Ridley reports fiscal Q2 net earnings of US$7.3M, up 14.1% from year-ago period; revenue from continuing operations down 2.9% to US$152.5M

Nevin Barich

MANKATO, Minnesota , February 6, 2014 (press release) – Ridley Inc. (TSX:RCL) today reported its financial results for the three and six months ended December 31, 2013. All currency amounts are stated in U.S. dollars unless otherwise noted.

For the three months ended December 31, 2013, Ridley's earnings before interest, taxes, depreciation and amortization (EBITDA) from continuing operations were $13.0 million compared to $10.6 million last year. Consolidated net income (after income taxes) for the quarter was $7.3 million ($0.57 per share) compared to $6.4 million ($0.50 per share) last year.

Ridley's results in the second quarter of fiscal 2014 reflect a return to a more normal market environment from last year when severe drought across much of the U.S. reduced forage availability and increased demand for feed supplementation. Ridley's overall tonnage volume in the second quarter increased by 3.9% over the same period last year. Volume in the beef sector was lower in the second quarter this year compared to last year, but is comparable to prior years when drought was not a factor. Volumes were higher this year in the dairy, swine and poultry sectors, which are less affected by drought conditions. Product mix trended towards higher value-added products while unit margins benefited from more favorable raw material positions relative to last year resulting in a 12.0% increase in gross profits of continuing operations in the second quarter this year.

Operating income of continuing operations (before income taxes) increased by 25.0% in the second quarter of fiscal 2014 to $11.2 million. U.S. Feed Operations (USFO) reported a $0.7 million increase in operating income for the three months ended December 31, 2013, on a favorable product mix and improved unit margins that offset lower volumes relative to last year. Ridley Block Operations (RBO) reported a $0.9 million increase in operating income from last year on improved unit margins and the contribution of Stockade Brands acquired late in the second quarter last year. Ridley Feed Ingredients (RFI) reported operating income of $1.1 million in the second quarter this year, an increase of $0.7 million over last year, also the result of improved unit margins and volume growth.

In the second quarter last year, Ridley merged its Canadian Feed Operations with Masterfeeds Inc. to form Masterfeeds LP, the second largest feed provider in Canada. Ridley's share of the operating income of its joint venture interest in Masterfeeds LP improved to $0.4 million in the second quarter this year from $0.2 million last year.

MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis dated as at February 5, 2014 and the accompanying interim consolidated financial statements for the three and six months ended December 31, 2013 have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") which incorporate International Financial Reporting Standards ("IFRS").

Second Quarter Results

Exceptions - In the preceding summary data, net income was reported before exceptions. Those exceptions in the six months ended December 31, 2013 were comprised of $0.3 million, net of income taxes, from the gain on the sale of a previously closed facility in Castleton, Indiana, and $0.1 million, net of income taxes, for the asset impairment loss and restructuring accrued for closure of the Chambersburg, Pennsylvania facility. There were no exceptions in the first six months of last year.

EBITDA - Operating income before depreciation, amortization and exceptions. EBITDA does not have a standardized meaning prescribed by GAAP and, therefore, is not readily comparable to similar measures presented by other companies. However, management believes that this measure provides investors with useful supplemental information.

Consolidated Second Quarter Results

Revenue from continuing operations was $152.5 million in the second quarter of fiscal 2014, a decrease of 2.9% over 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. Lower revenues reflect a general reduction in raw material costs over the last several months, which had the effect of reducing average unit selling prices for the Company's feed products.

While tonnage volumes were lower in the beef cattle sector from the easing of drought conditions that had boosted demand for feed supplementation last year, volumes were higher in other animal species less affected by forage availability, including dairy cattle, swine and poultry.

Consolidated gross profit from continuing operations in the second quarter of fiscal 2014 was $23.9 million compared to $21.3 million in the same period last year. The major part of the 12.0% increase in gross profits in the second quarter was the result of the 3.9% increase in overall volumes combined with higher unit margins that reflected a favourable product mix in
most market segments and improved raw material positions.

Operating expenses, which include technical services, selling, administration expenses and research and development, in continuing operations were $12.7 million in the second quarter compared to $12.4 million last year.

Net income from continuing operations, net of income tax expense, for the second quarter of fiscal 2014 was $7.3 million ($0.57 per share) compared to $5.7 million ($0.45 per share) in the same period of fiscal 2013.

EBITDA is comprised of operating income of continuing operations before depreciation, amortization and exceptions. For the three months ended December 31, 2013, EBITDA was $13.0 million compared to $10.6 million for the same period last year. The increase of $2.4 million in EBITDA is mainly comprised of a $2.5 million increase in gross profit offset by the $0.3 million increase in operating expenses and a $0.2 million increase in depreciation and amortization.

