The Andersons, Inc.
Q4 2020 Earnings Call Transcript

Published: 17 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to The Andersons 2020 Fourth Quarter Earnings Conference Call. I would now like to introduce your host for today's conference call, Mr. John Kraus, Director of Investor Relations. You may begin, sir.

[John Kraus:]

Thanks, Kevin. Good morning, everyone, and thank you for joining us for The Andersons Fourth 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, 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 at our -- of our website at andersonsinc.com shortly.

[A - Pat Bowe:]

Thank you, John, and good morning, everyone. I appreciate you joining our call this morning to review our fourth quarter results. I want to begin today by thanking our 2,400 employees for successfully rising to the challenge in a year that we'll not soon forget. Our plant employees adopted the necessary additional practices needed to continue safely running our essential business operations, and our office staff quickly adapted to work inefficiently from home. We could not have accomplished what we did in 2020 without their tireless efforts.

[Brian Valentine:]

Thanks, Pat. We're now turning to our fourth quarter results on Slide #5. In the fourth quarter of 2020, the company reported net income attributable to The Andersons of $16 million or $0.48 per diluted share and adjusted net income of $19.4 million or $0.59 per diluted share on revenues of $2.5 billion. In the fourth quarter of 2019, we reported net income attributable to the company of $6.6 million or $0.19 per diluted share and adjusted net income of $18.4 million or $0.55 per diluted share on revenues of $1.9 billion. Adjusted pretax income attributable to the company increased $4.8 million year-over-year as a sizable increase in trade's performance and lower corporate expenses more than offset a small loss in Ethanol that was driven by a $6.6 million noncash mark-to-market charge, as Pat mentioned earlier. Adjusted EBITDA attributable to the company was $85 million in the fourth quarter of 2020, which was comparable to 2019 despite the impacts of the pandemic on our 2020 results. For the full year 2020, net income attributable to The Andersons was $7.7 million or $0.23 per diluted share and adjusted net income attributable to The Andersons was $2.9 million or $0.09 per diluted share on revenues of $8.2 billion. These numbers compare to reported net income of $18.3 million earned in the same period of 2019 or $0.55 per diluted share and adjusted net income attributable to the company of $43 million or $1.30 per diluted share on revenues of $8.2 billion. The year-over-year decline was largely driven by the impact of the COVID-19 pandemic on our Ethanol business. This was offset in part by significantly better performance in our Plant Nutrient segment and considerably lower corporate expenses driven by our cost savings initiatives. Full year adjusted EBITDA was $226 million compared to 2019 full year adjusted EBITDA of $254 million. Our full year 2020 reported effective tax rate of 42% included the effects of $14.8 million in CARES Act tax benefits. Those benefits resulted in more than $39 million in tax refund requests, most of which we expect to receive in 2021. We currently believe that our 2021 effective income tax rate will be in the range of 24% to 26%, excluding the tax impact of income from the noncontrolling interest. Now we'll move on to a review of each of our 4 businesses, beginning with Trade on Slide 6. Trade reported pretax income of $28.3 million and adjusted pretax income of $29.3 million compared to a pretax loss of $19.9 million and adjusted pretax income of $17.6 million in the same period of 2019. Fourth quarter 2019 adjusted pretax income excluded approximately $40 million in asset impairment charges.

[Pat Bowe:]

Thanks, Brian. We're very encouraged about how things are setting up for us in the early part of 2021. Rally in grain and other commodity prices that began at mid-November has been a blessing for ag market participants, unlike anything we've seen in a long time. Strong exports, particularly to China, have led the rally, which we think could last for some time as being driven by increases in demand. Expectations are that more corn acres will be planted in 2021, which will be good for both our Trade and Plant Nutrient segments. These conditions continue to drive strong elevation margins and considerable volatility, which we welcome because it creates good merchandising opportunities for us. In addition, we are seeing excellent results in other products we merchandise such as feed ingredients and propane. Spot ethanol crush margins have fallen sharply over the last 90 days and continue to be unseasonably low. We hedged more than 1/3 of our expected first quarter gallons before year-end, which should help mitigate continued low margins during the first quarter. Our plants continue to run well at relatively low variable cost per gallon. This week's polar vortex has impacted a large portion of the country. Natural gas shortages and power outages are causing curtailments to a large number of ethanol plants. This should reduce ethanol production and decrease stocks in the short term.

[Operator:]

Our first question comes from Ben Bienvenu with Stephens Inc.

[Ben Bienvenu:]

Congrats on a solid closing for the year.

[Pat Bowe:]

Yes. Thanks, Ben.

