ModivCare Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 2, 2023

There are 5 speakers on the call.

Operator

Good morning, and welcome to Otter Tail Corporation's First Quarter 2023 Earnings Conference Call. Today's call is being recorded. We will hold a question and answer session after the prepared remarks. I will now turn the call over To the company for their opening comments.

Speaker 1

Good morning, and welcome to our Q1 2023 earnings conference call. My name is Tyler Nelson. Last night, we announced our Q1 financial results. Our complete earnings release And slides accompanying this call are available on our website at autertail.com. A recording of this call will be available on our website later With me on the call today are Chuck MacFarlane, Otter Tail Corporation's President and CEO and Kevin Moll, Auto Tail Corporation's Senior Vice President and Chief Financial Officer.

Speaker 1

Before we begin, I want to remind you that we will be making forward looking statements during the As noted on Slide 2, these statements represent our current views and expectations of future events. They are subject to risks and uncertainties, which may cause actual results to differ from those presented here. So please be advised about placing undue reliance on any of these statements. Our forward looking statements are described in more detail in our filings with the Securities and Baudrillard:] And with that, I'd like to turn the call over to Mr. Chairman.

Speaker 1

Thank you, Mr. Chairman. Thank you, Mr. Chairman. I will now turn the call over to Otter Tail Corporation's President and CEO, Mr.

Speaker 1

Chuck MacFarlane.

Speaker 2

Thank you, Tyler. Good morning, and welcome to our Q1 2023 earnings call. Please refer to Slide 4 as I begin my comments on our Q1 results. We are pleased with our Q1 financial results. We generated earnings per share of 1.49 As expected, our earnings declined compared to Q1 of last year as earnings from our Plastics segment receded from historic highs.

Speaker 2

In contrast, our electric and manufacturing segments each produced double digit earnings growth in the Q1 of 2023. Based on our Q1 results and expectations for the remainder of the year, we are increasing our 23 earnings guidance range from $4.55 to $4.85 per share, an increase of approximately 20% from our previous guidance, driven by increased earnings from our Plastics and Manufacturing segments. In a moment, Kevin will provide a more detailed discussion of our Slide 5 illustrates our expected 5 year compounded annual growth rate in earnings per share through the end of 2023, with and without the impact of our Plastics segment. Through dependable earnings and steady growth at Otter Tail Power, BTD, PO Plastics And changes in corporate costs, we expect to produce a compounded annual growth in earnings per share from 2018 through the 5 years ending 2023 of 9.5%. This excludes the results of our Plastics segment.

Speaker 2

The additional earnings and cash flow generated by our Plastics segment over this time period provide additional strength To our already strong credit metrics, liquidity and capital structure and allow for capital investment in our operating companies. Turning to Slide 7, we illustrate Otter Tail Power's efforts in working toward a cleaner energy future. We are targeting to reduce carbon emissions from own generation resources approximately 50% from 2,005 levels by 2025 And 97% by 2,050, assuming historic MISO dispatch occurs. Additionally, Our owned and contracted energy generation is forecast to be more than 50% renewable by 2025. And turning to Slide 11, in March, Otter Tail Pyle filed its supplemental integrated resource plan.

Speaker 2

The filing incorporated the effects of the passage of the Inflation Reduction Act, changes in our forecasted customer load, The adoption of MISO's seasonal capacity construct and increased MISO reserve margin requirements, all of which occurred after the initial IRP filing in 2021. One specific item to mention is the increase MISO's winter reserve margin, which increased from 8% to 25%. This significantly impacts Otter Tail Power, Our preferred plan, as outlined in our filings last month, requests authority to At on-site liquefied natural gas storage at Astoria Station in 2026 at 200 megawatts of solar generation in the 2027 to 2028 timeframe and commence activities to prepare for the addition of 200 megawatts of additional wind generation in the 2029 timeframe. Our preferred plan also requests authority to withdraw from our 35 percent ownership interest in Coyote Station should major non routine capital investment be required at the facility. In addition to those actions, we outlined in our IRP our intention to repower our 4 legacy wind farms In 2024 through 2026, at an estimated cost of approximately 200,000,000 It is anticipated that this investment will reduce customer rates.

