Andersons Q2 2023 Earnings Call Transcript

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August 2, 2023

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to the Andersons 2023 Second Quarter Earnings Conference Call. My name is Anthony, 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.

Operator

As a reminder, This conference is being recorded for replay purposes. 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, Anthony. Good morning, everyone, and thank you for joining us For the Anderson's 2nd quarter earnings call, we have provided a slide presentation that will enhance today's discussion. If you are viewing this presentation via the webcast, the slides and commentary will be in sync. This webcast is being recorded and a recording and the supporting slides 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.

Speaker 1

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 This presentation and today's Measure are included within the appendix of this presentation. On the call with me today are Pat Beaux, President and Chief Executive Officer and Brian Valentine, Executive Vice President and Chief Financial Officer. After our prepared remarks, we'll 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 To review our Q2 results and for your continued interest in The Andersons. I'm very pleased with our Q2 results. We are 2nd best ever Q2, exceeded only by the second Quarter of 2022, which was an all time record for the company. Our Nutrient and Industrial segment results For our best in 15 years, and our renewables results were very strong as well.

Speaker 2

While our trade results were down year over year Due to the fact that last year's results were impacted by strong demand and market volatility in response to the Russian invasion of Ukraine. On a year to date basis, trade remains ahead of last year. Trade Group results for the quarter include strong merchandising earnings On good positions across several products and geographies. Performance of our North American assets was lower last year due to normalized grain elevation margins. Recent investments in premium food and feed ingredients Added to our results, operating results from our renewables business was very good due to a combination of strong crush margins And efficient operations.

Speaker 2

We continue to benefit from good merchandising of ethanol and co products And further growth of our low CI renewable diesel feedstock merchandising volumes. Our plants are running efficiently and generated improved yields above last year. Our Nutrient and Industrial results reflect improved volumes as we were well prepared for the planting season, which was delayed somewhat compared to last year. As expected, lower overall fertilizer prices compressed margins From the high levels we saw in 2022, but our increased sales pushed results higher. 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 2

Brian?

Speaker 3

Thanks, Pat, and good morning, everyone. We're now turning to our Q2 results on Slide number 5. In the Q2 of 2023, the company reported net income from continuing operations attributable to the of $55,000,000 or $1.61 per diluted share and adjusted net income of $52,000,000 $0.39 per diluted share in the Q2 of 2022. Gross profit for the quarter Was $222,000,000 compared with $231,000,000 in 2022. For the year to date period, gross profit of $370,000,000 in 2023 was up from $350,000,000 In 2022, driven by improvements in trade and renewables.

Speaker 3

Adjusted EBITDA for the Q2 of 2023 Was $144,000,000 compared to $169,000,000 in the Q2 of 2022. Trailing 12 months adjusted EBITDA exceeds $386,000,000 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 tax rate, we still expect a full year adjusted effective tax rate Between 22% 25%. 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 $118,000,000 in the Q2 of 2023, compared to $135,000,000 in 2022.

Speaker 3

Commodity prices have moderated since the highs of last spring, Resulting in a sharp decline in our short term borrowings from $1,200,000,000 in 2022 to $103,000,000 at the end of June. And with the current interest rate environment, our teams are actively monitoring working capital levels to ensure appropriate customer service while balancing interest rate exposure. Next, we'll take a look at capital spending and long term debt on Slide 7. We continue to take a disciplined approach to capital spending, which we expect will be approximately $125,000,000 to $150,000,000 for the year, Roughly half of which is typically related to maintenance capital. Through June, we have spent $76,000,000 on capital expenditures.

