The Andersons, Inc. (ANDE) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to The Andersons 2019 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode to prevent background noise. [Operator Instructions] Later, we will have a question-and-answer session and instructions will be given at that time. Now, it's my pleasure to turn the call to Mr. John Kraus, Director of Investor Relations.

Good morning, everyone, and thank you for joining us for The Andersons first quarter 2019 earnings call. We have 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, 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. 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. On the call with me today are Pat Bowe, President and Chief Executive Officer; and Brian Valentine, Senior Vice President and Chief Financial Officer. Pat, Brian and I will answer your questions after our prepared remarks. Now, I'll turn the floor over to Pat for his opening comments.

Thank you, John, and good morning, everyone. Thank you for joining our call this morning to review our first quarter 2019 performance. After Brian reviews our results, I'll wrap up our prepared remarks with some comments about our outlook for the balance of 2019. And then, we'll be happy to take your questions. Our reported and adjusted first quarter results were well behind those of the first quarter of 2018. But both were significantly impacted by accounting adjustments related to our Lansing Trade Group acquisition. Holding that acquisition was certainly in the highlight of the quarter and I'm very pleased about the progress we're making with the integration of our Trade Group. Our new team and assets are both performing well, especially considering the difficult grain market conditions. We began managing our commodity positions on a combined basis on day one and the level and extent of market and customer information being shared by our team is exactly what we need to capture the top-line synergies we know are available. We're also making great progress toward identifying and capturing the $10 million in run rate expense synergies we promised to deliver by the end of next year. Having made these comments about our Trade Group, the market backdrop was difficult for most of our groups during the quarter, and those conditions contributed to some disappointing results. The Trade Group operated in a flat low-volatility environment that hampered the group's margins. The group also incurred an insured loss due to water damage at its Anselmo, Nebraska facility, most of which we expect to recover through insurance later this year. The Ethanol Group continued to remain profitable for the quarter, making the best of a very weak margin environment during most of the quarter. Difficult times like these reinforce the wisdom of our strategy in this business, operate as efficiently as possible to maximize margin from each bushel of corn we grind and effectively manage risk by using prudent hedging strategies. The Rail Group continued its solid performance recording better results year-over-year. Income from the leasing business improved due to record utilization and more cars on lease, and revenue and margin improvements led to better results from our repair network. As we planned, income from car sales was lower year-over-year. Our Plant Nutrient Group struggled with difficult early season conditions across our selling region. We expected a good start to the year due to the difficulty many farmers had in getting any fertilizer applied during the wet fall, but persistent rain and cold pushed both primary and specialty nutrient volumes down considerably year-over-year. Lawn and contract manufacturing was also down due to reduced volumes with a few key customers, which we anticipated last year. Later in the call, I'll speak about our outlook for the remainder of 2019. Brian will now walk you through a more detailed review of our financial results.

