The Andersons, Inc. (ANDE) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to The Andersons divestiture announcement conference call. [Operator Instructions] I would now like to hand the presentation over to your host today, Mr. Mike Hoelter, Vice President, Corporate Controller and Investor Relations. Please go ahead, sir.

Thanks, Katherine. Good morning, everyone, and thank you for joining us for The Andersons divestiture announcement conference call. We have provided a slide presentation to accompany 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 supporting slides will be made available on the Investors page of our website at andersonsinc.com shortly. Please direct your attention to the disclosure statement on Slide 2 of the presentation as well as the disclaimers in the press release related to forward-looking. Certain information discussed today constitutes forward-looking statements that reflect the company's current views with respect to future events, financial performance and industry conditions. These forward-looking statements are subject to various risks and uncertainties. Actual results could differ materially as a result of many factors, which are described in the company's reports on file with the SEC. We encourage you to review these factors. This presentation and today's prepared remarks contain non-GAAP financial measures. Reconciliations of non-GAAP measures to the most directly comparable GAAP financial measure are included within the appendix of this presentation. 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, we will be happy to take your questions. I will now turn the call over to Pat.

Thanks, Mike, and good morning. Thank you for joining us today to discuss our announcement that we have sold our railcar leasing business to American Industrial Transport for approximately $550 million in cash. We also have announced our intention to divest our railcar repair business, which includes 29 facilities throughout the United States. After careful consideration of the alternatives, we concluded that The Andersons will be better able to create greater value for our shareholders by fully exiting the Rail business and focusing on growing our core business of Grain and fertilizer. The Andersons have been in the railcar business for over 30 years and is a trusted partner in the rail industry. We have been an important participant in the North American industry and our diverse range of more than 22,000 railcars positioned us as a top 10 railcar leasing company. We are very pleased to be selling the leasing business to AITX, who's had a deep understanding of our heritage and will be looking to expand the breadth and depth of its railcar leasing platform, making it an outstanding owner for the business. AITX expects to hire the majority of the current employees who are among the most skilled and experienced in the railcar leasing industry and have been an important part of our success. The railcar leasing business has been a successful and consistent cash flow generator for The Andersons. However, the current environment made this an opportune time for us to divest our rail assets and enabled us to receive evaluation for our leasing business of over 10x the trailing 12-month EBITDA. The proceeds will allow us to reduce debt and ultimately redeploy capital to enhance shareholder returns. Most of the income for our Rail segment has been generated from the leasing business. Our remaining repair business represents a smaller portion of the segment. Generally, this is a capital-light, high service business model with much of the revenue coming from non-Andersons-owned railcars. Our 29 shop repair network spans the entire U.S. from Queens, New York to Bakersfield, California. We have a unique network of full-service shops to support the maintenance needs of our previously owned railcars and third-party railcars as well as a large agent 4 presence in the U.S. railroad network. We believe our assets and our skilled personnel will be attractive for another owner. We are targeting to complete the sale within the next 12 months and therefore, intend to carry the business under discontinued operations in our financial statements. To be clear, though, it will be business as usual for our repair network as we continue to operate and support our customer relationships. Turning to Slide #4. We have a high-level overview of The Andersons on a pro forma basis, excluding rail. We have a portfolio of assets that are linked across the North American ag supply chain. In our trade business, we merchandise grain across a broad network of 78 locations and trade numerous grain, feed, food and pet food ingredients. We handle 30 million tons of grain, putting us among the top 5 companies in the U.S. Our Trade business is also directly linked to the supply of corn to our Ethanol business, with an annual capacity to produce 550 million gallons of ethanol. We've consistently been one of the strongest fertilizer distribution companies in the Eastern Corn Belt. Our plants are geographically well positioned, large scale and low cost. And we've built upon that fertilizer base to create a broad Plant Nutrient business. We handle 2.3 million tons per year through our 37 facilities. When we say our vision is to be the most nimble and innovative North American ag supply chain company, we're referring to our ability to move products from the farm to the fork or from the field to fuel. We connect ag production to the point of use across both time and geographies, sometimes months in advance and across thousands of miles. Slide 5 shows our network across North America. We have a nationwide reach that enables an end-to-end supply chain, connecting