[Ben Bienvenu:]

I want to ask as it relates to the '21 outlook. You talked about, on the Trade side specifically, elevated elevation margins as a result of the strong demand backdrop but solid merchandising opportunities. Can you help us think about weighing that very constructive backdrop against a lack of crop carry? And just kind of how you're thinking about what the setup today looks like maybe relative to what you saw 3 months ago and relative to 2020, if you could?

[Pat Bowe:]

Sure, Ben. That's a really good question. And things have changed pretty dramatically over the last year, as you guys have been following along with us as the market rally, led by primarily exports to China, have inverted the markets in corn, wheat and beans, caused a tightness of spreads which has eliminated carry and storage income for the industry, which also incents you to push that grain out. So where loadings have been high, elevations have been high, and that's a good part of the business where you're creating margin opportunities and earning elevations, loading out grain domestically or for export. The challenge is that, that wheat storage income, we used to rely on year-on-year over the previous years, has been gone. And so we don't have that, as we've highlighted in previous calls. But the opportunities to merchandise and trade well, as you've seen in this last quarter, by a broad array of product lines, has really contributed to the strong earnings, and we think that will continue.

[Ben Bienvenu:]

Okay. Great. On the capital allocation front, you guys have done a nice job reducing long-term debt. Obviously, working capital is higher with higher readily marketable inventories. But as you think about deploying capital from here, can you give us a sense of when you look at growth CapEx opportunities and the relative return profiles of in-house investment opportunities versus tuck-in or more meaningful M&A, what the landscape looks like of the sets of opportunities that you have?

[Brian Valentine:]

Yes, Ben. This is Brian. Great question. I would say from that perspective, it's probably a combination. I think when we think about even our Trade group, there's a lot of places where we're looking at what we would call asset-light type investments that would be nice growth opportunities that would give us an opportunity to enter into some other areas. Certainly, when you think about things like renewable diesel, that's an area that we're thinking about, and there's, of course, the higher protein feed areas. And it's -- I'd say it's probably a combination. I don't necessarily see us doing a -- call it a Lansing-type acquisition at this point. But for us to look at some bolt-ons in that $50 million to $100 million range would certainly not be out of the question.

[Pat Bowe:]

And maybe I'll just build onto that, and Brian answered it perfectly. We have a solid pipeline of projects. We've been working on for years on some of those. Or as you mentioned, Ben, bolt-ons that are just expansions of existing product lines or adding a new product line to a fertilizer plant or a food ingredient plant or a new trading platform. So we have those ongoing. And I'd like to describe them as branches on the trees, as our 2 verticals, our fertilizer and grain business. And of those 2 verticals, we have lots of branches we can add on to those trees. And we are looking to continue to do that. It helps us have a broader portfolio of margin opportunities. And we're probably looking at some of those areas that relate to what's on trend from a -- what's in trend on the food side and what's in trend from an environmental sustainability side. And a lot of those factors are product lines we're interested in investing in.

[Ben Bienvenu:]

Best of luck with the start of the year.

[Pat Bowe:]

Thank you.

[Operator:]

Our next question comes from Ken Zaslow with Bank of Montreal.

[Ken Zaslow:]

John, I guess it's a good way to go out. So I'll say that. Good luck.

[John Kraus:]

Thank you.

[Ken Zaslow:]

A couple of questions. First is on the trading of vegetable oils as well as the co-products, corn, all that stuff, how much profitability does that add? How do we contextualize that in terms of the outlook? Is this a needle-mover? Is it a marginal? How do I think about this going forward? Just because I think it's a real opportunity. I just can't figure out how to size it.

[Pat Bowe:]

Yes. You're right on with that, Ken, is that we think long term, it's a needle-mover, but short term, not so. We've been positive in earnings, but they're not big enough to call it a needle-mover near term. Now the increase in corn oil value, because that just shows up in our crush margin, right, so that's a nice benefit to ethanol in general, and that's been a good play for us to direct our corn oil to the renewable diesel market. We set up this trading desk earlier in the year, have some very experienced merchants on that and look forward to opportunities to grow it. It's profitable and doing well to start-up, but I'd say not a needle-mover today, but we're building sort of the foundation to have a pretty good business there as we look forward going forward.

[Ken Zaslow:]

Okay. And then in terms of the Trade and Grain group, when you envision it -- again, I just wanted to clarify. When you thought about it, obviously, you don't have the elevation -- the forward market on the wheat, the carry on the wheat, but on the flip side more on the elevation and grade on the product in corn. Does that offset it? And would you say that it's in the same position that you would have thought it was? Would it be better or worse? I get the sense, it seems like it's more -- it's better than what you would have thought it was, even excluding the wheat carry.

