Ridley : Reports Financial Results for Fiscal 2015 Second Quarter

MANKATO, MINNESOTA--(Marketwired - Feb 11, 2015) - Ridley Inc. (TSX:RCL) today reported its financial results for the three and six months ended December 31, 2014. All currency amounts are stated in U.S. dollars unless otherwise noted.

For the three months ended December 31, 2014, Ridley's adjusted earnings before interest and taxes ("adjusted EBIT") were $15.3 million compared to $11.5 million last year, an increase of 33.0% over last year. Adjusted earnings before interest, taxes, depreciation and amortization ("adjusted EBITDA") were $17.2 million compared to $13.4 million last year, an increase of 28.5% over last year. Consolidated net income (after income taxes) for the quarter was $10.5 million ($0.82 per share) compared to $7.3 million ($0.57 per share) last year, an increase of 43.6% over last year.

Consolidated revenue increased by $11.7 million (7.7%) to $164.3 million in the second quarter compared to last year, mainly the result of an 8.9% increase in sales volume. Gross profit increased by 17.3% to $28.0 million in the second quarter from $23.9 million last year reflecting increased sales volume and moderately higher average unit margins resulting from an improved product mix. Operating income increased by $2.6 million or 23.0% to $13.7 million in the second quarter of fiscal 2015.

Ridley's U.S. Feed Operations (USFO) reported a $1.4 million (35.5%) increase in operating income for the period on sales growth in most species segments. Ridley Block Operations (RBO) reported a $0.3 million (4.6%) increase in operating income over last year, mainly from strong sales growth in the beef cattle sector. Ridley Feed Ingredients (RFI) reported a $0.9 million (80.0%) increase in operating income over last year from sales volume growth and improved product mix. Ridley's share of net income from its interest in the Canadian operations of Masterfeeds LP in the second quarter improved by $1.2 million (350.0%) over last year on strong sales growth and $0.7 million in proceeds from insurance claims.

Ridley's results in the second quarter of fiscal 2015 reflect a favourable economic environment for livestock and poultry producers and solid internal performance.

MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis dated as at February 11, 2015 and the accompanying interim consolidated financial statements for the three and six months ended December 31, 2014 have been prepared in accordance with Canadian generally accepted accounting principles (GAAP) which incorporate International Financial Reporting Standards (IFRS).

RESULTS OF OPERATIONS

The following summary is presented to assist in understanding the second quarter and year-to-date results of fiscal 2015.

1. Exceptions - In the preceding summary data, net income is reported before exceptions. There were no exceptions in the second quarter or year-to-date of fiscal 2015. Exceptions last year were comprised of $0.3 million, net of income taxes, from the gain on the sale of a previously closed facility in Indiana, and $0.1 million, net of income taxes, for the asset impairment loss accrued for closure of a facility in Pennsylvania.
2. Adjusted EBIT - Operating income and share of income of associate before exceptions.
3. Adjusted EBITDA - Operating income and share of income of associate before depreciation, amortization and exceptions.
4. EBIT and EBITDA do not have a standardized meaning prescribed by GAAP and, therefore, are not readily comparable to similar measures presented by other companies. However, management believes that these measures provide investors with useful supplemental information.

Consolidated Second Quarter Results

For the three months ended December 31, 2014, consolidated revenue was $164.3 million compared to $152.5 million in the same period last year. A comparison of revenue is not necessarily indicative of the strength of Ridley's business because revenue is influenced by fluctuating commodity prices. The increase in revenue of $11.7 million (7.7%) in the second quarter was the result of an 8.9% increase in overall tonnage volumes partly offset by a decrease in average unit prices reflecting generally lower feed ingredient prices from last year.

Consolidated gross profit in the second quarter of fiscal 2015 was $28.0 million compared to $23.9 million in the same period last year. Gross profit is a key measure of the performance of Ridley's business and generally reflects the margin of net sales revenue over ingredient cost, less manufacturing expenses. The major driver of the 17.3% increase in gross profit in the second quarter this year was the increase in overall tonnage volumes combined with higher unit margins due to a more favourable product mix. For much of last year and continuing in the current year-to-date, livestock and poultry producers have benefited from the combination of high prices for their meat, milk and egg products and lower trending costs for corn and other commodities. In this positive economic environment for producers, demand has been sustained for higher value-added animal nutrition products.

Direct production costs and manufacturing overheads, which are included in gross profits, increased by 9.5% in the second quarter over last year, largely in line with increased tonnage volumes as reflected in labor and utilities expenses as well as performance-related incentive accruals.

