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CHS fiscal Q1 earnings affected by down cycle

Earnings decline 22% from year-ago period, primarily due to down cycle in energy sector

CHS Inc., the nation's leading farmer-owned cooperative and a global energy, grains and foods company, reported net income of $209.2 million for the first quarter of its 2017 fiscal year.

Earnings for the period (Sept. 1 to Nov. 30, 2016) declined 22% from the same period of fiscal 2016. The decrease was primarily attributed to lower pretax earnings in the company's Energy and Foods segments, along with Corporate & Other. These declines were partially offset by increased pretax earnings in the CHS Ag segment as well as earnings from the new Nitrogen Production segment.

"We've been in business for nearly nine decades, so we've experienced these types of cycles before," CHS president and chief executive officer Carl Casale said. "Although it's not possible to predict how long the current down cycle in the ag and energy industries will continue, we'll navigate through this period by continuing to run our businesses efficiently and effectively, by maintaining a strong balance sheet and by ensuring we serve our owners' and customers' needs in all we do."

The CHS Energy segment generated a pretax income of $70.0 million for the first three months of the 2017 fiscal year, compared to $192.9 million for the same period in 2016, representing a decline of 64% (Table). This reduction is primarily due to the down cycle in the energy sector and significantly reduced refining margins for the company's two refineries. In addition, earnings for the company's transportation business declined, while the lubricants business remained flat and propane earnings increased from the same period a year ago.

The CHS Ag segment — which includes its domestic and global grain and crop nutrients businesses, renewable fuels, local retail operations and processing and food ingredients — generated income of $109.2 million, an increase of 58% over the same period a year ago.

Grain marketing earnings increased as a result of increased grain margins. Earnings from renewable fuel marketing and production operations increased as a result of higher ethanol sales margins. The wholesale crop nutrient business increased mainly due to increased margins. Country operations earnings increased because of increased grain volumes and other income, which was partially offset by loan loss reserves.

The CHS processing and food ingredients businesses experienced decreased earnings due to the sale of an international location and lower margins in the domestic soybean crushing business. These reductions were partially offset by higher margins in the canola crushing and soybean refining businesses.

The Nitrogen Production segment generated income of $27.0 million before taxes during the first three months of the fiscal year. This increase in income was primarily driven by a gain of $29.1 million associated with an embedded derivative asset established due to the terms of the company's strategic investment in CF Industries Nitrogen LLC (CF Nitrogen"). Since the investment occurred in February 2016, there are no comparable results in the prior year for this segment.

The Foods segment, which was previously reported as a component of Corporate & Other, generated pretax earnings of $10.6 million during the first quarter of 2017. This represents a decrease of $7.7 million from the same period the year before. This segment consists solely of the equity investment in Ventura Foods LLC.

Corporate & Other generated pretax earnings of $8.8 million during the first quarter of fiscal 2017, compared to $9.4 million during the same time period the previous year. This segment primarily represents the company's equity investment in the Ardent Mills LLC wheat milling joint venture and Business Solutions operations.

CHS is a global agribusiness owned by farmers, ranchers and cooperatives across the U.S. It supplies energy, crop nutrients, grain marketing services, animal feed, food and food ingredients and business solutions such as insurance, financial and risk management services. CHS also operates petroleum refineries/pipelines.

CHS Inc. earnings by segment (million $)

-For the three months ended Nov. 30 (fiscal year)-

 

2017

2016

Energy

70.0

192.9

Ag

109.2

69.3

Nitrogen Production

27.0

-

Foods

10.6

18.3

Corporate & Other

8.8

9.4

 Income before income taxes

225.6

289.9

 Income taxes

(16.6)

(23.7)

 Net income

209.0

266.2

 Net income attributable to non-controlling interests

0.2

0.3

 Net income attributable to CHS Inc.

209.2

266.5

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