Thanks, Pat, and good morning, everyone. In the first quarter of 2019, the Company incurred a net loss attributable to The Andersons of $14 million, or $0.43 per diluted share, and an adjusted net loss attributable to The Andersons of $5.3 million or $0.16 per diluted share on revenues of $2.1 billion. These results compared to the first quarter of 2018, when our revenues of $636 million generated a net loss of $1.7 million or $0.06 per diluted share. Revenues were much higher in the current quarter due to the acquisition of Lansing Trade Group and Thompsons Limited. Total company adjusted EBITDA increased by $12.5 million or 45% to $40.2 million. The Trade Group was the largest contributor to that increase. The Company's effective tax rate was 27.8% for the first quarter of 2019 compared to 13.5% in the first quarter of 2018. We now expect that our 2019 full-year effective tax rate will be between 24% and 26%. With respect to our balance sheet, as we shared on our last call, the Lansing acquisition changed our capital structure. Between existing debt that we assumed from Lansing and Thompsons and new debt we incurred to finance the transaction, our long-term debt-to-equity ratio is now just below 1:1. While that ratio is historically high for us, we're not uncomfortable with it and we will work diligently to reduce debt in the next few years. However, that objective will not preclude us from evaluating and completing growth projects that fit with our strategies and generate appropriate economic returns. We next present a bridge graph that compares 2018 pre-tax income to adjusted 2019 pre-tax income year-over-year for the first quarter. Adjusted first quarter pre-tax income declined by $5.9 million from the first quarter of 2018. Trade Group adjusted pre-tax income fell by $4.7 million, but that result included $4.4 million in incremental depreciation and amortization, resulting from the Lansing acquisition and a $2.2 million property loss at Anselmo, Nebraska. Plant Nutrient pre-tax income decreased by $5 million primarily due to relative weakness in primary and specialty nutrients as well as in the lawn and contract manufacturing product lines. The $4 million improvement in the other segment was in part due to the absence of severance expenses, which were $1.4 million in the prior period, and the lower SAP implementation-related expenses. Given the recent closing of the Lansing acquisition, we thought it made sense to spend a couple minutes summarizing the transaction-related adjustments we made this quarter to reported Trade Group and Company pre-tax income and also provide some color about the amounts of the non-cash purchase accounting related adjustments we expect to be recorded in future quarters and years. First, we made several one-time non-cash adjustments this quarter. A $3.5 million charge to other income to eliminate the value of the pre-acquisition equity investments in Lansing and Thompsons and recognized the cumulative foreign currency translation losses related to the investment in Thompsons. A $3.2 million charge for the purchase accounting step-up in the value of inventory and contracted grain acquired. And a small charge to interest expense to write-off unamortized financing fees associated with the credit facility that was refinanced in early January. We also incurred about $800,000 in cash transaction expenses during the quarter, primarily due to evaluation and audit-related services and we estimate that we will incur about $500,000 in additional expenses before completing all acquisition and integration activities. When combined with the amounts that we recorded in 2018, we expect transaction costs will total less than $8 million, which is in line with the original estimate we shared when we announced the acquisition last fall. As part of the purchase price, we issued restricted stock awards to approximately 80 legacy Lansing employees to replace existing unvested incentive compensation and fund employee retention payments. In the first quarter, we issued a total of 606,000 restricted shares at a total cost of $20.5 million, which will be recorded as non-cash compensation expense over various vesting periods through to 2021. We recorded and adjusted for approximately $3.4 million in such expense in the first quarter. We currently expect to record and adjust for stock compensation expense of $4.8 million in the second quarter and $2.9 million in each of the third and fourth quarters of 2019. We also expect to record and adjust for $4.8 million of such expense during 2020 and $1.6 million during 2021. In total, we expect to adjust Trade Group results by $22.8 million in 2019 for all of these items. The purchase accounting valuation of identifiable intangibles and the revaluation of fixed assets increased amortization expense by $2.8 million and depreciation expense by $1.6 million in the first quarter. We did not formally adjust reported earnings for these amounts. We estimate that total incremental depreciation and amortization related to this acquisition will be $17.5 million per year through 2021. The acquisition of Lansing will make year-over-year comparisons for the Trade Group challenging given that we now own 100% of both Lansing and Thompsons rather than minority stakes in each company. As Pat mentioned, the integration is going quite well and we are pleased with the performance of the people and assets that are now part of our Company. The Trade Group incurred a $5.9 million adjusted pre-tax loss but that loss included the $4.4 million of incremental depreciation and amortization expense, as well as the loss in Nebraska mentioned earlier. Excluding those items, the Trade Group would have posted a small pre-tax profit on an operating basis. In comparison, the former Grain Group recorded a first quarter 2018 pre-tax loss of $1.2 million. Trade Group adjusted EBITDA for the quarter was $18.6 million, up from the first quarter 2018 Grain Group EBITDA of $5.7 million. The Ethanol Group recorded somewhat lower results driven by weaker margins but bolstered by successful hedging and increased production efficiency that improved yields. First quarter pre-tax income attributable to the group was $2.6 million compared to $3.1 million of pre-tax income in the first quarter of 2018. The 2018 amount includes about $1.2 million that was reclassified from former Grain Group earnings to the Ethanol Group in conjunction with the Lansing acquisition to conform with go-forward treatment. A small team of Lansing ethanol and DDG traders was integrated with the group as a result of the acquisition and they are already having a positive impact on results. Construction on the ELEMENT biorefinery in Kansas is proceeding as planned. It will be the world's most technologically advanced dry mill ethanol facility when it begins production, which we currently expect to happen in the early part of the third quarter. The Plant Nutrient Group recorded a pre-tax loss of $3.9 million in the first quarter of 2019 compared to pre-tax income of $1.1 million in the first quarter of 2018. Primary and specialty nutrient tons were each down more than 10% year-over-year, as poor weather delayed the start of the spring application season. Primarily nutrient margins improved but specialty nutrient margins were somewhat lower. The group's lawn and contract manufacturing business results were off by more than $2 million on expected lower volume. Gross operating, administrative and general expenses rose by almost 5% year-over-year and interest expense also was higher as delayed sales increased {***Epart-016***} {***Spart-016***} Gross operating, administrative and general expenses rose by almost 5% year-over-year and interest expense also was higher as delayed sales increased the group's use of working capital. Plant Nutrient EBITDA for the quarter was $5 million, compared to 2018 first quarter EBITDA of $9.3 million. The Rail Group generated $4.3 million of pre-tax income in the first quarter, compared to $4 million last year. Leasing income was up $1.2 million. Cars on lease averaged 22,500 during the quarter, up 10% over first quarter 2018. Utilization rates averaged a record 95.7% for the quarter, up almost 800 basis points compared to the first quarter of 2018. We think utilization may have peaked during the quarter and we expect it to remain above historical levels. Average lease rates were up slightly year-over-year, in large part due to acquiring some cars on lease with relatively high rates in the fourth quarter of 2018. As expected, income from car sales was lower, falling $1.7 million year-over-year. The group's car sale income results were impacted for the first time by new lease accounting rules that became effective in January. The immediate impact of the new rules was the reclassification of $3 million in unamortized gains on recourse financing transactions that were closed prior to 2018. This amortization had been a regular source of car sale income for the group for many years and would have resulted in $1.3 million of a full year 2019 pre-tax income, had the rules not changed. The group's repair business had a much better quarter than in the previous year as it generated higher repair revenue and better margins. Finally, the group's EBITDA for the quarter was $16.3 million, which was about 20% higher than first quarter 2018 EBITDA of $13.5 million. And now I'd like to turn things back over to Pat, who will provide some closing thoughts.