Operating expenses, which include administration, sales and marketing, technical services, and research and development costs, were $14.3 million in the second quarter compared to $12.7 million last year. The increase of $1.6 million (12.2%) in operating expenses this quarter is primarily related to performance-related incentive accruals.

Operating income is defined as net income before share of income of associate, finance expense, finance income and income tax expense. Operating income increased by $2.6 million or 23.0% to $13.7 million in the second quarter of fiscal 2015.
Ridley owns a non-controlling interest in Masterfeeds LP ("Masterfeeds"), an animal nutrition business in Canada formed as a limited partnership with Ag Processing Inc. Ridley's share of the earnings of Masterfeeds is reported as share of net income of associate, which in the second quarter of fiscal 2015 was $1.6 million including $0.7 million received in insurance proceeds related to fire damage at a Masterfeeds facility in Humboldt, Saskatchewan in 2013.

Adjusted EBIT is comprised of operating income and share of net income of associate before exceptions. For the three months ended December 31, 2014, adjusted EBIT was $15.3 million compared to $11.5 million for the same period last year. The increase in adjusted EBIT of $3.8 million (33.0%) reflects the $2.6 million increase in operating income in the second quarter and the $1.2 million increase in share of net income of Masterfeeds. Adjusted EBITDA is comprised of operating income and share of net income of associate before depreciation, amortization and exceptions. For the second quarter of fiscal 2015, adjusted EBITDA was $17.2 million compared to $13.4 million for the same period last year, an increase of $3.8 million (28.5%) over last year.

Net income (net of income tax expense) for the second quarter of fiscal 2015 was $10.5 million ($0.82 per share) compared to $7.3 million ($0.57 per share) in the same period last year. Income tax expense in the second quarter averaged 30.6% of income before taxes compared to 35.4% last year. The lower rate of income tax in the second quarter this year was due to a refinement in the method of calculating the deferred tax liability related to Ridley's investment in Masterfeeds. This adjustment in the calculation of the deferred tax liability had the effect of reducing income tax expense in the second quarter by $0.7 million.

Consolidated Six Months Results

For the six months ended December 31, 2014, consolidated revenue was $306.5 million compared to $286.5 million in the same period last year. The increase in revenue of $20.1 million (7.0%) was the result of an 8.7% increase in overall tonnage volume partly offset by a decrease in average unit prices reflecting generally lower feed ingredient prices from last year.
Consolidated gross profit for the six months ended December 31, 2014 was $48.1 million compared to $41.6 million last year. The increase in gross profits of $6.5 million (15.6%) was largely the result of the increase in overall tonnage volume and higher average unit margins due to a more favourable product mix.

Direct production costs and manufacturing overheads, which are included in gross profits, increased by 8.4% in the first six months of fiscal 2015 in line with the increase in tonnage volume as reflected in labor, incentive accruals and utilities expenses.

Operating expenses, which include administration, sales and marketing, technical services, and research and development costs, were $27.3 million in the six months ended December 31, 2014, a $2.0 million (7.9%) increase over last year. The increase in operating expenses was primarily related to accruals for performance-related incentives. Earnings exceptions last year, which are also included in operating expenses and were related to the closure and sale of two manufacturing facilities in fiscal 2014, had the effect of reducing operating expenses last year by $0.2 million.

Operating income increased by $4.5 million (27.6%) to $20.8 million in the first six months of fiscal 2015.

Ridley's share of the income of its associate, Masterfeeds, for the first six months of this year was $2.0 million, of which $0.7 million was insurance proceeds related to a fire at a Masterfeeds facility in 2013.

Adjusted EBIT for the first half of fiscal 2015 increased to $22.8 million from $16.5 million last year. The increase in EBIT of $6.4 million (38.8%) was comprised of the $4.5 million increase in operating income this year, and the $1.7 million increase in Ridley's share of the income of its associate, Masterfeeds. Adjusted EBITDA was $26.5 million compared to $20.0 million for the same period last year, an increase of $6.5 million (32.3%).

Net income for the six months ended December 31, 2014 was $15.1 million (earnings per share of $1.18) compared to $10.4 million (earnings per share of $0.81) in the same period last year. Income tax expense for the year-to-date reflects a $0.7 million adjustment that resulted from refinement in the method of calculating the deferred income tax liability related to the investment in Masterfeeds.

Comprehensive Income

Comprehensive income (loss) is the change in net assets that results from transactions, events and circumstances from sources other than investments by and/or distributions to shareholders. Accumulated other comprehensive income is comprised entirely of unrealized gains and losses on the translation of the financial statements of related entities with foreign functional currency to U.S. dollar reporting currency.