Speaker 2

The levelized cost of energy per megawatt hour in the revised IRP Is lower than the plan submitted in 2021, reflecting our focus on customer affordability. Slide 12 provides an overview and status update on our significant capital investment projects. Our team continues to effectively execute On project plans, working to secure projects that are completed on time and on budget. I will now provide a few details on several projects. On Slide 13, we provide an overview of the Ashtabula 3 Wind Acquiring the facility provides a lower cost alternative than maintaining the power purchase agreement.

Speaker 2

Regulatory recovery of our $51,000,000 investment began in the Q1 of 2023. Turning to Slide 14, construction continues on Otter Tail Power's 49 Megawatt Hoot Lake Solar Project. Construction began in May of 2022 and is expected to be completed in the second half of twenty twenty three. $60,000,000 investment has been approved through the renewable rider. Passage of the Inflation Reduction Act has increased the investment tax credit on this project Summary of Otter Tail Power's investments under Tranche 1 of MISO's long range transmission plan.

Speaker 2

Otter Tail will be co owner in 2 Tranche 1 projects, The Jamestown to Ellendale and Big Stone South to Alexandria 345 kV transmission projects. Our team is focused on project development and planning and coordinating these complex projects with our co owners. We have filed for construction work in progress with FERC for each project to ensure timely recovery of our capital investment. In total, we estimate Otter Tail's capital investment in these projects to be approximately 390,000,000 40% of the capital investment is expected to occur in the next 5 years. These investments have A very minimal impact on OTP's retail customers as the costs are allocated across the MISO Midwest footprint.

Speaker 2

Our team continues to monitor developments at MISO regarding tranche 2 transmission projects. Our 5 year capital plan does not include any estimates for future projects At this time, Slide 16 provides an overview of Otter Tail Power's capital spending plan. We have updated our capital plan to incorporate the capital investments included in our supplemental IRP filing. The plan includes $1,100,000,000 of capital investment over the next 5 year period, is an increase of approximately $50,000,000 over our prior capital plan and produces a 6.5% annual compound growth rate in rate base over this timeframe. It is important to highlight that most of the capital investment from our solar and wind investments outlined in our IRP occur after 2027 and therefore are not reflected in this 5 year horizon.

Speaker 2

We anticipate approximately 80% of our capital investments will be recovered through existing rates or riders. This rate based growth is a key driver in our ability to produce earnings per share growth at our target level of 5% to 7%. Slide 17 provides an overview of key regulatory matters on our agenda for 2023. Our utility team is off to a good start and on track to accomplish our most important regulatory filings in 2023. Additionally, as we complete our internal cost of service studies this year, we will determine whether a North Dakota general rate case will be filed in late 2020 Turning to our Manufacturing segment on Slide 21.

Speaker 2

End market demand in agriculture, construction and energy markets is driving volume growth and profitability at BTD. Steel prices in the Q1 of 2023 are substantially lower than the Q1 last year, but we did see a sharp increase in steel prices near the end of March. BTD continues to manage inflationary cost pressures in the business, partially through increased product pricing. Geoplastics' earnings were driven by product pricing and the sourcing of low cost material inputs, which led to increased gross profit margins in the quarter. Sales volume in the horticulture end market did soften in the Q1 as lead time improvements across the industry resulted in decreased order backlogs.

Speaker 2

Slide 24 provides an overview of our Plastics segment. Continuing the trend from the last half of twenty twenty two, Sales volume continued to be soft in the Q1 of 2023 as distributors and contractors manage their inventory levels. Slide 25 highlights our resin recent resin and PVC pricing. We continue to benefit from elevated PVC pipe pricing despite resin costs receding from historic highs. PVC pipe prices remained higher than estimated for the Q1 of the year and early into the Q2.

Speaker 2

Our updated pricing expectations for the remainder of the year are the primary driver for our increased 2023 earnings guidance that Kevin will expand on. I will now turn it over to Kevin to provide additional commentary on our Q1 results and our updated outlook for 2023.