Speaker 3

Included in the spending are several growth projects, expanding capabilities in our fertilizer, renewables and premium food businesses. Shortly after the end of the quarter, we closed on the acquisition of ACJ International, For us in the pet food ingredients supply chain. We are evaluating various growth projects in our pipeline, including additional M and A opportunities. 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 capacity to support growth investments For those 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 number 8. Trade reported pretax income of $5,000,000 And adjusted pre tax income of $7,000,000 in the Q2 of 2023 compared to $24,000,000 in the same period of 2022. While Trade's quarterly results are down from the Q2 of last year, our year to date results are higher than last year. Merchandising performance was mixed with some profit centers recording very strong results, while others did not have similar market compared with last year, which was impacted by a period of significant volatility following the start of the Russia Ukraine war. Results in the North American assets were down following a good Q1 as Elevation margins normalized.

Speaker 3

Investments in growth projects made in prior periods were additive to our premium food and pet food ingredient businesses. Trade's adjusted EBITDA for the quarter was $27,000,000 compared to $47,000,000 for the Q2 of 2022. Year to date adjusted EBITDA is $71,000,000 compared to $67,000,000 Last year. Moving to slide 9, Renewables had 2nd quarter pre tax income attributable to the company Of $39,000,000 and adjusted pre tax income of $32,000,000 compared to $46,000,000 in the Q2 of 2020 Included in the prior year results are $9,000,000 of USDA COVID relief funds And $24,000,000 of mark to market gains. Our current quarter earnings were solid due to strong ethanol crush margins Combined with efficient operations at our 4 production facilities, which drove improved yields.

Speaker 3

Merchandising results For renewable diesel feedstocks, feed ingredients and 3rd party ethanol trading were also up compared with last year. The total volume of vegetable oils merchandised increased 64% over 2022, as we continue to grow our renewable diesel feedstock Business. Renewables had adjusted EBITDA of $74,000,000 for the quarter compared to $86,000,000 Industrial business reported its highest second quarter in 15 years with pre tax income of $43,000,000 Compared to $38,000,000 in 2022. An overall volume increase of 21% Driven by demand in our agricultural product lines led to an outstanding quarter after a slow start to the year. With fertilizer prices stabilizing at more historical levels, we were well positioned to serve our customers throughout the spring planting season.

Speaker 3

Year to date sales volume has increased by 10%, although as expected margins declined in our Ag Products given the significant year over year reduction in market prices. Nutrient and Industrial had EBITDA for the Q2 of $52,000,000 compared to $47,000,000 last year. And with that, I'll turn things back over to Pat for some comments

Speaker 4

about our

Speaker 3

outlook for the remainder of 2020

Speaker 2

Thanks, Brian. We remain positive about our 2023 outlook. And at the midpoint of the year, We're very pleased with our results year to date. We knew that our record Q2 of 2022 results would not repeat given several of the geopolitical and global market events that occurred last year. That said, our year to date results are very strong.

Speaker 2

Improving U. S. Crop conditions should influence the global grain supply outlook as well. And as always, weather Through the key crop growing season will influence final production, but the recent rains in the Midwest is good news to U. S.

Speaker 2

Farmers. Our trade business outlook remains solid. Most of our draw areas have seen improvement in crop conditions in July, and we are monitoring this closely. Also in July, we sourced more of the winter wheat harvest than we originally anticipated and at better qualities In our Eastern assets, like last year, our Louisiana assets are well positioned for their early harvest. With our balanced portfolio of merchandising and grain assets, we're able to optimize both volatility and crop dislocation As well as potential shift with larger production and carry markets.

Speaker 2

In our Renewables segment, Ethanol crush margins remain historically strong and are above our early 2023 expectations. We believe that our Eastern ethanol plants are favorably located with expected lower corn costs through harvest. We remain focused on improving our 4 production facilities for optimal efficiency and are making investments to increase our fermentation capacity. We also continue to grow our supply arrangements from other producers, distillers corn oil and other third party renewable diesel feedstocks. We are evaluating a number of opportunities that will 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. The Nutrient and Industrial business outlook Has improved with strong second quarter results. We expect to see solid farm incomes once again, Which should continue to support purchasing of crop inputs, including our value added low salt starters and micronutrients. We also anticipate growth in our industrial product lines. As always, the timing of harvest and fall application season Will influence 4th quarter demand.