Discontinued operations are comprised of the Company's feed manufacturing business in Canada, previously reported as the Canadian Feed Operations (CFO) segment, which was merged into a limited partnership with Masterfeeds Inc. in the second quarter of fiscal 2013. Prior period results of CFO have been re-presented here as discontinued operations. Net income from discontinued operations in the second quarter of fiscal 2014 was nil compared to $0.7 million last year. In the second quarter last year, CFO recorded a net pre-tax operating loss of $2.1 million, which was offset by a $3.7 million pre-tax gain on the disposal of CFO net assets to the limited partnership with Masterfeeds.

The Company owns a non-controlling interest in the limited partnership, Masterfeeds LP. Starting with the second quarter of fiscal 2013, the Company's share of the earnings of Masterfeeds LP is reported as share of net income of associate, which in the second quarter of fiscal 2014 was $0.4 million compared to $0.2 million for the month of December last year.

Including income from discontinued operations, the Company reported net income after taxes for the three months ended December 31, 2013 of $7.3 million ($0.57 per share) compared to $6.4 million ($0.50 per share) in the same period last year.

Consolidated Six Months Results

For the six months ended December 31, 2013, revenue of $286.5 million from continuing operations was $13.7 million or 4.6% lower than the same period last year reflecting a general reduction in raw material prices this year combined with a 0.4% decrease in overall tonnage volumes for the period. Volumes last year, particularly in the first quarter, gained significantly from severe drought in the Midwestern states, which has since abated in most areas.

Consolidated gross profit from continuing operations for the first half of fiscal 2014 was $41.6 million compared to $40.9 million last year, which reflected a favourable product mix in most market segments and lower unit costs of raw materials. Direct production costs and manufacturing overheads, which are included in gross profits, increased by 4.3% in the first half of fiscal 2014.

Operating expenses of continuing operations in the first half of fiscal 2014 were $25.2 million, an increase of $1.3 million over last year. Earnings exceptions in the first half this year, which are also included in operating expenses, were related to the closure and sale of two facilities earlier in the year.

EBITDA from continuing operations in the first six months of fiscal 2014 was $19.8 million compared to $20.3 million for the same period last year. The decrease of $0.5 million in
EBITDA is comprised of the $0.6 million decrease in operating income offset by an increase of $0.3 million in depreciation and amortization expense and $0.2 million in income from net exceptions in the first half.

Net income from continuing operations for the six months ended December 31, 2013 was $10.4 million (earnings per share of $0.81) compared to $10.8 million (earnings per share of $0.85) in the same period last year. Net income from discontinued operations was nil this year compared to $0.6 million last year. Including income from discontinued operations and share of income of associate, the Company reported net income after taxes of $10.4 million (earnings per share of $0.81) for the first half of fiscal 2014 compared to $11.4 million (earnings per share of $0.90) in the same period last year.

The accompanying interim financial statements reflect the Company's adoption of IAS 19r "Employee Benefits" which significantly changed the recognition and measurement of defined benefit pension and post-retirement expense, and the disclosure of all employee benefits. Implementation of this standard in the Company's interim consolidated financial statements required restatement of the fiscal 2013 comparative numbers. In summary, the effects of IAS 19r on previously reported financial statements for the six months ended December 31, 2012 were: (1) reclassification of $1.5 million from retained earnings to accumulated other comprehensive income, and (2) a reduction of net income by $0.4 million ($0.02 per share).
The accompanying notes to the financial statements more fully explain the reporting changes caused by IAS19r and the retrospective effect on the Company's previously reported results for fiscal 2013.

Ridley reports its financial results according to IFRS that have been incorporated into the Handbook of the Canadian Institute of Chartered Accountants ("CICA"). However, Ridley has included in its management discussion and analysis certain non-IFRS financial measures and ratios that its management 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.

Operating income is defined as net income before finance expense, finance income, income tax expense, share of net income or loss of associate and net income or loss from discontinued operations. Earnings before interest, taxes, depreciation and amortization ("EBITDA") is defined as operating income of continuing operations before depreciation and amortization, gain or loss on sale of facilities and asset impairment loss.

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. Other comprehensive income (OCI) is comprised of unrealized gains and losses on translation of financial statements of related entities with foreign functional currency to U.S. dollar reporting currency, the transition adjustment between retained earnings and accumulated other comprehensive income related to the adoption of IAS19r and the accumulated currency translation losses realized upon disposal of the Canadian business unit. Comprehensive income in the second quarter of fiscal 2014 was $6.5 million, which was comprised of net income of $7.3 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, 2013 was $10.1 million, which was comprised of net income of $10.4 million, as reported above, less unrealized losses of $0.3 million on the translation of the financial statements of related entities with foreign functional currency to U.S. dollar reporting currency.