Speaker 3

Thank you, Chuck, and good morning, everyone. We are pleased with our Q1 financial results. We generated Diluting earnings per share of $1.49 This is the 2nd best first quarter results we have ever reported, second only to the Q1 last year. As expected, our operating revenues and earnings declined from the record Q1 of 2022, driven by lower sales volumes in our plastics segment. Both our electric and manufacturing segments Delivered double digit quarter over quarter earnings growth.

Speaker 3

Please refer to Slide 29 as I provide an overview of our Q1 segment earnings. Electric segment net earnings increased $4,000,000 or approximately 21% over the Q1 of 2022. The increase in earnings is primarily driven by higher commercial and industrial sales volumes, including a full quarter impact In 2023 of our new commercial customer in North Dakota that was brought online in the Q1 of 2022. Increased rider revenues from the recovery of construction costs of Hoot Lake Solar and the commencement of recovery of our investment in Ashtabula 3 And lower pension and other post retirement plan costs based on an increased discount rate and expected returns on planned assets These items were partially offset by higher O and M costs driven by maintenance expenses from an outage at Big Stone plant, Increased interest costs related to short term borrowings on the Otter Tail Power credit facility Manufacturing segment earnings increased $2,800,000 or 68% over the Q1 of 2022, driven by A 19% increase in sales volumes at BTD driven by end market demand in agriculture, construction, Energy and Power Generation, favorable product mix and pricing initiatives have offset inflationary cost pressures at BTD And increased product pricing and the availability of low cost raw material inputs drove earnings growth at T.

Speaker 3

O. Plastics. Steel prices which have which impact our revenues, but generally do not impact earnings given that we pass through price variability to customers We're 21% lower in the Q1 of 2023 compared to last year. Scrap metal prices, Which tend to follow steel prices and do impact our earnings were lower in the Q1 of 2023 compared to last Q1 of last year. Net earnings from the Plastics segment decreased $17,200,000 or 34% compared to 2022.

Speaker 3

Sales volumes declined 46% compared to the Q1 last year As distributors and contractors reduce purchase volumes and tightly manage inventory levels against the backdrop of higher interest rates And lower housing market activity. Poor weather conditions, including a prolonged winter season in the upper Midwest And heavy rains in California also impacted sales volumes in the Q1 of 2023. Resin costs have receded from record highs experienced in 2022. In total, our material costs were down approximately 20% In the Q1 of 2023, sales prices for PVC pipe remain near historic highs It increased approximately 7% from the Q1 of last year. Our corporate costs were positively impacted by earnings generated on our short term cash equivalent investments And market based gains recognized on our corporate owned life insurance policies.

Speaker 3

Lower health insurance Claims also impacted 1st quarter earnings in 2023. Slide 31 includes an updated business outlook for 2023. We are increasing our earnings per share guidance to a range of $4.55 to $4.85 a 20% increase From the midpoint of our initial guidance of $3.76 to $4.06 We are maintaining our earnings guidance for the electric segment. Our manufacturing segment earnings guidance is increasing Due to increased sales volumes at BTD compared to our original view, driven by demand in energy, Agriculture, Power Generation and Construction Markets increased scrap metal revenues from the combination of higher scrap volumes Due to increased production activity and higher scrap metal pricing, while we are being impacted by inflationary Cost pressures in our manufacturing segment. We expect product pricing initiatives and favorable product mix So largely offset the impact of higher costs that we are experiencing.

Speaker 3

In addition, we are increasing our earnings guidance for Plastics segment due to elevated sales prices producing stronger than anticipated margins in the first half of twenty twenty three. We currently anticipate margins will begin to compress in the second half of the year as industry supply and demand dynamics normalize, Which will put downward pressure on sales prices of PVC pipe. Partially offsetting increased margin expectations in the first half of the year is lower sales volumes as we continue to see distributors and contractors tightly manage inventory levels. These assumptions reflect our current expectations for the remainder of 2023. We currently anticipate a decline in profitability in the last half of twenty twenty three compared to our expectations for the first half of the year.

Speaker 3

Should the current market conditions persist through the last half of the year, we could see further upside to Plastics segment earnings. And finally, we are decreasing our guidance for corporate costs in 2023 Due to higher expected earnings on our short term cash equivalent investments, gains recognized on corporate investments in the Q1 And lower expected employee health insurance claims. These items will be partially offset by increased incentive compensation costs. We now expect our earnings mix for 2023 to be approximately 43% from our Electric segment And 57% from our Manufacturing and Plastics segments net of corporate costs. We continue to monitor various economic indicators such as single and multifamily housing starts, Interest rates and consumer confidence levels to ensure we are well positioned when changes occur.