Speaker 2

In conclusion, I continue to be extremely proud of our team And their dedication to serving customers and we remain committed to our 2025 EBITDA goal of $475,000,000 In reaching that goal, we must successfully complete the internal growth projects and acquisitions that we have in our pipeline. We will continue to remain disciplined in this approach. We are pleased with the progress we're making on executing our long term growth strategy And we'll continue to make decisions that benefit customers and maximize shareholder value. Thank you. And with that, we'll now Turn it back over to our operator, Anthony, who will take your questions.

Operator

We will now begin the question and answer First question will come from Ben Bienvenu with Stephens. You may now go ahead.

Speaker 4

Hey, thanks. Good morning, guys. Congratulations.

Speaker 2

Thank you, Ben.

Speaker 4

I've got a handful of questions. I wanted to start on the Renewables business, really strong results here. You talked about kind of continued momentum into the back half of this year with sustained strength And margins in the industry. Can you talk a little bit, Pat, about your ability to already lock in some of those Strong margins as we look out to 3Q. And then when you look at the pieces that build up to a more robust backdrop, Your view on the sustainability of those dynamics?

Speaker 2

Sure. Yes, very good comments, Ben. I think when we go back earlier in the year, Our outlook for ethanol margins have greatly surpassed what we originally thought they're going to be. So we've been really pleased with driving demand. I think Official numbers are up almost 2% on June through August.

Speaker 2

So this vacation driving that everyone seems to be doing, Let alone jet fuel demand, etcetera, is really driving the demand side. We're not back to the pre COVID Commuter miles that we had, but we are seeing more of a return to work, maybe pushing that a little bit, but also the implied blending It continues. So we're getting good small increases in blending all the time. So stocks have been tight all year. We continue a steady export pace of that 1,300,000,000 to 1,400,000,000 gallons.

Speaker 2

And so the outlook continues strong And now we'll be going into a harvest period where we'll hopefully have a really good corn crop. The rains have been outstanding here this last month. So We're set up very well. Your question about hedging and forward, we always trade our positions. We'll put on forward Edges, what it makes sense, we've done some of that this past year to capture margin opportunities.

Speaker 2

We've done some of that, but generally the market is still pretty inverted To the spot and the spot spend increased value. So there hasn't been any big opportunities. If anything, we look further out into the Q1, Which is historically a lower price period as you go in the winter. So we always look for opportunities in the winter months if we could lock down a good margin then. So Well, we keep our eyes open for that.

Speaker 4

Okay, great. Very helpful. And then you gave some comments that were helpful in Characterizing the trade business set up ahead, but I wanted to ask you, you made a comment about lower basis values in The East versus the West for corn benefiting renewables. When you look at kind of East versus West Crop conditions as they stand today, some of the benefits of assets in Louisiana and the Gulf, These around basis that exists that you see through New Crop as well. Any comments there on the benefits of your asset base would be helpful.

Speaker 2

Sure, absolutely. And if I indicated about an East West split, I didn't mean it that way that historically like the last quarter, we had seen The last couple of quarters, Eastern values cheaper than the West as the West was really struggling with bad weather and Tight supplies last year. That's kind of equalized a little bit. So that east to west differential has become more neutralized here in the last month or 2 as we get closer To this next coming harvest, I think we're very excited about a couple of things in our merchandising business. One, as you know, Ben, we're big players in the soft red wheat market with our Eastern located assets, a tributary to the CME delivery point here in Leto, we had surprisingly really good wheat quality as well as good yields.

