Andersons Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Andersons 2023 Third Quarter Earnings Conference Call. My name is Joe, and I will be your coordinator for today. At this time, all participants are in listen only mode. Later, we will facilitate a question and answer session. As a reminder, this conference is being recorded for replay purposes.

Operator

I will now hand the presentation to your host for today, Mr. Mike Holter, Vice President, Corporate Controller and Investor Relations. Please proceed.

Speaker 1

Thanks, Joe. Good morning, everyone, and thank you for joining us for The Andersons' 3rd quarter earnings call. We have provided a slide presentation that will enhance today's discussion. If you are viewing this presentation from our webcast, the slides and commentary will be in sync. This webcast is being recorded, Recording and the supporting slides will be made available on the Investors page of our website at andersonsinc.com shortly.

Speaker 1

Please direct your attention to the disclosure statement on Slide 2 as well as the disclaimers in the press release related to forward looking statements. Certain information discussed today constitutes forward looking statements that reflect the company's current views with respect to future events, Financial performance and industry conditions. These forward looking statements are subject to various risks and uncertainties. Actual results could differ materially as a result of many factors, which are described in the company's reports on file with the SEC. We encourage you to review these factors.

Speaker 1

This presentation and today's prepared remarks contain non GAAP financial measures. Reconciliations of the GAAP to non GAAP measures are included within the appendix of this presentation. On the call with me today are Pat Bowe, President and Chief Executive Officer and Brian Valentine, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will be happy to take your questions. I will now turn the call over to Pat.

Speaker 2

Thank you, Mike, and good morning, everyone. Thank you for joining our call this morning. 3rd quarter results were solid for the company compared against last year's best ever third quarter. Our Renewables segment had a record Q3 and was significantly ahead of last year. Trade results were down against last year's best ever Q3 and included some atypical charges.

Speaker 2

Nutrient and Industrial results in this Seasonally quiet quarter will improve from 2022. Trade results for the quarter include improved results In our North American assets and in the recent investments and acquisitions in Premium Food and Pet Food Ingredients, Our merchandising results were solid in the quarter, but were negatively impacted by a currency related loss in Egypt. With regard to this loss, our international business strategy includes the supply of grain to dense Population growth regions in Africa and the Middle East. We enable this through repeatable trade flows with long term customers. Within our merchandising portfolio, results in our Middle East, North African business this quarter were impacted By limited U.

Speaker 2

S. Dollar currency liquidity in Egypt. As a practice, we sell in U. S. Dollars.

Speaker 2

This loss resulted from an unfortunate and unique situation where we accepted a lower exchange rate from key customers for product already delivered. Given our customers' limited ability to access U. S. Dollars, this was an issue isolated to Egypt and our other Swiss Merchandising Business showed an improvement for the quarter. Operating results from the Renewables business were outstanding With a combination of strong crush margins and efficient operations, our ethanol production facilities We continue to benefit from good merchandising, Particularly renewable diesel feedstocks, where we increased sales volume and further diversified our product portfolio.

Speaker 2

Our Nutrient and Industrial results in this seasonally low quarter reflect improved margins in our ag supply chain and manufactured products. Brian will now cover some key financial data, and after that, I'll be back to discuss our outlook for the remainder of 2023.

Speaker 3

Brian? Thanks, Pat, and good morning, everyone. We're now turning to our Q3 results on slide number 5. In the Q3 of 2023, the company reported net income from continuing operations attributable to the Andersons Of $10,000,000 or $0.28 per diluted share and adjusted net income of $5,000,000 or $0.13 per diluted share. This compares to net income of $17,000,000 or $0.50 per diluted share in the Q3 of 2022.

Speaker 3

Overall, gross profit of $158,000,000 for the quarter was just below the $164,000,000 in 2022, With Renewables and Nutrient and Industrial showing increases, offset by a year over year decline in trade. For the year to date period, gross profit of $528,000,000 increased from $514,000,000 in 2022. Adjusted EBITDA for the Q3 of 2023 was $70,000,000 compared to $83,000,000 in the Q3 of 2022. Trailing 12 months adjusted EBITDA totaled $374,000,000 Our effective tax rate varies each quarter based primarily on the amount of income or loss attributable to non controlling interests. We recorded taxes for the quarter at a 21% effective rate.