producers to customers. We have scale and regional strength in grain, ethanol and fertilizer. While we're not all things to all markets, we have significant assets that are well positioned for us to compete effectively. Over the past 5 years, we've made substantial changes to transform the company by improving our portfolio and reducing costs. We've achieved a consistent track record of creating a leaner cost structure, addressing underperforming assets. We put in place a focus on continuous improvement. In 2019, we made the largest acquisition in the company's history and successfully integrated the Lansing Trade Group and Thompsons Limited. Also in 2019, we merged our 4 separate ethanol entities into 1 LLC with our long-time partner, Marathon Petroleum Company (sic) [ Corporation ]. The divestiture of the Rail business represents an important step in our transformation journey. I'm proud of the significant progress we've made, and I'm very excited about the growth prospects for the company going forward. As communicated in our Investor Day presentation last year, our major strategic growth initiatives are summarized on Slide #6. These are to: one, drive margin expansion and reduce capital intensity; two, innovate and develop new products and services; three, grow profitably and leverage emerging market opportunities. And four, we established a targeted long-term debt to adjusted EBITDA ratio of below 2.5x. By increasing our focus on the core Grain and fertilizer businesses, we'll be better positioned for growth. Our improved liquidity will increase flexibility and make possible future investments in strategic growth opportunities. We're making significant progress towards optimizing The Andersons for growth. Turning now to Slide #7. Our total debt as of June 30 was $1.7 billion, including $923 million of long-term debt. The outstanding short-term debt is supported by readily marketable inventories and cash margin deposits. Note that in 2019, long-term debt increased to fund a portion of the Lansing and Thompsons acquisitions. And since then, we've been working to reduce our debt. At our Investor Day in December 2020, we gave a goal of reducing our debt by at least $200 million by 2023. With the proceeds of this sale, we'll be able to surpass this goal and reduce our pro forma debt ratio to 2.2x. Looking at our capital allocation framework going forward, we plan to maintain a long-term debt-to-EBITDA of less than 2.5x. We will continue our balanced approach to capital investment, which will include internal growth projects and may also include acquisitions that fit with our growth strategies. We also plan to continue returning cash to shareholders. We expect to continue paying quarterly dividends and we may also consider repurchasing shares as appropriate in the future. Moving on to Slide #8, which includes our historical EBITDA by business segment. Looking at the trailing 12 months through the first half of 2021, we have achieved significant growth above any prior year period. We've exceeded our $300 million EBITDA goal by earning trailing 12-month adjusted EBITDA of $343 million. This divestiture will enable us to reduce debt well ahead of our 2023 target. We also continue to be disciplined in our approach to capital deployment as we work to improve our return on invested capital. Moving now to Slide #9. We have updated EBITDA targets provided at the 2020 Investor Day. We have established a new long-term 2025 EBITDA target of $375 million to $400 million. Within our core verticals of fertilizer and grain, we're optimistic about our many opportunities for growth. We can continue to achieve organic growth within our existing business while also looking for opportunities to selectively pursue value-creating bolt-on acquisitions. We expect that a key driver of growth will be our ability to innovate within growing trends in agriculture. Just a few of these focus areas include: the increasing importance of sustainability, traceability and organic agriculture; carbon reduction opportunities across the North American ag supply chain; renewable diesel feedstocks; organic fertilizers; and plant-based protein feedstocks. So in closing, I'd like to summarize the exciting growth opportunities for The Andersons. The increasing global demand in our industries will provide us opportunities to grow our core Grain and fertilizer businesses. We are equipped and ready to take advantage of nimble and innovative growth in several trending areas within sustainable ag. We have a proven track record of strong execution in volatile markets, with experienced trading, logistics and operations teams. And finally, we've continued our disciplined capital allocation strategy, allowing us to take advantage of a flexible balance sheet at the right time for the right growth opportunity. We're committed to achieving our vision to be the most nimble and innovative North American ag supply chain company. And now we'll be happy to take your questions.

[Operator Instructions] And our first question comes from Ben -- I'm sorry, it comes from Ben...

Benjamin Bienvenu.

From Stevens.

Congratulations, guys. This is awesome. And really, really excited to see this. I'm curious, a couple of housekeeping questions, but I want to ask some strategic questions as well. Housekeeping-wise, you noted the $550 million. What is that number sort of net of tax payments on a gain on sale? Kind of what are the direct proceeds to you guys? I see the debt repayment is a little bit lower than that amount. I'm wondering if there is a tax component that gets pulled out of that? And/or are you planning on keeping some of the balance of the sales in the cash coffers for now?

