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Andersons Inc (ANDE 1.24%)
Q1Â 2020 Earnings Call
May 6, 2020, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
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.
[Operator Instructions] I would now like to turn the conference over to your host, John Kraus, Director of Investor Relations, you may begin.
John Kraus -- Director, Investor Relations
Thanks Celine. Good morning everyone and thank you for joining us for The Andersons' First 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 slide s and commentary will be in sync. This webcast is being recorded and the recording and the supporting slide s 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. 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. 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, 2020 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.
Patrick E. Bowe -- President and Chief Executive Officer
Thank you, John and good morning everyone. Thank you for joining our call this morning not only to review our first quarter results, but also 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 spreads in the last couple of months. We have operated more than 70 years with the 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. 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 for the executive level task force that actively manage our response early on. We've communicated with employees often to make 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. 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'd 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 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. The pandemic had a significant impact on our first quarter results. The Ethanol Group was the most directly impacted our four business units, but both the Trade and Rail groups were affected as well. Fully 90% of the $30 million decrease in year-over-year adjusted pre-tax income attributable to the company came from the Ethanol Group, approximately half of which resulted from non-cash charges, 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 basis.
While ethanol production slowed nationally, it did not fall as quickly as demanded leading to record stocks that are now beginning to slowly subside. The Rail Group impacted by carload 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, we will 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.
Brian A. Valentine -- Executive Vice President & Chief Financial Officer
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 31, 2020. Recent stress testing we 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. As we usually does in the first quarter, short-term debt rose as we've built fertilizer inventories in anticipation of planting season. We consider the current short-term debt level to be seasonally normal.
Reducing our long-term debt remains a priority. Our long-term debt maturity schedule is laddered well with no significant amounts coming due before August of next year.
Since 2016, we've been building a culture of expense management. In the last four years, we've identified more than $40 million in expense reduction opportunities. More recently, we announced an increase in the expected synergies from the Lansing acquisition from $10 million to $15 million and that we plan to reduce other operating expenses by an additional $5 million. However, the current crisis calls for us to do more. As a result, we now intend to reduce expenses in 2020 by $20 million exclusive of the amounts mentioned previously. We began to do that by immediately reducing discretionary spending such as travel, use of outside contractors, professional fees and various other expenses. We are also reducing capital spending.
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. In the first quarter of 2019, we reported a net loss attributable to company of $14 million or $0.43 per diluted share and an adjusted net loss of $5.3 million or $0.16 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%. The adjusted 2020 rate accounts for benefits that we expect to receive under the CARES Act that we have excluded from our reported income. We currently believe that our 2020 full year effective income tax rate will be in the range of 20% to 26%, but the rate could vary based on the amount of income or loss attributable to non-controlling interests. Long-term debt increased year-over-year 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 in an adjusted pre-tax loss of $8.7 million compared to a pre-tax loss of $17.9 million and an adjusted pre-tax loss of $6.3 million in the same period of 2019. Substantial decrease in ethanol demand resulted in a significant drop in corn basis, 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 it's merchandizing businesses were solidly profitable. Current quarter adjusted pre-tax income excludes $1.3 million or $0.03 per diluted share in stock compensation expenses associated with the Lansing Trade Group acquisition. 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 [Technical Issues] and $0.04 per share respectively. Trade Group adjusted EBITDA for the quarter was $9.9 million compared to the $18.7 million, the Group recorded in the first quarter of 2019. Moving to slide nine, the Ethanol Group recorded a first quarter pre-tax loss attributable to the company of $24 million compared to pre-tax income of $3 million in the first quarter of 2019. I want to remind everyone that first quarter 2020 includes the consolidated results of all five ethanol plants, where as 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-mark adjustments mark-to-market adjustments totaling $14.7 million, of this amount roughly two-thirds relates to declines in the value of contracts on feedstocks, ethanol and co-products.
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 $4.1 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. 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 was $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. 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 fell to 24,400 as a result of scrapping 400 cars and average cars on lease fell slightly to 21,900 compared to the fourth quarter. Average lease rates fell 7% year-over-year. Service and other income was comparable to the first quarter 2019 amount, repair business results were marginally lower year-over-year. Finally, the Group [Technical Issues] $14.4 million in EBITDA for the quarter, which was 11% lower than last year's result. And with that, I will turn things back over to Pat.
Patrick E. Bowe -- President and Chief Executive Officer
Thanks, Brian. When we last spoke February 13, 2020, we said that the Corona virus epidemic had not yet had a direct material impact to the company. We also thought that the implementation timeline for the Phase one trade agreement with China would be a positive business driver for our trade in 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 the known. We will continue to control what is in our power to control. The part of the Central U.S. ag food supply chain, which is operated throughout the crisis, we remain focused on [Technical Issues] safety of employees and provide an exceptional [Technical Issues] to our customers with strong start to the spring planting season, which should continue to be a positive for our Plant Nutrient Group, a large corn crop should be beneficial for the Trade Group beginning with the 2020 fall harvest and well into 2021.
We expect ethanol demand to improve as the U.S. economy reopens. We operate highly efficient plants and are well positioned to benefit from that when it happens. For the Rail Group, the year-over-year decrease in North American railcar loadings has widened even further over the last 12 weeks, which suggests that both leasing and repair income could trend 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 the move toward 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. While economic challenges may continue for a bit longer, our company is in a good position to emerge stronger from this difficult time.
We believe in the future of American agriculture in 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.
Questions and Answers:
Operator
Ladies and gentlemen [Operator Instructions]. Your first question comes from the line of Kenneth Zaslow from BMO Capital Markets. Your line is open.
Kenneth Zaslow -- BMO Capital Markets -- Analyst
Hey, good morning everyone.