Speaker 3

We expect a full year adjusted effective tax rate between 21% 24%. Next, we'll move to slide 6 to discuss cash, liquidity and debt. We generated cash flows from operations before changes in working capital of approximately $50,000,000 in the Q3 of both 2023 2022. Commodity prices have moderated since the highs of last year, resulting in a sharp decline in our short term borrowings From over $650,000,000 at the end of the Q3 of 2022 to $14,000,000 in 2023. Our teams continue to actively monitor working capital levels to ensure appropriate customer service, while balancing interest rate exposure.

Speaker 3

Next, we'll take a look at capital spending and long term debt on Slide number 7. We continue to take a disciplined approach to capital spending, which we expect will be between $125,000,000 $150,000,000 for the year, about half of which is typically related to maintenance capital. Through September, we have invested about $109,000,000 Included in this spending are several growth projects,

Speaker 2

And we will be expanding capacity

Speaker 3

in our premium food, renewables and nutrient and industrial businesses. In addition to the capital investments, We closed on the acquisition of ACJ International early in Q3, a growth opportunity for us in the pet food ingredients supply chain. We are evaluating several growth projects in our pipeline, including additional M and A opportunities and projects to lower the carbon intensity of our ethanol production. Our long term debt to EBITDA currently is about 1.6 times, which is well below our stated target of less than 2.5 times. We have a balance sheet with significant capacity to support growth investments that meet our strategic and financial criteria.

Speaker 3

Now we'll move on to a review of each of our businesses, beginning with Trade on Slide 8. Trade reported pretax income of $8,000,000 and adjusted pretax income of $5,000,000 compared to $41,000,000 in the same period of 2022. We had mixed operating results in our trade business portfolio when compared to our record 2022 Q3. In the North American assets, we had improved 3rd quarter results, which included additional wheat space income. Investments in growth projects, including acquisitions and additional food corn capacity, We're accretive to our premium food and pet food ingredient businesses.

Speaker 3

This was mostly offset by a decline in our U. K.-based organics business, which had record performance in 2022. Aggregate results of our merchandising businesses were down from the Q3 of 20 In a backdrop of a less dynamic U. S. Grain market, although several product lines had improved performance.

Speaker 3

As Pat mentioned earlier, in the Middle East, North Africa business, we sell in U. S. Dollars. However, given the limited U. S.

Speaker 3

Dollar Currency liquidity our customers in Egypt have experienced. We elected to accelerate the monetization of certain Egyptian receivables at lower exchange rates. This decision during the quarter also led to a revaluation of the remaining Egyptian receivables. In total, This resulted in a pre tax charge of $19,000,000 or $0.43 per share recognized in the 3rd quarter. Trade's adjusted EBITDA for the quarter was $21,000,000 compared to $60,000,000 for the Q3 of 2022.

Speaker 3

Year to date, trade adjusted EBITDA is $92,000,000 compared to $128,000,000 in 2022. Moving to Slide 9. Renewables had a best ever third quarter, generating pretax income attributable to the company Of $26,000,000 compared to $8,000,000 in the Q3 of 2022. Our current quarter earnings were outstanding due to strong ethanol crush margins combined with efficient operations at our 4 production facilities, which drove improved ethanol yields. Operating costs decreased slightly year over year.

Speaker 3

Merchandising results for renewable diesel feedstocks, feed ingredients and third party ethanol trading improved nearly $5,000,000 when compared with 2022. Renewables had EBITDA of $60,000,000 in the 3rd quarter compared $34,000,000 in the Q3 of last year. Year to date adjusted EBITDA of $157,000,000 Is $13,000,000 ahead of $144,000,000 last year. Turning to slide 10. The Nutrient and Industrial business reported a pretax loss of $8,000,000 compared to a loss of $12,000,000 in 2022.

Speaker 3

Overall, fertilizer margins increased in the seasonally slow quarter. While volumes increased in our Ag Supply Chain business, volumes in specialty liquids were impacted by a month long rail disruption at one facility and manufactured products were lower on continued slow consumer demand. Inventory adjustments that were taken in the Q3 of 2022 did not repeat. Nutrient and Industrial had positive EBITDA for the for the remainder of the year.

Speaker 2

Thanks, Brian. We remain very positive about our 2023 EBITDA outlook and expect to meet or exceed the previously communicated $350,000,000 to $375,000,000 range. U. S. Agriculture production remains high with a move to carry markets off a strong harvest volumes, which is beneficial from our grain asset footprint.