Speaker 2

It surprised us because it was pretty Dry at hand, we thought that yields might be sacrificed, and they didn't. And the soft red wheat crop came in very strong, both here and into Canada, In Ontario, so we feel very good about our ability to earn, this goes back for you, Ben, and the analysts, the variable storage rate. So The softwood wheat market is close to 75% of carry and thus we're probably pretty highly likely chance of earning A variable storage rate tick, if you remember the days we do that, that's a good thing for Andersons. So while we talk about volatility of global markets, We do see a stable, really good soft red wheat Eastern crop that's at good values that will generate earnings for us. On the corn and bean front, it's good as you mentioned dislocation regionally, right?

Speaker 2

So you have to remember, we're not solely like an We're really focused on a lot of domestic markets, both cattle and dairy and hog as well as supplying ethanol players and others. And it's still quite volatile out there in local truck markets. Our team has done a great job navigating those markets here the last 2 months, And we see that to continue to provide good opportunities for the rest of the year. So we're pretty confident about how Grain merchandising results will look at the balance of the year. And the last point, if you don't mind me going there, Ben, is just on the global Look, I know you all are watching things closely.

Speaker 2

We had a big Brazilian crop. It looks like the U. S. Crop will be a good one this year now after some early concerns. It's been very hot, but as you know, rain makes grain as we always say.

Speaker 2

So we just see hot wet conditions and it's perfect for growing corn. On the globe though, these recent activities in the Ukraine and Russia continue to add gasoline to the fire here. So as you know, there is a situation, there's a bridge called the Kerch Bridge, Kerch, that connects Russia to Crimea and is very critical For grain movements out of Russia, Russia grain wheat movements have still been huge, which is good to supply the needy Countries, especially in Africa and the Middle East. The challenge is this bridge has been bombed a couple of times before by Ukraine. And if that were to be destroyed or damaged shares, that will impact especially wheat exports.

Speaker 2

And the other side of that coin, the Russians had a 25 drone strike this morning, 15 of those hit in Ishmael. This In Ukraine, it's right on the Danube. It's a port location for barge loading, Destroying some grain and food grain facilities and being right on the Romanian border as you all know also causes concern about that Romania being a NATO and an EU country. So the bottom line on wheat and European situations related to the Russian Exports is quite volatile. And I think probably the most important thing that the market is watching right now and of course we're watching that closely.

Speaker 2

What it does mean is that volatility in a macro sense coming back to the Andersons, I think it plays right into our hands For merchandising opportunities. So I gave a very long winded answer, Ben, to tell you about what's going on in the market weather and geopolitics, That's the exciting news of what's happening today.

Speaker 4

That's great, Pat. Super helpful. One more question for me, and it's for Brian and the balance sheet. It's amazing what a difference a year makes. The balance sheet leverage has come down considerably.

Speaker 4

I think typically seasonally your short term borrowing comes down into the back half of the year, which would imply that things may be deleverage more. How should we be thinking about your appetite for balance sheet leverage? You talked about your targets, maybe help us think about what you'd like to do there?

Speaker 3

Yes. It's a good question. You're right. And 3rd quarter is typically where we would see the largest decline. Some of that has changed a little bit now that we have More of the with our Swiss office and the international and some of the merchandising and the larger loads there.

Speaker 3

But I would say, generally Speaking, we feel good about where we're positioned today. We feel good about our ability to do growth projects, be it Capital expenditures and M and A and we kind of we feel really good about where we're positioned and expect To use it as appropriate for the right types of projects?

Speaker 2

We'll talk about this later. We executed on 2 acquisitions here in the last 6 months that are accretive, And we're feeling good about those. I called them in a previous call base hits and doubles,

Speaker 3

so it

Speaker 2

would be a smaller to midsize acquisition. So we're excited about that. One point I think that's interesting to note about balance sheet is, obviously, corn and bean prices are off the peak a year ago as is fertilizer quite a bit, But farmer selling is quite a bit less. So last year when the market rallied, we had a pretty good book on farmer business. And this year, the farmer has been Red sent to sell till he sees what his crop is.

Speaker 2

So our absolute ownership levels are lower. To me that provides an opportunity for us As we go into harvest. So I think that's a good position to be in.