Thanks, Brian. As we look forward to the rest of 2019, we still expect our overall Company results to improve significantly over those of 2018 on an operating basis, even considering our slow start. While we are continually looking for profit improvement opportunities throughout the Company, we will continue to focus on integrating Lansing and Thompsons and achieving synergies. The Trade Group is already well on its way to capturing $10 million in run rate expense synergies and we should see those begin to positively impact our results later this year. We remain confident that the Lansing acquisition will be accretive to 2019 earnings on an operating basis. That said it will help greatly if some of the several macroeconomic factors putting this industry would turn in our favor. We're watching the weather patterns closely regarding the planning progress. The market is becoming increasingly concerned about corn planting across the Midwest. Continued wet weather will further narrow the planting season, which put forth some amount of switching from corn to soybeans. Resolution to the U.S. trade dispute with China would bring activity that should provide additional exports and volatility to the Ag markets. And with the world oversupply of corn and soybeans, another crop on the way soon and expanded CME storage rates coming late this year, the value of our grain storage capacity should remain strong. The Ethanol Group is off to a good start considering the continued difficult margin environment. As we entered the quarter, the group had hedged more than 40% from its second quarter production at acceptable margins. While the pace of U.S. exports have been strong so far, we believe full year 2019 exports could fall short of 2018 results without resolution of the U.S.-China trade dispute. Resolution would likely reopen Chinese imports of Ethanol and DDGs. The anticipated approval in the next several weeks of year-round E15 sales should improve demand somewhat in 2019, and we believe it will become significantly more meaningful in future years. All four of our plants continue to operate well. We expect the ELEMENT plant to be fully operational by the end of the year and we continue to feel confident about the incremental margin improvements this plant will create. After an improved 2018, our Plant Nutrient Group results are below what we plan for them to be early in the year. The group will be challenged to make up the significant ground that lost in the first quarter before year-end, especially if fields don't dry soon. Quite simply, as the wet weather persists across much of our market area, we are concerned that farmers may not have time or an inclination to use as much fertilizer as we anticipated in the face of continuing low grain prices. We still expect a good year from our lawn and contract manufacturing business, though it will not repeat the record 2018 performance. The group results are redoubling its efforts to better manage costs in light of slower sales. The Rail Group's leasing business results should continue to improve year-over-year. While overall economic and carload demand remains strong, the group also sees weakness in select markets. In addition, the group expects that renewal rates on the railcars and many of its expiring leases will be lower, even its current market rates continue to slowly improve. The group had chosen to run less [ph] than it has historically on income from selling cars, choosing rather to methodically build its fleet while continuing to reduce its average age. While our first quarter results were not what we planned for and several of our groups are working in very difficult markets, we are confident about their earnings power we're building in the Trade Group. We still anticipate making a significant improvement in earnings per share and EBITDA on an operating basis year-over-year and remain highly confident that we'll achieve our EBITDA run rate goal of $300 million by the end of next year. I'll now turn it back over to our operator, Carmen, who'll help us entertain your questions.

Thank you. [Operator Instructions] And our first question is from Ken Zaslow with Bank of Montreal. Your line is open.

