LETTER TO SHAREHOLDERS THREE-MONTH AND NINE-MONTH PERIODS ENDED DECEMBER 31, 2011
The following is our report to our fellow shareholders on Ceres’ results and activities for the three-month and nine-month periods ended December 31, 2011.
Highlights for the nine-month period and the third quarter ended December 31, 2011 were as follows:
- Consolidated – nine-month period ended December 31, 2011: $4.7 million ($0.31 per share), quarter ended December 31, 2011: $1.15 million ($0.08 per share);
- Riverland Ag – nine-month period ended December 31, 2011: $13.1 million ($0.87 per share), quarter ended December 31, 2011: $4.5 million ($0.30 per share). The increased consolidated and Riverland Ag EBITDA for the current quarter, compared to the quarter ended September 30, 2011, is primarily driven by improved facility utilization and improved trading gains;
- Net income (loss):
- Consolidated – nine-month period ended December 31, 2011: loss of ($3.4 million) (($0.23) per share), quarter ended December 31, 2011: loss of ($1.7 million) (($0.11) per share);
- Riverland Ag – nine-month period ended December 31, 2011: $5.1 million ($0.34 per share), quarter ended December 31, 2011: $1.7 million ($0.11 per share).
- Consolidated net loss includes the effect of Ceres’ corporate-level share of General and administrative expenses as follows: nine-month period ended December 31, 2011: $4.5 million ($0.30 per share), quarter ended December 31, 2011: $1.3 million ($0.08 per share), and Finance loss as follows: nine-month period ended December 31, 2011: $3.9 million ($0.26 per share), quarter ended December 31, 2011: $2.1 million ($0.14 per share);
- Cash and Portfolio Investments:
- As at December 31, 2011: total of $45.2 million, being $3.08 per share as at that date (September 30, 2011, total of $48.3 million ($3.22 per share)). The decrease in cash and portfolio investments is primarily driven by the continued repurchase of shares through the normal course issuer bid and investments in property;
- Shareholders’ equity per common share:
- As at December 31, 2011, consolidated shareholders’ equity per common share is $10.83 (September 30, 2011: $11.07; June 30, 2011: $10.58). The decrease during this quarter is primarily attributable to the strength of the Canadian dollar over the quarter and the effect on the un-hedged portion of Ceres’ investment in the net assets of Riverland Ag that are denominated in U.S. dollars. A portion of the decrease is also due to write-downs on portfolio investments as they were liquidated to fund Riverland Ag’s strategic initiatives.
- In December 2011, Riverland Ag increased a long-term credit facility by $21.3 million and renegotiated the annual interest rate from 6.25 per cent to 5.35 per cent over 10 years, which will support growth initiatives as well as supplement resources to finance working capital; and
- Normal Course Issuer Bid:
- On October 13, 2011, Ceres announced a normal course issuer bid commencing on October 17, 2011 with the intention of purchasing up to 1,184,334 shares. For the quarter ended December 31, 2011, Ceres purchased 279,724 shares for a total cost of approximately $1.5 million. The average purchase price during this quarter, under the normal course issuer bid, was $5.37.
After the disappointing results of the previous quarter, which were driven by lower facility utilization and the narrowing of carrying charges in the market, we are pleased with the progress of our inventory rebuilding as well as the improvement in earnings at Riverland Ag during the third quarter. The strategy to rebuild inventories is continuing, but is likely to take a number of quarters before we are operating at close to full capacity. While we have no control over the carrying charges in the market place, we are pleased that, during the quarter, we are able to generate trading gains that resulted from the strength and position of our assets and helped offset the current lower carrying charge market.
The grain industry continues to evolve. In December 2011, the Canadian Government passed legislation ending the Canadian Wheat Board’s (the “CWB”) marketing monopoly on wheat and barley, to become effective in August 2012. While there are certain challenges as to the legality of this move, it appears that most industry participants are planning for this change. In January 2012, the Minneapolis Grain Exchange announced that its removal of the U.S. origin condition for wheat delivered against its Hard Red Spring Wheat contract will be effective for the September 2012 contract, which now corresponds to the end of the CWB’s monopoly. In addition, they increased their storage rate by 40%. Given Riverland Ag’s delivery position in the Minneapolis Wheat contract, this change is viewed positively. We remain focused on investing in infrastructure assets at critical points in the agricultural value chain, such as strategically-located grain elevators, key logistics links and selected further processing operations, to capitalize on opportunities arising in the North American industry.
Ceres has now owned Riverland Ag for a full six quarters. We are pleased with the financial results, operational improvements and strategic initiatives that have been achieved over this 18- month period. Over the 12 months ended December 31, 2011, Riverland’s aggregate EBITDA was $18 million, representing $1.19 per Ceres common share, and aggregate net income was $7.1 million, representing $0.47 per Ceres common share (12 months ended September 30, 2011: aggregate EBITDA was $18 million, representing $1.18 per Ceres common share, and aggregate net income was $6.8 million, representing $0.45 per Ceres common share).
Looking ahead for the remainder of our fiscal year ending March 31, 2012, Riverland Ag will continue to make operational improvements, bring its new capacity fully into operation, capitalize on margin opportunities presented in the cereal grain markets, and look to strategically increase the capacity utilization of the grain storage facilities through a combination of owned inventory and third party storage. The focus on strategically increasing storage utilization has been put in place, as well as strategies to offset the current reduced carrying charge revenues. However, it may take a number of quarters to re-establish our past operating earnings levels. In particular this summer could represent a volatile time in high value milling cereal grains as the industry awaits this year’s North American harvest after a couple of poor harvests from rain the last two years. At Ceres, management will continue to monetize Ceres’ remaining portfolio investments and continue to invest in business opportunities related to Riverland Ag.
Gary Selke, Chief Executive Officer
Michael Detlefsen, President
Jason Gould, Chief Financial Officer
February 8, 2012