Q1 2022 Otter Tail Corp Earnings Call
Good morning, and welcome to the Otter tail Corporation quarter, one 2022 earnings conference call. Today's call is being recorded and we will hold a question and answer session. After the prepared remarks.
I'll now turn the call over to the company's opening remarks.
Good morning, everyone and welcome to our call. My name is Tyler acre men and the manager of Investor Relations at Otter tail.
Last night, we announced our first quarter 2022 earnings results.
Our complete earnings release and slides accompanying this call are available on our website at <unk> Dot com.
A recording of the call will be available on our website later today.
With me on the call today are Chuck Macfarlane Otter tail corporations, President and CEO and Kevin <unk> Otter tail corporations, senior Vice President and Chief Financial Officer.
Before we begin I want to remind you that we will be making forward looking statements. During this call as noted on slide two 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 please.
Undue reliance on any of these statements are forward looking statements are described in more detail in our filings with the Securities and Exchange Commission.
Which we encourage you to review.
Otter tail Corporation disclaims any duty to update or revise our forward looking statements due to new information future events developments or otherwise.
For opening remarks, I will now turn the call over to Otter tail Corporation's President and CEO , Mr. Chuck Macfarlane.
Thank you Tyler and good morning, and welcome to our first quarter 2022 earnings call.
Thanks to the efforts of our employees Otter tail Corporation have record financial results in the first quarter of 2022.
Please refer to slide four as I begin my comments on the first quarter results.
We achieved earnings per share of $1 72, which is an increase of 136% over the first quarter of 2021 the.
The increase was led by our plastics segment, which had another outstanding quarter.
Kevin will provide more detailed discussion of our Q1 financial performance in his comments, but here's an overview.
Our electric segment increased earnings by $1 6 million or nine 4% over Q1 2021.
This was primarily due to the favorable impact of weather as well as increased commercial and industrial sales.
Our manufacturing segment earnings decreased by $1 3 million from Q1 2021.
The decrease was due to lower productivity and increased costs. Additionally.
Additionally, <unk> customers have been taking less product and they have forecasted as they are experiencing supply chain constraints from other suppliers, which is impacting the demand they have for products from bpd.
The plastics segment quarterly earnings increased $41 7 million over Q1 2021.
The expected decline in RASM in pipe prices did not materialize in the first quarter.
PVC resin production and supply did improve slightly during this period resin.
Resin prices are now expected to increase through July driven by increased natural gas prices and a strong resin export market.
We continue to grow otter tail power through capital investments in generation transmission distribution and technology projects.
We are closely monitoring and tracking supply chain issues, and inflationary pressures, which may impact all of our capital projects.
As shown on slide 10, Otter tail powers Hoot Lake Solar project is still on schedule to be completed in 2023.
Construction of the 49 megawatts solar project is expected to begin in May of 2022 mirror and on the retired Hoot Lake coal plant property.
Theres been some inflationary pressure on freight and steel costs.
We have contracted thin film panels, which are not subject to the current department of Congress circumvent review are forced labor allegations in China.
The project costs are approved to be recovered through the Minnesota renewable rider.
Our investments in who'd like solar and those identified in our integrated resource plan and other capital expenditure plans.
Provided the opportunity to meet the carbon emission reduction and renewable energy goals and targets we have set.
As shown on slide six.
Assuming forecast dispatch occurs.
We are targeting to reduce carbon emissions from our own generation resources, approximately 50% from 2005 levels by 2025.
97% by 2050.
Additionally, our owned and contracted energy generation will be more than 50% renewable by 2025.
The high performance crypto mining and related infrastructure solutions load Otter tail power announced last fall.
Third to come online in the first quarter of 2022, which helped to contribute to the favorable first quarter. The utility has.
Otter tail power has established large.
Super large general service rates in Minnesota, and North Dakota.
Having these rates in place provides the sales team with another tool to attract large new loan customers through our service territory.
The sales team continues to work on adding new loads.
From potential customers similar to the one announced last fall as well as other commercial and industrial customers.
Otter tail Power's integrated resource plan filed in September 2021 continues to move forward.
The Minnesota Public Utilities Commission hearing on the ERP is expected to be scheduled during Q3 of 2022.
As shown on slide 12, the preferred five year plan requests authority to add dual fuel capability at a story of station.
At 150 megawatts of solar at a yet to be determined site and have commenced the process of withdrawing from our 35% ownership interest.
And the coal fired Coyote station generating plant.
As reflected on slide 15, we are projecting a five 9% annual rate base growth over the 2021 to 2026 timeframe.
From 2022 to 2026 Otter tail Power's forecasting capital expenditures of $978 million.
Rider recovery is expected for nearly half of the forecast capital spend.
As shown on slide 18, Otter tail power has maintained lower rates than the national average.
Otter tail power continues to monitor fuel costs and works to provide low cost generation for its customers through its own generation fleet as well as market purchases.
Turning to our manufacturing segment <unk>, our contract metal fabricator.
The challenge to adjust production to meet the changing OEM customers delivery requirements caused by supply chain issues. They are experiencing.
These adjustments resulted in reductions and production efficiencies.