[Pat Bowe:]

Yes. I think you're got it right on there. So elevations have stayed high, and we think that's going to continue. We've also had good volatility that creates merchandising opportunities in the interior, even disruptions like this week with weather. You got to move around that and make things happen. So we like that kind of volatility in the market. We understand with these inverted markets, we don't see any big change in carry until we get another crop. So that's kind of -- that stays with you for the year. But the good news is the merchandising is -- more than offset that, and it feels like that's going to stay for a while.

[Ken Zaslow:]

Okay. And then my final question is, when I think about the ethanol side as well, when you put it all together, I know there was a $300 million EBITDA bogey. Does that still seem attainable even though ethanol is a little bit lighter, but the grain is still better? Is that kind of -- so kind of a squishy balloon where it all comes out roughly around there anyway? Is that how to think about it?

[Pat Bowe:]

Yes. I wish the balloon squished that easy. But let's go back to -- we first set the goal in 2017 in December. That was our first Investor Day, when I stated we have a $300 million run rate end of 2020 goal. And reactions at that time that, that was kind of bold and aggressive. The good news was our EBITDA went from $157 million in 2017, up to $177 million in '18, and to $254 million in '19. But then it dipped this year as we just finished the year at $226 million. COVID and the impact of COVID on ethanol demand really hurt us this year. It was a cost of $40 million swing in earnings versus '19 in ethanol, and with a $25 million loss for the year. So when we started December and we stated at our December Investor Day, we said $300 million could be possible only if we see a dramatic improvement in ethanol turnaround in 2021. The bad news is first quarter, crush margins, as you know, have been negative and are starting out pretty tough. So that makes it harder to get a full rebound in earnings this year to reach that target.

[Operator:]

Our next question comes from Eric Larson with Seaport Global.

[Eric Larson:]

Congratulations, John, and best of luck going forward. And nice quarter, everybody. So just to push back a little bit on Ken's question as well. I certainly understand the volatility that is really going to help you. We know the elevation margins are really good. But will we need to see a change in the inverse futures curve with the -- with new crop to really give you a good positive increase in trade earnings this year?

[Pat Bowe:]

Yes. I think you know, well, Eric, that I think that we've seen the merchandising opportunities and the margins we've been making on all the product lines we're trading -- we're pretty optimistic for that to continue throughout '21. So that feels good. We mentioned that -- I don't see the inverse softening until we ever really have a good handle on what new crop looks like. What was a big plan in acreage number, it could be a potential to get that to happen by the end of the year, but that will happen pretty late in the year, as you know. So that won't have that much of a dramatic impact on '21 until late fourth quarter as far as widening carries and capturing storage income.

[Eric Larson:]

Yes. I would expect that might be more of a carryover into fiscal -- into 2022.

[Pat Bowe:]

Into 2022, yes. Correct.

[Eric Larson:]

Yes. Okay. And then my next question is on Rail. That business is obviously -- is kind of maybe bouncing along the bottom here. I mean I think you were pretty conservative on how you're looking at it for 2021. What could happen there that might improve the outlook for Rail?

[Pat Bowe:]

Yes. So we've had -- we have good movements in grain, which is nice for our business, and intermodal has picked up. But relatively without seeing a really good recovery. So a widespread COVID economic recovery package and booms in other segments, including chemicals and plastics and housing and other things that could get the overall economy moving, could really help car movement and utilization rates. What also has helped a little bit is scrap metal prices have rallied. So scrapping -- we've scrapped some cars here, and so that helps the size of the fleet for the entire market a little bit. But having said that, again, it's just -- we always say Rails slow up, slow down. So it's hard to get that movement quickly in 2021. So we've been seeing kind of a flat outlook, which feels right. But by the end of the year, you could see -- like we agree with you. We think we've hit bottom, but to see it really pick up, if anything, would be late in the year if that were to occur.

[Eric Larson:]

Okay. Then the final question, and I'll pass it on. The setup for Plant Nutrient this year is really good. Obviously, we've got really good crop prices. Farmers are going to spend the money to maximize yields. We're going to see some acreage increases. But you didn't really talk that much about margins. I suspect that we could get back to some margins that we had in the 2011, '12, '13 time frame, maybe '14 time frame. Would that coincide with your thinking as well?