Speaker 4

Very good. That's great. Thank you all so much.

Operator

Our next question will come from Brian Wright with ROTH Capital Partners. You may now go ahead.

Speaker 5

Thanks. Good morning and congrats on the results. I wanted to just take a step back and you talked about the exploring growth And merchandising of renewable diesel food stocks and also the investments in lower carbon intensity. So I just wanted to Think about it in terms of prioritization of capital allocation and how you see that, number 1. And number 2, just kind of how you see those Opportunities between organic versus inorganic?

Speaker 2

Brian, thanks for that question. It's an important clarification. So there's really 2 strategies in our overall renewables business. We have 2 paths we're taking strategically. 1 is on the We created a renewable diesel feedstock trading desk a couple of years ago and have built that business up.

Speaker 2

We continue to grow that, and our volumes get bigger each We'd like to do more in that space. And if there were bolt on acquisitions or potentially to do things in that space, We would like to do that. That won't include we were not going to get we're not going to build a $3,000,000,000 renewable diesel plant. We're talking to focus on the feedstock side. We've optimized our corn oil production with investments in our ethanol plants to feed that, and we're looking for other opportunities to continue to grow The RD feedstock, not just vegetables, but also fats and EUCO.

Speaker 2

So it's an area of growth for us. So that's one plank of the strategy. And the other plank is about our ethanol assets themselves. So we've talked before about we feel our 4 plants are very Large competitive low cost facilities, we've invested in them consistently over the years to make them that way. Now we want to do additional investments to make them lower in their carbon footprint or lower their CI scores.

Speaker 2

So we have some opportunities. We mentioned we're doing Some work right now on different energy projects in the plants as well as fermentation increases the capacity and we're working on projects For capturing carbon capturing and sequestering carbon, nothing we can announce at today's call, but things we're working on. So The 2 different planks, one is on renewable diesel feedstock. The other one is how do we make our battleships in the ethanol business stronger and lower CI, and we want to continue to focus on because we think long term, the most efficient plants with the best yields and the lowest CI scores are going to be winners. So we're just Plucking away and making those plants better through investing in them and that's where a good chunk of our capital will be going.

Speaker 5

Great. Thank you. And then just a follow-up on the pet food assets. It's 2 acquisitions and A short amount of time in that space, how to think about that? Or do you feel like you've got a footprint there that you're comfortable with or is that an opportunity as well?

Speaker 3

Yes, that's a good question. I guess what I'd say on that one, Brian, is We feel really good about the Bridge and ACJ acquisitions. They are very complementary with our existing pet food ingredient Business, we feel really good about what that brings. And just to kind of put that in context, I would say The incremental EBITDA you could think of from the combination of those 2 is probably call it $10,000,000 plus or minus On an annual basis and we'd love to do more, but we feel really good about bringing those two teams into our fold. But yes, it's a space where there's A lot of growth, a lot of there's better margin opportunities and we'd like to grow it further.

Speaker 3

And maybe Brian just to kind

Speaker 2

of hit on that a little bit more is Our stated strategy around 2 segments besides the overall grain merchandising business, which we've historically been in for 75 years, We've been pushing growth in 2 areas, pet food and food ingredients. So on the food ingredients side, we've been a long term supplier of Food Grade Corn to Chip Manufacturers. And we have added capacity and added Capabilities to those assets both in Illinois and Nebraska to have more capability in that food space. So we'd like to expand that footprint. That's a very stable, consistent supply business that we like.

Speaker 2

And then on the pet food ingredients side, we've been in that business For quite a bit of time, we want to add additional products and capabilities. But one cautious thing we have, I think you've seen in the past, pet food companies Got very high priced and some very high multiples were paid for ingredient companies and we don't want to do that. We're seeing very discipline Keep things that are inside our wheelhouse and things we know how to do and can buy at fair value. So with the case of Bridge and ACJ, we're excited about those 2 bolt On acquisitions and they fit that criteria exactly in the pet food ingredient space.