Comprehensive income for the second quarter of fiscal 2015 was $9.6 million which was comprised of net income of $10.5 million, as reported above, less unrealized losses of $0.8 million on the translation of the financial statements of related entities with foreign functional currency to U.S. dollar reporting currency. Comprehensive income for the six months ended December 31, 2014 was $13.1 million, which was comprised of net income of $15.1 million, as reported above, less unrealized losses of $2.1 million on the translation of the financial statements of related entities with foreign functional currency to U.S. dollar reporting currency.

Reconciliation of Non-GAAP Financial Measures

Ridley reports its financial results according to IFRS that have been incorporated into the CPA Canada Handbook. However, Ridley has included in this management discussion and analysis certain non-IFRS financial measures and ratios that it believes provide useful information in measuring the financial performance and financial condition of Ridley. These measures and ratios do not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other public companies, nor should they be construed as an alternative to other financial measures described by IFRS.

Starting in the second quarter of fiscal 2015, Ridley includes the share of net income or loss of associate in its presentation of adjusted EBITDA, a non-IFRS measure, to reflect the material and continuing contribution of Masterfeeds to Ridley's performance.

The following table presents a reconciliation of adjusted EBIT and adjusted EBITDA to net income, the most closely comparable GAAP measure to adjusted EBIT and adjusted EBITDA:

SEGMENT RESULTS

The following is a summary of consolidated operating income (loss) of the reporting segments of the Company's operations for the second quarter and six months year-to-date of fiscal 2015 and 2014. "Corporate" in this presentation includes the consolidating elimination of intersegment sales.

U.S. Feed Operations (USFO)

The USFO segment consists of twenty full-line production facilities, operating in the United States as Hubbard Feeds. USFO plants derive most of their business from manufacturing and marketing a broad range of complete feeds, supplements and premixes to meat, milk and egg producers, and owners of equine and companion animals located mostly in the Midwestern United States.

Tonnage volume increased by 8.0% in the second quarter of fiscal 2015 compared to last year and by 7.2% for the six months year-to-date. Volume this year has benefited significantly from strong producer economics in the beef, dairy and swine sectors and solid sales management performance.

Gross profits in the second quarter this year were $14.3 million compared to $11.7 million in the same period last year. The $2.6 million increase in gross profits reflects increased sales volumes. For the year-to-date, gross profits were higher by $3.5 million over last year.

Operating expenses increased by $1.1 million in the second quarter this year, mainly the result of increased performance-related incentive accruals. For similar reasons, year-to-date operating expenses increased by $1.5 million.

Operating income for the second quarter of fiscal 2015 was $5.4 million, an increase of $1.4 million over last year. Year-to-date operating income was $8.4 million compared to $6.4 million for the same period last year.

Ridley Feed Ingredients (RFI)

The RFI segment manufactures and distributes vitamin and trace mineral premixes, small packaged specialty products, medicated and non-medicated feed additives, and micro feed ingredients to customers throughout North America from its production facility in Mendota, Illinois.

Revenue in the second quarter of fiscal 2015 increased by $4.2 million or 13.9% over the same period last year as a result of sales growth in redistributed feed ingredients and value-added manufactured products. Year-to-date revenues increased by 17.9% reflecting strong producer economics in most sectors of livestock and poultry production.

Gross profit increased by $1.0 million in the second quarter over last year, mainly the result of increased sales volume and improved unit margins. Gross profit of $5.7 million for the six months year-to-date increased $2.0 million from last year.

Operating expenses increased over last year by $0.1 million in the second quarter and by $0.1 million for the six months year-to-date.

Operating income for the second quarter was $2.0 million, an increase of $0.9 million over last year reflecting the increase in gross profit for the period. Year-to-date operating income was $3.3 million compared to $1.5 million last year.

Ridley Block Operations (RBO)

The RBO segment manufactures and markets a complete range of block supplements, including low moisture, pressed, compressed, composite and poured blocks, minerals, and dried molasses from eight U.S. facilities.

RBO's tonnage volume in the second quarter of fiscal 2015 increased by 11.7% over last year on strong sales volumes driven by a favourable economic environment in the beef sector. For similar reasons, year-to-date volume increased by 9.2%.

Gross profits in the second quarter increased by $0.6 million or 5.9% over last year reflecting increased sales volumes. Direct production costs and manufacturing overheads, which are included in gross profits, increased by 17.7% in the second quarter, mainly due to higher tonnage volumes in the period, as reflected in labor costs, utilities, and an increase in workers compensation costs for that period. For the six months year-to-date, gross profits increased by $1.0 million (6.2%) over last year, generally in line with increased sales volumes.