Speaker 3

Additionally, we are actively managing The impacts of inflation across all of our operating companies. There continues to be concerns related to the rising interest rate environment and what impacts We'll have on earnings in 2023, especially related to variable rate debt and the need to refinance or issue new debt during the year. We continue to assess our exposure to rising borrowing costs as low risk. Our variable rate debt consists of 2 credit facilities. We don't expect to have any outstanding borrowings on our parent company facility and minimum amounts are going to be drawn on the utility facility.

Speaker 3

The increased cost of these borrowings is considered in our updated 2023 guidance. Due to our higher levels of earnings and cash flows over the last 2 years, we are in the enviable position of being able to earn a return on our excess cash. We don't have any new debt issuances scheduled until 2024 and our next scheduled bond maturity is in December of 2026. While we recognize the additional risk of having non electric businesses in our portfolio, these businesses have the ability to generate high levels of earnings and cash During strong economic times and this has been demonstrated over the last 2 years. The uplift in earnings Especially driven by the Plastics segment performance has further strengthened our equity layer.

Speaker 3

As of March 31, 2023, we have a consolidated equity layer of 59% and we expect that to increase further during the remainder of the year. This offers us a distinct advantage as compared to the utility sector as we have no equity needs in our 5 year financing plan. As previously mentioned, our updated 2023 guidance reflects elevated earnings From our manufacturing platform, we currently expect our earnings mix to move to 65% from our electric segment And 35% from our manufacturing platform beginning in 2024. As part of this shift in earnings mix, We currently expect the normalized earnings from our Plastics segment to be in the range of $36,000,000 to $41,000,000 Slide 37 reflects the collective strategies of our platforms and financial performance targets. This business model serves us well and we remain Well positioned to fund our rate base growth opportunities at the utility with our strong balance sheet, ample liquidity to support our businesses And strong investment grade corporate credit ratings.

Speaker 3

We're now ready to take your questions.

Operator

Please standby as we compile our question and answer roster. One moment

Speaker 1

please.

Operator

Our first question comes from the line of Tate Sullivan of Maxim Group. Your line is now open.

Speaker 4

Hi, good day. First focusing on your decline, the comment, Kevin, you said decline in profits In the second half of twenty twenty three, if plastics pricing decreases, what conditions Could cause the plastic pricing to be more resilient than you expect. I mean, starting there, please.

Speaker 3

Yes, Tate, thanks. We continue through the Q1 of 'twenty three and certainly into 2nd quarter, we have seen our sales prices continue to be stronger than we expected In spite of there's certainly inventory management going on at distributors and contractors given the Higher levels of inventories that they had in 2022 and kind of the softness of the construction markets that have been going on. I think that to the extent that those conditions We're expecting those conditions to continue through the rest of the year. And as the Distributors, contractors work through their higher levels of inventories we're currently expecting then that The demand will the volumes will start to come back some. We're expecting our volumes in the last half of 23 to be consistent with the volumes we had in the last half of twenty twenty two, but we just are Seeing indications in the market that there could with certain product lines that sales prices are starting to pull back.

Speaker 3

Yes, we're watching that carefully and certainly being cautious as we look forward to the rest of the year. To the extent that This pullback that we've seen in some of the pricing of products doesn't continue And sales prices continue to remain strong given that the PVC pipe is a It's not a significant cost to these overall construction jobs. To the extent that those prices stay strong, that's where we're Seeing that there could be potential upside to the year, but we certainly haven't reflected that in any of our guidance.

Speaker 4

I guess how far in terms of the visibility ahead in the business? I mean is it the distributors, your customers? I mean do they not Place orders farther than a month ahead of time or how are they managing inventory and what kind of visibility do you have into So their orders, how far ahead did they place orders for your PVC pipes?

Speaker 3

We have real good visibility through the second quarter.

Speaker 1

Okay.