Hi, good afternoon, everyone.

Good afternoon, Ken.

Hello?

Yes, hear you, Ken.

I have two questions, one is, can you frame the opportunity if China and U.S. would come to a trade resolution. Can you talk about the true scope of how it would change your earnings?

Yes, it's a great comment, and I think the market is very focused on U.S.-China trade deal in light of the tweets here just last night from the White House, and negotiations we still assume are going on as scheduled for Friday, that are going to happen. So I think there's a lot of positivism – positive feelings about China trade deal in the market, I'd say, a week and two weeks ago, even Secretary, Perdue, making comments about it for Ag. So I think a lot of people were expecting we could see a deal here in the coming weeks. Question is, this is a real snag last night or not. The markets have taken that a little bit negatively. So the impact would be really, Ken, it always depends on the details, right. So getting open market in general is a good thing for all Ag markets and the big question in China now with the African swine flu taking down separately 25% to 30% of their hog herd, what does that meant to consumption of soybean meal, DDGs and corn overall. But short term, we still think it could be very positive for Ethanol, if Ethanol is important as well as DDGs that would be a first direct impact to The Andersons. Right now with that, African swine flu, the demand for protein in all parts of the world, Australian beef and from Brazil, from U.S. and all proteins kind of keeps the protein market hot in U.S. So that's a good thing for our corn and beans supplies for the Southeast protein customers, so that's positive impact. But in general, I think, Ag would really get a big boost if we could see this export market open again to China. To quantify that actual dollars and cents, our earnings for us, it's difficult without knowing the particulars of the deal, but I think the market is really anticipating something to happen.

What would you say would put your green markets back in the average or would it be – I don't know just kind of some framework. And if you can – I'm just trying to figure out how to conceptualize it?

Yes, I think that – I think that what it means grain market to me in flat price of corn and soybeans, I think the supply and demand balance of kind of a burdensome situation in global stocks will more weight on the market related to flat price or Chicago price. When it relates to our margins, anything that creates some volatility and the need for throughput capacity both for domestic markets or export will help our margins, how much that remains to be seen.

Okay. And then just my second question is, with the higher utilization rates over the railcars, why would your leasing rates start to go down and you never really truly enjoyed the uptick of the utilization rates, can you frame that and then I'll leave it there.

Sure. And I'll take a shot at this. So we have some leases that are coming off that are lapping that were done at the higher lease market, so lease rates were high three and four and five years ago. So some of those, as they renew, are actually coming now at lower lease rates. Overall, though, this is the highest utilization rate we've seen in a long, long time. We picked over 95%. We think it could dip back a little bit maybe to 93%, 92%, but this is still a very high utilization rate for our fleet and that's a good sign. We just have some lapping leases that are not – were down at the peak and now slightly lower; some leases that were done within a year actually at higher prices. So we have some leases that are going at higher prices on some types of cars, but leases that are back a couple years are lapping at slightly lower rates.

And we – so we expect some of those to continue to, as Pat said, come on at lower rates. But we expect that will kind of lapse, if you will, between now and end of 2020 or early 2021. It's kind of the time frame.

Great. I appreciate it. Thank you.

Thanks, Ken. And also, we will be attending the BMO conference that Ken putting on this next week. We're presenting on Wednesday, May 15, and we're happy to take part in the conference in New York.

Thank you.

Thank you. [Operator Instructions] Our next question is from Eric Larson with Buckingham Research. Your line is open.

Yes. Good morning, everyone. How are you doing?

Good morning, Eric.

A couple of questions. Obviously, I think we really have to look at you more on an EBITDA basis, rather than even earnings basis at the EPS basis. So can you give us a little feel what your CapEx is going to be this year, what you might be spending for railcars? In other words, we're just trying to get one of – maybe a free cash flow number might be, could you give us little more visibility on some of those metrics?

Sure. Sure. This is Brian. I think if we think of kind of a full year capital expenditures, I would think that somewhere in the range of $150 million is probably the kind of number that we'd be expecting.

That's combined, Eric, we were around $100 million previously for the legacy ANDE, and it's close to about $50 million when adding in Lansing, so kind of our normal rate of capital expenditures.

Yes, I would think of kind of $80 million to $100 million is kind of maintenance capital run rate and then as we layer in some of the other pieces. So that's kind of a number I would have in mind there.

And I think Brian mentioned his comments, we’re being very prudent with the expenditure of capital given our debt situation. So we’re looking to – we are scrutinizing our projects to make sure they make really good returns. Of course, the safety or environmental projects we must do, but we feel like we have that a pretty good control.