Speaker 2

Farm income is projected to decline With our broad portfolio of Ag Products, we remain positioned to perform well into 2024. Our trade business outlook remains positive. Corn harvest is ongoing, although a bit delayed in our eastern asset locations as it has been slower to dry down in the fields. As of this call, soybean harvest is nearly complete nationwide, And the significant soft red wheat harvest this summer is already providing good space income, especially with the first VSR tick starting in September. And wheat income opportunities should continue to expand into 2024.

Speaker 2

The wet corn harvest in the East This delay could move Some of our planned 4th quarter elevation income into early 2024. But overall, we are very pleased with the size and quality of the crop in our draw areas. With our balanced portfolio of merchandising and grain assets, we're able to optimize both volatility and crop dislocation As well as a potential shift with larger production and carry markets. We're projecting a solid finish to the year in trade, although not quite as high as last year's Q4 earnings. In our Renewables segment, Ethanol crush margins have remained very strong with good industry fundamentals.

Speaker 2

We believe that our eastern ethanol plants are Favorily located with expected lower corn costs post harvest. We remain focused on improving and maintaining our 4 production facilities For optimal efficiency and are making investments to increase our fermentation capacity. Production continues at a high level And we currently expect to exceed last year's Q4 earnings on a combination of strong plant performance and good merchandising. In addition, our renewable diesel feedstock merchandising business continues to grow and show bottom line improvements. Our renewables business is important to achieving our growth strategy targets, and we are actively pursuing opportunities that will Further expand our renewable diesel feedstock business and lower the carbon intensity of our ethanol production with Potential benefits from the Inflation Reduction Act.

Speaker 2

The outlook for this business remains strong heading into 2024. The Nutrien and Industrial business outlook also remains positive. While 2023 net farm income is forecasted to decline From last year's record high, it remains above the historical average, and corn producers should continue to value specialty products, which maximize yield. As always, the timing of harvest and market conditions as well as market price and carrying costs will influence our 4th quarter demand. We currently project an improvement over last year's Q4 earnings.

Speaker 2

So in summary, as we mentioned earlier, We expect to meet or exceed the previously communicated 2023 range of $350,000,000 to $375,000,000 in adjusted EBITDA. I'm very proud of our team's hard work, and I'm confident in our ability to execute against our strategy, and I'm optimistic about the year ahead. We remain committed to our 2025 EBITDA target of $475,000,000 to be achieved through internal growth And acquisitions. And we remain disciplined in our evaluation of growth opportunities. We're pleased with the progress on our long term strategy And with that, I'll be turning it over To Joe, our operator, to take your questions.

Speaker 3

Thank you.

Operator

We will now begin the question and answer session. At this time, we will take our first question, which will come from Ben Bienvenu with Stephens. Please go ahead.

Speaker 4

Hey, thanks. Good morning.

Speaker 2

Good morning, Joe.

Operator

Pat, I want to pick up

Speaker 4

where you left off with respect to the 2025 EBITDA goal, you're talking about $350,000,000 to $375,000,000 of EBITDA this year. Can you help Roughly bridge us from here to the $475,000,000 in 2025 and how much of that is growth CapEx, how much of it's M and A And maybe to the extent you can, timing of the ramp.

Speaker 2

Yes. Terrific. Very good question. Yes. Things are playing out from an ag fundamentals standpoint very well, especially leading by our renewables business.

Speaker 2

But the good crop and the outlook for storage income and other basic fundamentals are very solid going into 2024. Our plans for growth include, I'd say, half would be base investments in our core businesses for growth and half of that being M and A. We've been very prudent up to this point about investments and not wanting to overpay for any particular one asset. And I think the higher interest rates may play out to be a benefit to be enabled in the to buy something at a More reasonable price range. So we have some projects we're working on that could be help us move forward to achieve that goal.

Speaker 2

So we're staying very committed to achieving that target for the long range of 2025. So we feel good about that.

Speaker 3

Okay, fair enough.

Speaker 2

So my first question My emphasize half through core and half through M and A.

Speaker 4

Great, great. Could you compare contrast for us Q4 of this year to Q4 of last year? And what are the potential risks or opportunities across each of your business lines as we think about monitoring Kind of getting to the $350,000,000 to $375,000,000 range at the low end and the top end.

Speaker 2

Sure. I'll get started, and Brian can chime in. I think The key point, I think, was different than last year. The first one's got to be stronger ethanol fundamentals. So I think the thing that been around this ethanol business for over 30 years, You have to look at a lot of things that impact ethanol, and it's not just one item, right?