Speaker 3

And then there's certainly orders that are starting to be placed a little bit Beyond that, but not significant. And so visibility is good through Q2 and as we progress through Q2, then we'll start to get better visibility into Q3 and Q4. But as we sit here today, We are starting to see some of those signs that sales prices could start to Slide off in the last half of the year and we certainly recognize there's been we're expecting that we'll see some Decline in resin prices starting in the kind of the latter part of Q2 and into Q3. And so that's another sign, Tate, that we're looking at given that as resin prices start to decline, typically, we would expect Sales prices to decline as well.

Speaker 4

And then last for me before turning over, do you have you seen any signs on with these Historical margins in Plasti, any signs of new entrants into the market or competition? I mean, is it or is it just Take a long time to open a new PVC facility.

Speaker 3

Yes. We haven't seen any new competition. The cost of entry is pretty significant to build the PVC pipe plant and there hasn't been any New announcements from competitors that there may be like we've announced an expansion of the Biotech facility to add another line, there's some of that, but nothing significant with new competitors coming in.

Speaker 4

Thank you very much.

Operator

Thank you. One moment for our next One moment please. Our next question comes from the line of Tate Sullivan of Maxim Group. Your line is now open.

Speaker 4

Hey, thank you for taking my follow-up. On BTD, Hi. Similar to the question I asked on plastics, what is that I know it probably varies by end market, but in terms of the pricing and the contracts, Is it can it be as short as a month contract to manufacture some parts or can it be as long as a year? Can you give some Some commentary to the contract structures in BTD, please?

Speaker 3

Yes, Taej, that's going to vary depending on the Requests that will come from the customer in terms of what their specific product or part is that they need, what's the lifecycle Of the particular piece of equipment or product they're building in terms of we could be asked for a request to build a part For a particular, for example, a lawnmower deck for Toro that has a lifecycle of 3 to 5 years and that we would be looking to build parts For that over that period of time, we do get requests for replacement parts from customers as well. So it certainly varies From customer depending on what their specific particular needs are going to be as it relates to The backlog for manufacturing, we have that in the press release, but we our current backlog today It is about $289,000,000 at March 31, 2023, that's through the end of this year. And that compares with at the same time a year ago, dollars 339,000,000 and there is a fair amount of difference just in steel prices Between those two, there's about a $56,000,000 difference in steel prices. Steel prices were higher at the end of the first quarter Last year compared to the end of Q1 this year.

Speaker 4

And then I saw Slide 23 point to power generation, the outlook being positive in terms of data centers. Are you doing some parts for generators And that Mark, if you can comment there.

Speaker 2

Yes, Tate, this is Chuck. We do parts for on-site backup generation, not for the entire facility, but

Speaker 3

Yes, I do call out there, Tate, that Amazon and Google and Facebook are key to driving that.

Speaker 4

Thank you. And then Chuck, when you mentioned earlier, when you comment on repowering the wind farms on the utility, Is that replacing turbines, adding more towers? Can you comment on what that means?

Speaker 2

Generally in the industry, These facilities were put in the sort of 2007 to 2009 timeframe. We would Replace blades, rotors, hubs, but the tower foundation, Internal wiring, those types of things stay. We have to generally increase the value, the book value of the Asset by 80% of it's got to be new to qualify for a renewed tax credits on that. So We're doing that. So the foundation stay the same.

Speaker 2

Generally, it's larger blades and new generator

Speaker 4

Thank you very much for answering all my questions.

Operator

Thank you. One moment for our next question, please. Please standby as we compile the question and answer roster. One moment please. At this time, I would like to turn it back to Chuck for any further comments.

Speaker 2

Thank you for joining our call and for your interest in Otter Tail Corporation. Based on our Q1 results and expected higher sales volume and scrap Income at BTD, along with anticipated stronger margins in our Plastics segment, we are raising our 2023 earnings per share guidance to a range of $4.55 to $4.85 an increase of approximately 20% from our initial range of $3.76 to $4.06 Over the long term, we are well positioned with our utility growth strategy And predictable earnings stream, complemented by our strategic manufacturing and plastics businesses to achieve our financial targets. We expect to produce compounded growth in earnings per share of 5% to 7% off a base of 2024 earnings

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now

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ModivCare Q1 2023
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