SEGMENT RESULTS

In the second quarter of fiscal 2013, the Company modified its reporting segments to eliminate the Canadian Feed Operations (CFO) segment following the sale of substantially all of the net assets of its Canadian operations to Masterfeeds LP. The following is a summary of operating income (loss) of the reporting segments of the Company's continuing operations for the second quarter and six months year-to-date of fiscal 2013 and 2014. "Corporate" in this presentation includes the consolidating elimination of intersegment sales and the total assets and property, plant & equipment associated with discontinued operations.

U.S. Feed Operations (USFO)

The U.S. Feed Operations (USFO) segment consists of twenty full-line production facilities, operating in the United States as Hubbard Feeds, producing and marketing products for the core animal nutrition market. USFO plants derive most of their business by 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 was lower by 1.0% in the second quarter of fiscal 2014 compared to last year. Volume last year reflected a significant increase in demand for feed supplements in the beef sector due to the severe drought throughout much of the United States. Lower volumes this year followed from the return to a more normal level of demand for feed in the beef sector partially offset by gains in volume in the dairy and swine sectors in the second quarter. Year-to-date volumes were 3.5% lower than last year.

Gross profits in the second quarter this year were $11.7 million compared to $11.0 million in the same period last year. Unit margins were generally higher this year as volumes trended towards higher value- added products and raw material positions improved from the effects of drought last year. Year-to-date gross profits were higher by $0.4 million than last year.
Operating expenses were higher by $0.1 million in the second quarter this year. An increase in the allocation of head office administrative costs, previously absorbed by discontinued operations, was offset by reversal of a bad debt reserve from a prior period. Year-to-date operating expenses were higher by $0.7 million. Operating expenses in the first quarter this year included a $0.4 million gain on the sale of the site of the Castleton, Indiana feed manufacturing facility. Also in the first quarter, USFO discontinued feed manufacturing operations at its Chambersburg, Pennsylvania facility, which resulted in a $0.2 million asset impairment loss.

Operating income for the second quarter of fiscal 2014 was $4.0 million, an increase of $0.7 million over last year. Year-to-date operating income was $6.4 million compared to $6.6 million for the same period last year.

In the second quarter of fiscal 2014, the Company ceased feed manufacturing operations at its Chambersburg, Pennsylvania facility. Customer volume previously served by Chambersburg has been consolidated with the Company's equine-dedicated feed facility in Versailles, Kentucky.

Ridley Feed Ingredients (RFI)

The Ridley Feed Ingredients (RFI) segment produces 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 facility in Mendota, Illinois.

Revenue in the second quarter of fiscal 2014, including intersegment sales, increased by $1.9 million or 6.6% over the same period last year as a result of broadly based growth in volumes across most product categories and animal species. Year-to-date revenues were higher by 1.9%. Revenues earlier in the year declined from lower volumes of redistributed feed ingredients, particularly feed-grade vitamins and amino acids.

Gross profit of $2.2 million in the second quarter was $0.9 million higher than last year, mainly the result of increased volumes and improved unit margins. Gross profit of $3.7 million for the six months year-to- date was $0.8 million ahead of last year.

Operating expenses in the second quarter increased over the prior year by $0.2 million on generally higher selling and administrative costs while expenses for the six months year-to-date were higher by $0.4 million for similar reasons.

Operating income for the three months ended December 31, 2013 was $1.1 million, an increase of $0.7 million over last year reflecting the increase in gross profit for the period against slightly higher overhead expenses. Year-to-date operating income was $1.5 million compared to $1.1 million last year.

Ridley Block Operations (RBO)

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

RBO's tonnage volume in the second quarter of fiscal 2014 increased by 4.3% over last year, mainly from the contribution of new tonnage from Stockade Brands, which RBO acquired at the end of the second quarter of fiscal 2013. Volume last year was positively influenced by drought conditions that increased demand for feed supplementation, particularly in the Midwestern states. With the easing of drought conditions this year, volumes returned to historically more normal levels. The overall increase in volume in the second quarter this year reflects more favourable pasture conditions in the Southeastern states and the contribution of new volume from Stockade Brands. Year-to-date volumes were 5.4% lower than last year following a return to more normal conditions from the severe drought last year.

Gross profits of $9.9 million in the second quarter this year were higher by $1.0 million or 11.2% over last year reflecting increased overall volumes of block products, improved unit margins and the contribution of Stockade Brands acquired last year. For the six months year-to-date, gross profits were behind last year by $0.5 million reflecting reduced volumes in the first quarter this year relative to last year when strong demand was sustained by severe drought in the Midwestern states.