Patrick E. Bowe -- President and Chief Executive Officer
Good morning, Ken.
Kenneth Zaslow -- BMO Capital Markets -- Analyst
So just a couple of questions. Let me start off, big picture. Do you think that COVID-19 will change the earnings power? is the business are their 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?
Patrick E. Bowe -- President and Chief Executive Officer
Sure. No, it's a good question, Ken. So we have to look the portfolio. So good news is our Plant Nutrient business having a very strong spring. As you remember, we had a very wet spring last year and that hurt our volumes, we are having a really good start to the year. So, our Plant Nutrient business is in a very good position and running well. The Rail business has been impacted with the general economic slowdowns due to COVID and we think lease rates and maybe even volume of repairs will slow as we continue in the year, but that's usually a slower decline number, not a big rapid drop off. 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 eastern 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 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 to many contractors to the site at the time of the pandemic, so that 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 less than half rate, bt the plants are running well, and we took a 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. We just today numbers were out on gasoline demand, we went from down 50% to down 40%. We've seen a nice increase on the week. So that's a little bit of optimism on a recovery and gasoline demand, 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.
Kenneth Zaslow -- BMO Capital Markets -- Analyst
Okay. I was surprised by the grain results. Other grain based companies did not have as much on that side of the issue. There was issues obviously in ethanol. What do you 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 green operations, not the Ethanol like I just more.
Patrick E. Bowe -- President and Chief Executive Officer
Yeah, that's a very good question, Ken. So several parts of our business of our Trade Group are doing quite well. So, our feed ingredients pet food, several of our trading business had a very good quarter. Ethanol impacts, alot 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 would typical for us in the first quarter.
Kenneth Zaslow -- BMO Capital Markets -- Analyst
Okay. And then my last question is on the ethanol business. How does this end in terms of does the industry get restructured, does there again permanent closures, does it just end up as a long very long you until things get better, like how does this how does the picture end?
Patrick E. Bowe -- President and Chief Executive Officer
That's the crystal ball is difficult. You outlined three potential plays, right and I think that 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 shows 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 a right time when the market as form.
Kenneth Zaslow -- BMO Capital Markets -- Analyst
Great. I appreciate it. Thank you.
Patrick E. Bowe -- President and Chief Executive Officer
Thanks, Ken.
Operator
Your next question comes from the line of Ben Bienvenu from Stephens. Your line is open.
Ben Bienvenu -- Stephens -- Analyst
Hey, good morning everyone.
Patrick E. Bowe -- President and Chief Executive Officer
Good morning, Ben.
Ben Bienvenu -- Stephens -- Analyst
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 are matching that demand in lockstep or are you looking at gasoline demand and saying, you want to see a former a recovery before you really ramp production back up? And...
Patrick E. Bowe -- President and Chief Executive Officer
Yeah.
Ben Bienvenu -- Stephens -- Analyst
How it happened versus aggressive? Do you want to be in line of how efficient you're plants are?
Patrick E. Bowe -- President and Chief Executive Officer
Understand that first of all, if I said 50% for April I [Technical Issues] quarter. We've just up two of our plants Albion and Denison because the economics dictate that at those locations. So, as you know, then it's a combination of corn basis ethanol price, all the core products, etc, DDGs have rallied back quite a bit. So that dictates that those plants makes sense to run on a cash basis. So we're watching it to be very smart economically and really just to maximize profitability of each location. That's the way we look at it, we don't want to be early we were early bringing the plants down. We don't want to be early leading the volume back up, want to be smart and stay in tune with the market. 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 quarterly each plant by at a time.
Ben Bienvenu -- Stephens -- Analyst
Okay, great. And I'd love to get your impressions of trade flow outlook. We have good March export numbers and 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 normal normalization of trade flows this year in favor of the market that you're seeing?
Patrick E. Bowe -- President and Chief Executive Officer
Right. Yeah, 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 that Brazil, Argentina had a good year. And the devaluation of their countries have thousand be very competitive. We are more optimistic about exports to China and the latter half of the year. So any saber rattling with trade disputes [Technical Issues] welcome by the U.S. farmer or the [Technical Issues] because we would like to see some volume of exports. We will [Technical Issues] in the domestically dairy, chicken, swine and beef all have some different challenges related to the pandemic and early on those markets have 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 right in corn basis and capturing corn carries in the ETG Group.
Brian A. Valentine -- Executive Vice President & Chief Financial Officer
Okay, and my phone was cutting up out a bit. So I apologize if you talked about this already, but just where and your ethanol business, if at all you're hedged through the rest of the year and what kind of coverage you guys have heading into 2Q, 3Q?
Patrick E. Bowe -- President and Chief Executive Officer
Yeah, we really don't have forward coverage. We are having an an opportunity to do anything that's attractive. Of course, if we do those up [Technical Issues] we will move on that. So, it just hasn't been a forward book opportunity to put on this year.
Ben Bienvenu -- Stephens -- Analyst
Okay. Thank you so much.
Operator
There are no further question at this time, I will now turn the call back over to John Kraus.
John Kraus -- Director, Investor Relations
Thanks, Celine. We want to thank you all for joining us this morning. I also want to mention again that this presentation and slide s 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, August 5, 2020 at 11:00 AM 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.
Operator
[Operator Closing Remarks].
Duration: 31 minutes
Call participants:
John Kraus -- Director, Investor Relations
Patrick E. Bowe -- President and Chief Executive Officer
Brian A. Valentine -- Executive Vice President & Chief Financial Officer
Kenneth Zaslow -- BMO Capital Markets -- Analyst
Ben Bienvenu -- Stephens -- Analyst