Operating expenses in the second quarter of fiscal 2015 increased by $0.3 million from last year, mainly the result of higher performance-related incentive accruals. For similar reasons, operating expenses for the six months year-to-date increased by $0.4 million.

Operating income in the second quarter increased by $0.3 million over last year and by $0.6 million for the six months year-to-date.

LIQUIDITY AND CAPITAL RESOURCES

Ridley's net working capital and debt-to-equity positions are summarized below.

1. Net working capital is defined as current assets (excluding cash) less current liabilities (excluding outstanding cheques in excess of bank balances, short-term debt, and the current portion of long-term debt).
2. Net debt (cash surplus) is defined as bank obligations and outstanding cheques in excess of bank balances less cash and short-term deposits.
3. Capitalization is defined as bank obligations plus equity.

Net working capital balances decreased by $7.4 million in the three months between September 30, 2014 and December 31, 2014. Accounts payable and accrued liabilities balances increased by $7.2 million from the prior period due to timing of payments to suppliers. Working capital increased by an additional $3.2 million due to the seasonal increase in advances from customers who prepay their feed accounts, which are normally highest in the second quarter and are then drawn down over the remainder of the year. Accounts receivable were higher by $2.7 million from the prior quarter on seasonally increased revenues.

Compared to the same point in time a year ago, net working capital balances decreased by $8.3 million, mainly the result of higher accounts payable balances due to timing of payments to suppliers.

Net debt of $2.0 million as at December 31, 2014 was comprised of a $2.4 million balance in revolving credit and $0.7 million in outstanding cheques less $1.2 million of cash and short-term deposits. The Company's borrowing limit under its loan agreement with U.S. Bank was unchanged at $50.0 million as at December 31, 2014.

Outstanding Share Data

The Company's share capital consists of an unlimited number of common shares authorized with no par value. On December 11, 2014, the Company received approval from The Toronto Stock Exchange (the "TSX") to initiate a normal course issuer bid ("NCIB") for the Company's shares through the facilities of the TSX. The shares repurchase program permits the Company to purchase for cancellation up to 639,499 of its common shares over the twelve-month period ending December 15, 2015. As at February 11, 2015, the Company had not repurchased any shares under the current NCIB. The number of shares outstanding as at December 31, 2014 and as at February 11, 2015 was 12,789,978.

Capital Expenditures

Capital expenditures on property, plant and equipment, and intangible assets (software) in the second quarter of fiscal 2015 were $4.6 million, compared to $2.3 million in the same period a year ago. Increased capital expenditures this year reflect two facility expansion projects currently in progress. RBO is constructing a new $8.0 million feed supplement block manufacturing facility adjacent to its existing facility in Flemingsburg. RFI has commenced construction of a $4.5 million addition to its facility in Mendota. Both projects are expected to be completed in fiscal 2016. Total capital expenditures year-to-date were $7.0 million compared to $3.7 million last year.

Investment in Masterfeeds LP

Masterfeeds is a Canadian-based animal nutrition business formed as a limited partnership by Ridley and Ag Processing Inc. Ridley owns a non-controlling equity interest in Masterfeeds, reported as an investment in associate, which was $17.9 million as at December 31, 2014. In fiscal 2013 and 2014 Ridley reported the results of its former Canadian operations as net income from discontinued operations.

On December 18, 2013 a fire at the Humboldt, Saskatchewan feed plant owned and operated by Masterfeeds caused significant damage to the building and equipment forcing the facility to close while repairs are made. The cost of repairs is expected to be substantially covered by insurance. Production at the facility has resumed on a limited basis and is expected to be fully operational by the spring of 2015.

CASH FLOW

For the second quarter of fiscal 2015, cash generated from operations net of investing activities was $14.4 million compared to $9.5 million in the same three-month period last year. The increase of $4.9 million is the result of an increase in cash from operating activities of $6.4 million and a $1.1 million cash distribution from Masterfeeds, offset by a $2.4 million increase in capital expenditures primarily related to expansion projects at the Company's Mendota, Illinois and Flemingsburg, Kentucky facilities. For the six months year-to-date, cash generated from operations net of investing activities increased to $17.1 million compared to $10.8 million last year.

The following is a summary of cash generated or utilized by business operations, net of capital expenditures on property, plant and equipment and intangible assets.

1. Other items not affecting cash include deferred income taxes, asset impairment losses or reversals, gains or losses on sales of property, plant and equipment and facilities, share of income of associate, and other non-cash expenses.
2. Net change in non-cash working capital balances and other balances related to operations.
3. Post-employment benefit expense net of employer contributions to post-employment benefit plans.