Speaker 5

Great. Thank you so much.

Operator

The next question will come from Ben Klieve with Lake Street Capital. You may now go ahead.

Speaker 6

All right. Thanks for taking my questions. First question on the renewable diesel That you discussed on the call. First of all, Brian, thanks for providing a little bit of color on the volume increases year over year. That was super helpful.

Speaker 6

I appreciate the magnitude of And I'm wondering if you can talk about your strategy within renewable diesel and in particular how your strategy is informed By various tax incentives, I mean, the renewable fuel standard changes seem to get people in the space up in a tizzy Recently, and I'm wondering if you first of all, the hot take on that and then also how changes in these incentives really formulate your strategy in renewable diesel going forward?

Speaker 2

Okay. Thanks, Ben. Very good points. I think the interesting thing for us, we're not being a soybean crusher Or an RD manufacturing, and a lot of the big players who have crush plants makes a lot of sense. They've expanded.

Speaker 2

They partnered with key Renewable diesel players, that makes a ton of sense. The point is there's a lot of opportunities besides that, right? There's much Bigger space than people really think about when you talk about the whole use cooking oil space in fats and greases and then corn oil and other vegetable oils. So we feel that's the place that it fits really well for the Andersons. So we're continuing to add on our footprint we already have in corn oil and have built out Supplies of that.

Speaker 2

So none of that really has a direct correlation to tax incentives because it's that's related more to the RD manufacturer. We're really focused on being an ingredient supplier and a diverse ingredient supplier, both from the product type as well as the geography. So that's with our focus and we think we can get a lot bigger than that. And it isn't one big huge investment. I think there'll be probably more midsized ones that we could bolt on if we can make that work well.

Speaker 2

Very different On the ethanol side, as we talked about earlier, so the 2 tax incentives under the tax code were both the 45c and 45q, there Time element there, so people are working quickly to get new technologies into ethanol plants. So that's I think that's different Because then the RD side. So we are working on that and those tax incentives make a difference to the payback of those projects.

Speaker 6

Got you. Got you. And then both Pat, both you and Brian I talked about fermentation expansion in the Renewables segment. Can you help kind of characterize the Magnitude of this that you're looking at and then also the degree to which you want to kind of expand fermentation capacity kind of around the edges of existing plants versus At entirely new facilities.

Speaker 2

Yes. I think it's the latter. So in running and The good news, I've been around these facilities for over 30 years. It's not just fermentation, it's any bottlenecks that prevent you from reaching Peak crush capacity at our facilities, in some case, one facility that might be firm capacity to get you more put through. It's a focus on yield and specifically on corn oil yield, of course, the most valuable product we have right now.

Speaker 2

So any ounce of corn oil we can squeeze out, We're doing we've put in place the TRUESINT technology at our facilities. Our last one is going in as we speak. And so the other opportunities is it's not Like an incremental X percent of capacity, Ben, that way it's more about debottlenecking facilities to make them run more consistently. So that's what we're In the middle of working on right now, how do you make them again the most efficient, highest yielding and then lowest CI. So the CI story is a longer term game, right?

Speaker 2

We're in early innings of a long baseball game here on the renewable side and lowering CI. So we just we need to play the game smart, Make good bets in these early innings periods.

Speaker 6

Got it. Very good. That makes a lot of sense. All right. Well, I think I'm in good shape.

Speaker 6

Congratulations to you all on a really great quarter. Thanks for taking my questions and I'll get back in line.

Speaker 2

Appreciate the comments. Thanks, Ben.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mike Holter for any closing remarks.

Speaker 1

Thanks, Anthony. We want to thank you all for joining us this morning. Our next earnings conference call is scheduled for Wednesday, November 8, at 11 am Eastern

Operator

Conference has now concluded. Thank you for attending today's presentation. You may now

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