Speaker 2

So obviously, you look at corn basis or plants Good corn crop that we're bringing in right now. Also, you have just lower natural gas costs. We continue to have high income from corn oil and DDGs. We have a steady consistent demand, both domestically and abroad. We still on a relative oxygenate level are inexpensive for ethanol.

Speaker 2

And driving demand has picked up, especially noncommuter related vacation demand, etcetera, and the outlook remains solid. So we have good base fundamentals For ethanol, that would have been stronger than 1 year ago. We've put a lot of that in the bank already, but 4th quarter looks very good. Same is true for fertilizer. We've had a very solid year in fertilizer.

Speaker 2

A lot of the Q4 timing relates to when the harvest comes off and the farmer's ability To apply fertilizer, but we've had really good shipments here recently. So we feel solid about how our fertilizer business looks. And overall, our grain fundamentals are we said we have wheat income from storage that we didn't have a year ago. That's better. Volatility has been a little bit quieter than a year ago.

Speaker 2

So I think you've heard the marketplace people maybe not quite as extremely bullish as we were a year ago because Exports are softer out of the U. S, but domestic trade is still very good, and there's arbitrage opportunities. We had a very good harvest in Louisiana that's behind us now. So Fundamentals for grain are very solid. So in general, we have a good backdrop to finish the year.

Speaker 2

Brian, did you want to

Speaker 3

I think that summarizes it well. I mean, if I went high level, I would say we expect compared to last year's 4th quarter Improvements overall in the Renewables segment, some improvements, some modest improvement in our Nutrien Industrial segment, Still a strong quarter from trade, but maybe not quite as strong as last year's Q4, but we would expect it to be the strongest quarter of the year on a sequential basis and for all the factors that Pat mentioned.

Speaker 4

Okay, great. Thanks so much.

Operator

And our next question will come from Brian Wright with Roth and Cam. Please go ahead.

Speaker 5

Thanks. Well, I've got 2 questions. I wanted to just start off with, You talked about investments to increase fermentation capacity and just wanted to understand a little more

Operator

of the detail behind that, what you're willing to share?

Speaker 2

Yes. So I think the thing is we look at is efficiency in our facilities and we're able to add Steep, our fermentation capacity, which helps with the put through of the facilities and also impacts your yields, so both corn oil yields and overall ethanol yields. We've had these projects in the work for some time at 2 facilities. These aren't overnight additions, so we've been Making these investments over time. And I think what our ideas are with the Inflation Reduction Act incentives, we're interested in carbon sequestration Potential, we're active in a project to look at that at one of our facilities right now.

Speaker 2

And that in combination with making the plants as efficient From an energy standpoint, it's possible is really what helps us when it comes to just operating costs, but also for CI score reduction. So Our simple fundamental strategy is the larger scale high efficient plants with low CI scores will be winners. So we're taking active progressive steps To continue to invest our plans to do that. So it's not one big step change for continued investments to hit that goal.

Speaker 5

Okay, great. That's helpful. Thank you. And then can we just talk a little bit about like how to think about

Operator

The currency impact and how we're comfortable that that dynamic is contained to the Q3 and just can you help us with that?

Speaker 3

Yes. Thanks, Brian. It's a fair question, and I'll start out and then maybe Pat can add some So I mean, 1st and foremost, I think it goes without saying we're disappointed in the currency loss that we took in this quarter. And we've already taken steps This one really was the result of some highly unusual events and it's It's isolated really to a few deliveries within Egypt and so it's not applicable to the rest of the Egyptian business, let alone the remaining international footprint. As we mentioned, we made the decision during the quarter to accelerate the conversion of certain receivables in Egypt at lower exchange rates.

Speaker 3

This led to a revaluation of our remaining Egyptian receivables. And so the remaining value of those receivables on our balance sheet at September 30 was about $36,000,000 Our customers have continued to make good progress Converting these receivables and we have more than 60% of it already converted or in the process of being converted. So we don't believe Really the remaining currency exposure will be anything material. Depending on the ultimate exchange rates that it converts out at it, it could be Call it maybe another $5,000,000 in the 4th quarter, but like I said nothing material and we feel like this one's behind us and we're taking Have taken the right steps to ensure it doesn't happen again in the future. So Pat, I don't know any other color you want to provide on this one or the international strategy in general?