SELECTED QUARTERLY FINANCIAL INFORMATION

1. Revenue in fiscal 2013 and 2014 has been restated to exclude discontinued operations comprised of the Company's Canadian feed operations, which were substantially contributed to Masterfeeds LP in November 2012.
2. Exceptions include asset impairment losses and recoveries, gains and losses on the sale of facilities, and other costs.
3. Net income in fiscal 2013 and 2014 reflects the Company's adoption of amendments to IAS 19.

SEASONALITY AND COMMODITY VARIABILITY

The Company experiences seasonal variations in revenue. Historically, revenue is strongest in the second and third fiscal quarters when colder weather from October to March typically increases demand for beef cattle feed. Other product lines are only marginally affected by seasonal conditions. Certain of the raw materials comprising the Company's products incorporate commodity-based products and the by-products of commodity processing. Fluctuating commodity prices may therefore influence revenues and associated cost of sales as the Company's selling prices are adjusted to reflect current raw materials markets.

INTERNAL CONTROL OVER FINANCIAL REPORTING

The Chief Executive Officer and Chief Financial Officer have each signed form "52-109F2 - Certification of Interim Filings" and filed it with the appropriate securities regulators in Canada in compliance with National Instrument 52-109: Certification of Disclosure in Issuers' Annual and Interim Filings issued by the Canadian Securities Administrators. There has been no change in Ridley's internal controls over financial reporting or disclosure controls and procedures that occurred during the most recent interim period that has materially affected, or is reasonably likely to materially affect, Ridley's internal control over financial reporting.

FORWARD-LOOKING INFORMATION

This report contains forward-looking information. The forward-looking information includes statements concerning Ridley's outlook for the future, as well as other statements of beliefs, plans and strategies or anticipated events, and similar expressions concerning matters that are not historical facts. Forward-looking information and statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, contemplated or implied by, such statements. These risks and uncertainties include the ability to make effective acquisitions and successfully integrate newly acquired businesses into existing operations, the availability and prices of raw materials and supplies, livestock disease, product pricing, the competitive environment and related market conditions, operating efficiencies, access to capital, the cost of compliance with environmental and health standards and other regulatory requirements affecting Ridley's business, adverse results from ongoing litigation, and actions of domestic and foreign governments. Other risks are outlined in the Risk Management section of Management's Discussion and Analysis included in Ridley's Annual Report. Unless otherwise required by applicable securities law, Ridley disclaims any intention or obligation to publicly update or revise this information, whether as a result of new information, future events or otherwise. Ridley cautions readers not to place undue reliance upon forward-looking statements.

OUTLOOK

The major external drivers of Ridley's animal nutrition business are the prevailing economic conditions for producers of meat, milk and egg products, as well as market dynamics for feed ingredients purchased by producers or used as raw materials in the production of feed products, and weather related factors that affect the availability and quality of pastures and forages for livestock. The current economic environment has been generally favourable for livestock and poultry producers. Market prices for meat, milk and egg products are currently high by historical standards. Most feed grains and basic ingredient prices are currently lower relative to last year, which is beneficial for producers' cost of production. However, there are considerable challenges in anticipating the future direction of economic conditions for livestock and poultry producers. The potential for volatility in feed ingredient prices will remain an important driver for Ridley's results in 2015. In the face of external uncertainties, Ridley continues to improve its cost competitiveness and customer service through initiatives to improve operating efficiencies, implementation of lean manufacturing techniques and focus on meeting the demand for value-added animal nutrition products.

Ridley Inc., headquartered in Mankato, Minnesota, is one of North America's leading commercial animal nutrition companies. Ridley employs approximately 700 people in the manufacture, sales and marketing of a full range of animal nutrition products under highly regarded trade names. Ridley's common shares are listed on The Toronto Stock Exchange (trading symbol: RCL). Additional information, including the notes to the interim financial statements and Ridley's Annual Information Form (AIF), are available at www.sedar.com. Visit our website at www.ridleyinc.com.

Refer to accompanying notes to the interim consolidated financial statements. Certain prior period figures have been reclassified to conform to presentation in the current period - See Note 17.

Approved by the Board of Directors

Refer to accompanying notes to the interim consolidated financial statements.

Accumulated other comprehensive income (loss) is comprised entirely of the unrealized loss on translation of financial statements of related entities with foreign functional currency to U.S. dollar reporting currency.

Refer to accompanying notes to the interim consolidated financial statements.

Refer to accompanying notes to the interim consolidated financial statements. Certain prior period figures have been reclassified to conform to presentation in the current period - See Note 17.