Operating expenses in the second quarter of fiscal 2014 were ahead of last year by $0.1 million and by a similar amount for the year-to-date, mainly the result of increased employee benefits costs and the allocation of head office administrative costs previously absorbed by discontinued operations.

Operating income increased over last year by $0.9 million in the second quarter in line with the increase in gross profits and slightly increased operating expenses. Operating income for the six months year-to-date was lower by $0.6 million from last year reflecting the lower volumes and gross profits of the first quarter relative to the strong performance from drought-driven demand last year.

Liquidity/Capital Resources/Cash Flow

Net working capital balances decreased by $2.6 million in the three months between September 30, 2013 and December 31, 2013. Advances from customers who pre-pay their feed accounts were lower by $2.3 million while inventories were lower by $1.2 million, mainly the result of lower raw material prices and more efficient turnover rates. Accounts receivable were higher by $4.2 million reflecting the seasonal increase in sales volumes and revenue between the first quarter and second quarter of the current year. Compared to the same point in time a year ago, net working capital balances were higher this year by $2.5 million, mainly due to lower accounts payable and accrued liabilities that more than offset reduced inventories.

For the second quarter of fiscal 2014, cash available from operations net of capital expenditures and disposals (excluding business acquisitions) increased by $9.5 million compared to an increase of $12.6 million in the same three-month period last year. Cash flows last year included distributions from associate of $7.9 million following the transfer of working capital assets of Canadian operations to Masterfeeds LP and $2.1 million for the excess of working capital contributed to the start-up of Masterfeeds LP. Business acquisitions of $5.7 million last year reflect the net purchase price for the assets of Stockade Brands Inc.

The Company's borrowing capacity under its loan agreement with U.S. Bank National Association was unchanged at $50.0 million as at December 31, 2013.

Capital Expenditures

Capital expenditures on property, plant and equipment, and intangible assets (software) in the second quarter of fiscal 2014 were $2.3 million, compared to $3.6 million in the same period a year ago. Capital expenditures for the year-to-date were $3.7 million compared to $6.6 million last year. Lower capital expenditures this year were mainly due to the discontinuation of Canadian Feed Operations.

Investment in Masterfeeds LP

On November 30, 2012 the Company and Masterfeeds Inc., a wholly-owned subsidiary of Ag Processing Inc., completed the merger of their respective livestock and poultry feed and nutrition businesses in Canada into a new limited partnership called Masterfeeds LP. Masterfeeds Inc. and Ridley Inc. contributed essentially all of their respective Canadian feed operating assets and liabilities in exchange for relative unit holdings in Masterfeeds LP. Ridley retains a non-controlling equity interest in Masterfeeds LP.

Starting in the second quarter of fiscal 2013, results of the Company's Canadian operations up to November 30, 2012 are reported as net income from discontinued operations. Pre-tax earnings from the Company's investment in Masterfeeds LP are reported as share of net income of associate under the equity method of accounting, which in the second quarter of fiscal 2014 was $0.4 million. As a limited partnership, Masterfeeds LP is not subject to income taxes - any taxable income is allocated between the respective partners. The Company's investment in Masterfeeds LP is reported as an investment in associate, which was $17.3 million as at December 31, 2013.

Outstanding Share Data

The Company's share capital consists of an unlimited number of common shares, with no par value. On December 12, 2013, the Company received approval from the Toronto Stock Exchange (the "TSX") to initiate a normal course issuer bid 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, 2014. As at February 5, 2014, the Company had not repurchased any shares under the current normal course issuer bid. The number of shares outstanding as at December 31, 2013 and as at February 5, 2014 was 12,789,978.

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 the proposed transaction described herein, 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 risk that the proposed transaction described herein will not be completed, 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 the MD&A 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

Ridley's business is sensitive to any changes in the economic environment for livestock and poultry producers. Generally, most sectors of livestock and poultry production in North America are operating profitably at the current time. Grain prices have decreased significantly in recent months, which will be beneficial to the economic prospects of producers and a positive influence for the rebuilding of herd populations. The drought in much of the Midwestern states, which was severe at the start of Ridley's previous fiscal year, has since abated and is not a driver for feed volumes and prices in the current fiscal year. Seasonal weather conditions will continue to be an important factor in tonnage volumes for the beef cattle sector during the remaining winter months of Ridley's third fiscal quarter.

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.

* All content is copyrighted by Industry Intelligence, or the original respective author or source. You may not recirculate, redistrubte or publish the analysis and presentation included in the service without Industry Intelligence's prior written consent. Please review our terms of use.