Ben, this is Brian. Thanks. Good question. Yes, we do anticipate -- as you might imagine, some of these railcar assets have a fairly low tax basis because we were able take advantage of accelerated and most depreciation over past years. So we do anticipate, call it, after-tax proceeds in the range of $450 million to $475 million. We have some other credits that we'll be able to utilize to offset part of the tax gain. But $450 million to $475 million is what I would say after tax.

Okay. Perfect. So obviously, this greatly accelerates your aspirations of deleveraging the long-term debt profile of the business. Are we finished at this point right now? Or are you pivoting to growth mode? I know you guys have -- you mentioned here in the release in the presentation, bolt-on acquisitions, strategic opportunities, growth investments. If you could kind of categorize the potential investments you see ahead? And then also maybe give us some background on the time line around consummating this transaction. How long have you been considering it? And is this what the go-forward portfolio looks like? Are you finished divesting assets?

Okay. Good questions, Ben. This is Pat. So that I can remember those in order. But I think when we talk about -- you mentioned the term pivoting, I think we have been in a growth mode. So with 2019 of the acquisition of Lansing and Thompsons and then the fuller integration with Marathon in our ethanol plants and the building of the new ELEMENT plant. So we've been making consistent investments and doing M&A the last several years. So I don't know if I'd call it a pivot, but it does create the dry powder to be able to grow more aggressively. And as you first said, we will pay down debt and keep those ratios low. We have many areas that are -- provide opportunities for us. As I mentioned in my comments, on the food side, we still -- that trend continues as sustainable, traceable and organic. So there's opportunities there. There are opportunities that are being created with carbon reduction across the ag supply chain. We think there's going to be a good opportunity for us from the fertilizer side, up through the renewable fuel side, and renewable diesel feedstocks, as we mentioned on previous calls, where we've been active lately, organic fertilizers where we've been growing and also even in feedstocks for plant-based [ space ] proteins. So there's a bunch of, I call them newer growth alternatives, but the core is still strong. So core of enhancing, the cost position of our grain elevators, our fertilizer plants, our ethanol plants, making higher-value feed products and extracting as much as -- corn oils as possible out of ethanol, lots of excitement in specialty fertilizer products and more organically favorable to the environment. So there's opportunities across each of the businesses. So back to your main core question, yes, this is the core business we have. We call our 2 strategic verticals, grain and fertilizer, and really that encompasses a lot that are in those verticals, ethanol being part of grain, et cetera, and having even consumer products in our Fertilizers segment. So we have a broad group of products within those key verticals, and there's lots of opportunities for growth, both just investments in assets and new products as well as what we refer to as bolt-on acquisitions in our segments that we're in. So we're excited to continue that kind of growth trajectory. The other question you asked about was the -- I'll turn it to Brian.

Yes, Ben, if you -- and I guess, from a capital structure perspective, we had targeted to get our long-term debt to EBITDA below 2.5x. This will enable us to do this -- accelerate that and get there more quickly. I think we -- going forward, saying that we aspire to continue to have it in that, call it, 2 to 2.5x feels about right to provide us the flexibility, but also, call it, the capital structure efficiency. And so as we think about redeployment, I would call it really a balanced approach. Our -- now that we've been able to achieve that debt reduction target, we would say our first preference would be to reinvest in higher returning projects, be it organic and inorganic growth at reasonable values. So taking that disciplined approach and making sure that we're paying appropriate valuations. And as Pat mentioned before, we may also consider opportunistic share repurchases if it makes sense at some point in the future.

And one of the last questions you asked, Ben -- I want to make sure we answered all the questions you asked was, are you done? Is this it? I say, well, these are our 2 core verticals in fertilizer and grains, but that doesn't mean we don't have opportunities to always optimize our portfolio. I think you can see from at least my track record since I've been here the last 5 years, where we closed retail and sold assets in Iowa and Florida and Tennessee and now rail, we'll always be looking to optimize our portfolio. So there's an opportunity for a particular asset that we would sell to a better party. At the same time, we're growing and adding new businesses. We'll continue to do that. So we think we'll be playing on both ends of that. Not a wholesale change of an entire group like we did here, but particular assets.

[Operator Instructions] Our next question comes from Eric Larson with Seaport Research.

I pass on my congratulations as well. So the first question is just maybe more a little bit of clarification. I think Mike answered -- or maybe Brian answered, I'm not sure. But the estimated $450 million to $475 million of net proceeds, does that also include what you anticipate as the net proceeds from the sale of repair and -- of the repair business? Or is that just the sale of the lease assets.

Yes, Eric, this is Brian. Thanks for clarifying that. No, that's just the leasing part of the business. That does not include anything related to the repair network.