[Pat Bowe:]

I think I'd be probably on the optimistic side. And the problem is we just don't know because we've seen such a strong rally in fertilizer materials here in the last 90 days. So yes, we've had a big increase in farmer income and in commodity prices, which sets up really nice for fertilizer, but fertilizer prices have really spiked. Great for our suppliers to finally see a nice price increase. But I think the big thing going into this winter here will be the tightness of supply and making sure you can get supply and capture margin and then that you can be able to have the right volumes and right position. We feel good about that. I'm a little bit concerned about some of the value-added stuff. Even though farmer income is higher and crop inputs are higher, so are the raw material inputs for those products, which have really spiked. So we're not maybe runaway bullish on fertilizer margins. I feel that we'll be solid. And we do feel we should have a solid volume year. We might have pulled a little bit forward in this year because we have such a good fall season, that we'll wait to see how that outlook is. But bottom line fundamentals, as you said, are set up really well for fertilizer. And we'll be updating that margin outlook as we go through the year.

[Eric Larson:]

Can you quickly comment on where you think the inventories are in the distributor network for fertilizers? I recall back a number of years ago, The Andersons was actually way too long in their inventory level. Where are you with -- I know it's mostly a pass-through business, but have you bought forward at all for your inventories for spring sales for fertilizer?

[Pat Bowe:]

So simple answer to you is one word is tight. So the marketplace is very tight with shipments, and it varies by product type. But we normally make a pretty good program ahead of schedule with our key suppliers, and we expect that to run normally. So we don't have any -- but if you wanted to get really long today, you wouldn't be able to just because the availability is so tight you wouldn't be able to add much additional volume. So the answer is it's going to be a tight supply and demand season for fertilizer and a good rebound in fertilizer values.

[Eric Larson:]

Yes. No, I would have assumed that if you were going to do that, you'd have had to anticipated that in your fourth quarter. So okay.

[Operator:]

Our next question comes from Ben Klieve with National Securities.

[Ben Klieve:]

Before I ask, I got cut off for a few minutes here, Brian, during your comments. So if I'm making you guys repeat the stuff, I apologize. But a couple of questions around the Ethanol business in the context of the immediate effects of the weather event that you discussed plus the just general state of the industry. How do those variables make you think about your maintenance schedule coming up here in the spring? Should we expect a material shutdown? Or is this going to be kind of a return back to normal maintenance that you saw in 2019 and prior?

[Pat Bowe:]

Yes. I guess the good news of being around the Ethanol business for about 25 years, we've seen some pretty cold winters. And also if you scrimp on your maintenance shutdowns, it always cost you later. So we are going to be very prudent about our maintenance shutdowns and get those done on schedule as planned this spring. The interesting thing will be how do industry participants handle that this year with softer margins. Will they extend shutdowns longer or not depending on their grain positions? I think that remains to be seen. Your first point was -- and I brought up about the polar vortex in my comments, and many of you are like us that are buried in snow and cold the last couple of days. That we had a curtailment at our 1 plant, our new plant, ELEMENT, in Kansas. We've had a natural gas curtailment, and that is pretty common in a lot of the Western states in Texas, Kansas, Nebraska, et cetera. We feel good. All our other plants, we bought firm power supply here in the winter months, so we're in good position. There's a considerable number of plants that are either idled or we'll have to shut potentially because of curtailments it looks like. But it's going to be pretty short-lived. It looks like this weather snap is really just this week, and that will make some lesser production and maybe lesser stocks. But I think that is really a short-term item, and it's really what do we see on the longer-term outlook for supply and demand that's important.

[Ben Klieve:]

Got it. Very good. And I guess my -- you kind of touched on my other question, but curious about kind of the status of the ELEMENT plant here that continues to move towards being fully productive and fully integrated. Any updates on the outlook for that plant here over the next couple of quarters.

[Pat Bowe:]

Sure. The timing of this cold snap didn't help us. So be candid, because we're working on our approval run for California, and you have to have a 90-day period for that. But we're feeling good about -- the plant's been running. We're in the -- starting the trial for the California Air Resources Board, the LCFS program. We think we could be CARB certified by later in the summer, by end of July or so. We'll kind of see how this delay goes right now. But all things being equal, we have pretty high corn prices, but we also have really good feed prices there, and we just need to get the plant lined out with California approval. That's a big step.

[Ben Klieve:]

Well, best of luck navigating these dynamics.

[Pat Bowe:]

Thanks, Ben.

[Operator:]

And I'm actually not showing any further questions at this time.

[John Kraus:]

Okay. Thanks, Kevin. 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 of our website at andersonsinc.com. Our next earnings conference call is scheduled for Wednesday, May 5, 2021, at 11

[Operator:]

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.