Speaker 2

Yes, sure. I think what I'd like to do is just kind of put in So let's go up about 40,000 feet and look at the big picture here and our long term strategic intent in regards to our international business. So when you think about it, consumptive demand for grains in the U. S. And Europe is flat And basically growing at the low population growth rates, while Africa and the Middle East populations Continue to grow and demand for grain and foodstuffs continues to increase.

Speaker 2

So this is what I like to call the skate toward the puck is going to be strategy. And we've sold green exports to this region for many years, but we did it through 3rd party companies, We then sell on to the end customers. So in a sense, what we did with our Swiss office is cut out the middleman and we're Selling directly to the end use customers in that region. We feel it's really important to be close to the customer and build solid long term relationships, Especially in this region where demand is going to continue to grow for years to come. And Brian explained the details, where we normally sell in U.

Speaker 2

S. Dollars, But the situation in Egypt became very difficult for any of our customers to access exchange for U. S. Dollars, and thus we agreed to this conversion rate. It was an unfortunate situation and a result of a lot of highly unusual confluence events.

Speaker 2

We are now only doing business in U. S. Dollars, so that's not a repeatable action. I've taken steps to make sure that we don't have that happen again. And remember that when you merchandise vessels of grain, they can hold 40,000 up to 60,000 tons.

Speaker 2

At that time, a Panamax soybeans was worth over $40,000,000 So this is normal in our industry as far as the volumes and shipments that were happening. And the balance of our international business is performing very well. So kind of an isolated incident related to Egypt That we won't reoccur. So I just want to reinforce that our long term strategy of our Swiss office And our customers in that region, we're very much committed to. We think this is a strong place to be for the long term for our company.

Speaker 2

This was an unfortunate event, but it's isolated and we'll continue to move forward with that strategy.

Speaker 5

Great. Thank you so much.

Operator

And our next question will come from Ben Klieve with Lake Street Capital. Please go ahead.

Speaker 6

All right. Excuse me. Thanks for taking my questions. A couple for me. First of all, a clarifying question on both the press release and your prepared remarks You called out the Renewables segment had $5,000,000 of incremental merchandising business on a year over year basis.

Speaker 6

That $5,000,000 on revenue number or profitability number?

Speaker 3

That would be an EBT number, so profitability number.

Speaker 6

Okay, great. Thank you. And then Brian, you're looking at a pretty classy problem right now on your balance sheet, the $400 plus 1,000,000 of cash on hand. I'm wondering if you can talk about how you are looking now at the decision between Building a cash war chest for M and A and these CapEx projects versus paying down some of the paying down some of your long term debt, the Situation that you haven't had to deal with for several years now, what How is this calculus playing out in your head right now?

Speaker 3

Yes, it's a great question. I think right now we have a robust pipeline of projects that We're looking at and when we think about even some of the things that Pat talks about in the Renewables segment, some of these when you start to talk about Carbon capture and sequestration and some of these are can be larger projects. We also are When we think about our balance sheet and the debt position, we feel really good about our current long term debt position. I mean Our long term debt right now, call it roughly 70% of it is fixed at rates below 5%. So I think a combination of being able to deploy capital into growth investments and M and A, And we also have a share repurchase authorization that is still in effect, that we will continue to evaluate in taking that balanced approach.

Speaker 2

Maybe to build on that, I want to go back on the example, Ben, this last year, I talked about singles and doubles of bolt ons, Either capital or acquisitions, we did an investment in our food corn businesses last year that we sell on to CPG companies, mainly in the chips space, that's been executed well on time and is providing additional income right now, so So creative right out the chutes as well as 2 M and A projects we completed this year in Bridge Agri and ACJ, a pet food ingredients business. They're both performing very well. It's nice to have those integrated and earning above plan right out the beginning. Again, they work big, But they're incremental and higher return assets. We would love to continue to do projects like that.

Speaker 6

Got it. Very helpful from both of you. Thank you for that. Plenty more discussed, but that's probably a good place to leave it. Thanks for taking my questions and I'll get back in line.

Operator

And this concludes our question and answer session. I'd like to turn the conference back over to Mike Holter for any closing remarks.

Speaker 1

Thanks, Joe. We want to thank you all for joining us this morning. Our next earnings conference call is scheduled for Wednesday, February 20 1, 2024 at 11 am Eastern Time, when we will review our 4th quarter results. As always, thank you for your interest in The Andersons, we look forward to speaking with you again soon.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Remove Ads
Powered by Quartr
Earnings Conference Call
Andersons Q3 2023
00:00 / 00:00
Remove Ads