Okay. So that $100 million of legacy Andersons CapEx is, is that inclusive or exclusive of your – of railcar purchases?

That would be inclusive, but it would also be net of some of the financing of the railcar, so I’m thinking of that on kind of a net basis with some of the stuff that we do in our P&C line for rail.

Okay, got it. Okay. And then just a question on one of the adjustments. Obviously, your step-up of The Andersons is $4.4 million per quarter and it goes, I believe, per quarter through 2021, is that correct?

Yes, that’s correct. You’re talking depreciation and amortization or you talking sort of…

I think that $4.4 million is the step-up, correct?

Yes, that is correct. So it will be the $2.8 million and the $1.6 million and those are still estimates, our purchase accounting still being finalized, but those are good estimates for now.

Yes. And Eric, this is John. I would add to that, and you may or may not be looking past 2021, but some of the intangibles will be fully amortized at the end of 2021. So we would see that number dropping off, not sure exactly how much after 2021.

Okay. Okay. So just a question on the Trade Group. We know that – I think it goes throughout most of this year, is that you are still up against I think some pretty difficult wheat income numbers. I believe it’s virtually through most of this year. So when you look at the kind of the fully adjusted number of, I think a $1.2 million loss in the quarter versus a small gain, I believe $1.3 million of income last year, what would be – is wheat a big delta in that? I mean, what should we be looking for as kind of the year-over-year comp difficulty in wheat income?

That’s a good thing to point out. The biggest comparable difference in year-over-year was wheat income. So one year ago, we had really strong – I think we had all three ticks at that time, I can’t remember exactly, but making big wheat storage income, that dramatically changed year-on-year. So probably our biggest delta was wheat storage income. I’ll give an example and this is an example of synergies that we’ve learned by combining with Lansing. So we have bulk loading – just loaded here this weekend of wheat that’s going to Mexico. We haven’t shipped wheat from – toward Ohio to Mexico in about 30 years, a lot of that was because the relationship that Lansing had with the Mexican customer, and also it’s time to move the wheat out of storage here to make room for better carries with getting on corn and beans. And the outlook longer-term while you lose at wheat income, the storage income we will see on corn and beans especially later in the year when CME rates expand that will be a really nice improvement we’ll see, but the year-on-year difference was mainly due to wheat, but also we just didn’t have the normal trading margins we would have liked to during the quarter.

Okay, good. The other part here is just kind of – I think we’ve all been hoping for some increased grain volatility. I guess [indiscernible] on last year was bad, but I think it’s even worse this year. Pat, obviously, a lot of things can change, with the US-China trade agreement and all the other different kinds of things, but how should we – should we be thinking that your – this is still going to be a full year difficult thing and then just hope for upside on that? I mean, how do we think about modeling you’re kind of that whole…

Yes. I think the biggest thing for us right now and what the trade is focusing on is planting in China. So planting crops is key because we got to have the volume to handle, right. So right now, where it has been extremely wet and we have – as reported yesterday in the USDA Crop Progress, I mean, very little progress on corn planting, the – now the six day to 10-day outlook is for some dryness to come in. We can get a lot of corn planted really fast, but still we have to dry out a lot across the whole corn belt to catch up some last time we haven’t that, item number one, and probably the most important overall to everybody. A China trade deal and its simplifications for Ag markets can make a big difference. It won’t change all the global F&B of corn and beans overnight, right. Its’ just we still have a pretty burdensome quantity of stocks available to the world market. But it does going to make a shot in the arm we’ve been looking for, especially, I think the ethanol. On the grain trade, I think the most important thing is try to maximize that storage income and carries you can capture and really work closely with all our customers that we supply whether they’re flour millers or pet food companies or exporters or soy [indiscernible] just to really work on that domestic maximization of margins that we can. That’s all we can focus on this year. The macro picture will be what it’s going to be, and we just need to keep focusing on what we can do here domestically to make it best income possible.

Great. I mean, that’s helpful. I’ll pass it on, and will follow up a little bit later.

Okay. Perfect.

[Operator Instructions]

Without any further questions, I think, we’ll – thanks everybody for calling in for our first quarter call and as I mentioned, we’ll be in New York next week for the BMO conference and look forward to talk to everybody on our next call.

And our next earnings conference call is scheduled for Wednesday, August 7, 2019, at 11:00 AM Eastern Time when we will review our second quarter 2019 results. We hope you can join us again at that time. Until then, be well.

And with that, ladies and gentlemen, we thank you for participating in today’s conference. This concludes the program and you may all disconnect. Have a wonderful day.