CHS turns profit in second quarter despite loss in Ag segment

by Holly Demaree
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CHS
 
ST. PAUL, MINNESOTA, U.S. — Despite a challenging operating environment and a loss in its Ag segment, CHS Inc. turned a profit in the second quarter ended Feb. 28, compared to the loss it reported for the same period a year earlier.

Net income for the second quarter was $14.6 million, which compared to a loss of $31 million in the second quarter of 2016.

CHS Carl Casale
Carl Casale, president and CEO of CHS.

“As our operating environment remains challenging, we continue to act prudently, taking appropriate and measured actions regarding costs and investments, while positioning ourselves to take advantage of opportunities as they arise while focusing on return on our invested capital,” said Carl Casale, president and chief executive officer (CEO) of CHS. “We are on a journey and are starting to see the benefits of our focus.”

Earnings for the first six months of fiscal 2017 totaled $223.7 million, down 5% from $235.5 million compared to the same period of last year. The decrease reflected increased loan loss reserves, higher income taxes and continued challenges in the energy operating environment, which were partially offset by improved conditions across CHS wholesale and retail agricultural related businesses.

Revenues for the first six months of fiscal 2017 were $15.4 billion, up 7% from $14.4 billion in the same period of last year.

The CHS Ag segment, which includes domestic and global grain marketing and crop nutrients businesses, renewable fuels, local retail operations and processing and food ingredients, lost $9.3 million in the second quarter of fiscal 2017, which compared to a loss of $31.1 million for the second quarter for 2016.

Each of the primary business units in the Ag segment realized increased earnings during the second quarter of fiscal 2017, as compared to the second quarter of fiscal 2016, with the exception of country operations.

Grain marketing increased earnings due primarily to improved grain margins. Wholesale crop nutrients income increased for the quarter due to higher volumes. Processing and food ingredients earnings increased due to an impairment charge for assets held for sale in the prior fiscal year. Earnings from renewable fuels marketing and production operations also increased, primarily due to higher margins. The increases were partially offset by increased loan loss reserves related to the company’s country operations retail business.  Absent these reserve increases, the country operations retail business experienced strong second-quarter operating performance versus the prior year’s second quarter. The earnings were part of the $99.9 million total for the CHS Ag segment for the first six months of fiscal 2017, compared to $38.1 million for the first six months of fiscal 2016.

The company’s Foods segment, previously reported as a component of Corporate and Other, generated pretax earnings of $3.1 million during the second quarter of fiscal 2017, a decrease of $8.4 million compared to $11.5 million for the same period the fiscal year before, and $13.7 million during the first six months of fiscal 2017, compared to $29.9 million for the same period of fiscal 2016. CHS attributed the decreases to decreased margins at Ventura Foods, LLC, the CHS equity method investment that makes up the Foods segment.

Corporate and Other generated pretax income of $7.7 million during the second quarter of fiscal 2017, compared to $4.9 million during the same time period the previous year, an increase of $2.8 million, or 57%, and income of $16.5 million for the six months, compared to $14.2 million during the first six months of fiscal 2016. Earnings in this category are derived from the company’s equity investment in the Ardent Mills, LLC wheat milling joint venture and CHS Business Solutions operations.

The CHS Energy segment generated a pretax income of $16.6 million for the second quarter of the 2017 fiscal year, compared to a loss of $63.1 million for the same period in fiscal 2016, representing an increase of $79.7 million. CHS said results were primarily due to increased refining margins and a $46.1 million non-cash charge to reduce inventory to market value in the second quarter of fiscal 2016 that did not recur in the current year. The company’s propane and lubricants businesses experienced an increase in earnings, partially offset by a decrease in the company’s transportation business compared to the same period of the prior year. For the first six months of fiscal 2017, the segment generated pre-tax earnings totaled $86.6 million, compared to $129.9 million for the same period last year.

The Nitrogen Production segment generated income of $5.5 million in the second quarter, compared to income of $1.3 million over the previous fiscal year’s quarterly period, and $32.4 million for the first six months of fiscal 2017 compared to $1.3 million from the same period in fiscal 2016. CHS said the increase is primarily due to six months of activity in the current fiscal year, compared to only one month of activity in the first half of the prior fiscal year, given its investment in CF Nitrogen occurred in February 2016. 

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