attractive. Of course, if we do get those opportunities, we'll move on that. So there hasn't been a forward book opportunity to put on this year.

29:48 Thanks so much. There are no further questions at this time. I will now turn the call back over to John Krause.

29:59 Thanks, Helene. We want to thank you all for joining us this morning. I also want to mention again that this presentation and slides with additional supporting information are available on the Investors page or our website at andersonzinc.com. Our next earnings conference call is scheduled for Wednesday, August 5, 2020 at 11 a.m. 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.