Steel prices peaked in the fourth quarter of 2021 and they remain high.
Even though there were some price declines early in the first quarter of 2022.
<unk> increased in March.
We remain focused on receiving material on time to meet customer demand and passing through these higher steel prices to customers.
T O plastics had increased sales prices and volumes due to strong horticulture.
Sector sales, which led to increased operating revenues.
Our plastics segment continues to deliver extraordinary results.
Market conditions in Q4, 2021 continued into first quarter of 2022 with demand for PVC pipe remaining strong.
Sales prices continued to increase related to strong demand for PVC pipe and limited PVC pipe inventories.
We continue to monitor the current inflationary environment and its impact on our business we.
We are focused on improving the pricing of our products.
The pass through of pricing surcharges, where appropriate managing labor operating and maintenance expenses and updating capital budgets in light of increasing construction and equipment costs.
Ill now turn it over to Kevin to provide additional detail on our financial performance for the first quarter.
Thanks, Chuck and good.
Everyone.
We had a great first quarter with consolidated revenues up 43% and net earnings up 137%, which primarily were driven by the plastics segment or.
Our electric segment is a well run fully integrated electric utility with a growing rate base is expected to provide continued earnings growth with supportive regulatory environments.
A demonstrated ability to successfully execute.
Our scale capital projects.
Our manufacturing and plastics segments provide additional earnings growth and are well positioned for the future.
The additional earnings and cash flows generated by the plastics segment in 2021.
And expected to be generated in 2022 <unk>.
Provide additional strength to our already strong credit metrics liquidity and capital structure.
Our operating cash flows and the liquidity available under our credit facilities provide us additional opportunities to invest in our businesses.
Examples of this are a $20 million discretionary contribution made to our pension plan in February .
We acquired land in the fourth quarter of 2021 adjacent to our vinyl Tech facility.
This will allow us to execute on a potential facility expansion.
To improve plant operations, and logistics and increase plant capacity.
We currently expect the cost of this project to be up to $50 million for phase, one and an additional $7 million for a phase II expansion.
The phase II expansion would be outside the current five year Capex plan.
Phase one would add one extrusion line, which would increase our plant capacity by 26 million pounds.
In phase II would add another extrusion line further expanding capacity by an additional 26 million pounds.
We're also exploring additional capacity expansion at our BCD Dawsonville, Georgia facility.
To support continued organic growth opportunities with OEM customers served from that location and eliminate our current offsite leased warehouse.
We also expect to have additional transmission investment opportunities.
Up to $250 million, a majority of which is outside the current five year capital plan.
Slide 27 reflects availability under our lines of credit as well as our credit ratings for Otter tail Corporation, and Otter tail power company.
Standard <unk> Poors did revise its outlook for Otter tail Corporation from negative to stable during the first quarter.
And as shown on slide 29, our five year financing plan calls for the issuance of long term debt to primarily.
We support the electric segments rate base growth.
And there is no need for any external equity in the financing plan.
Please refer to slide 26, as I provide an overview of our first quarter 2020 to segment earnings.
The electric segment net earnings increased $1 $6 million or nine 4% over the first quarter of 2021.
The increase in earnings was primarily driven by the favorable impact of weather in the first quarter of 2022.
As well as increased retail sales volumes from commercial and industrial customers.
These items were offset by higher O&M costs related to.
An increase in operating costs from <unk> and the story station.
Both facilities were fully operational in the first quarter of 2022 compared to 2021, when they were still ramping up from recently going into service.
Increased incentive compensation costs related to current year financial and operational performance increased travel costs, resulting from the east Covid restrictions.
An increase in insurance costs, and depreciation and amortization expense also increased due to a story a station being placed in service in February of 2021.
Net earnings for the manufacturing segment decreased $1 $3 million compared with the first quarter of 2021.
The reduction in earnings resulted from a 5% decline in sales volumes at BCD as a result of our customers delaying or adjusting shipments in response to supply chain challenges they are experiencing from other suppliers.
Gross profit margins were negatively impacted by.
By lower productivity and increased costs.
The unpredictable customer demand created some labor challenges, which led to lower production efficiency.
We did experience an increase in operating revenues related to higher steel prices, which were passed through to our customers.
T O plastics also contributed to the growth in segment operating revenues.
This was primarily due to improved product pricing and sales volumes.
However, the increase in operating revenues was partially offset by lower gross margins due to the impacts of product mix and increased maintenance and freight costs.
Net earnings from the plastics segment increased $41 $7 million compared to the first quarter of 2021.
The higher net earnings resulted from improved sales prices of PVC pipe compared with the first quarter of 2021.
The increased sales prices exceeded increases in the cost of PVC resin.
Continued strong demand for PVC pipe products and limited PVC pipe inventories supported the rising sales prices.
These conditions were a continuation of the market dynamics experienced throughout 2021. Additionally.
Additionally.
The industry dealt with supply constraints of additives and other ingredients used to make PVC pipe.
This prevented us and competitors from being able to build inventory levels.
The expected declines in the resin and the price of PVC resin in the first quarter of 2021.
It did not materialize and resin prices started to increase in March due to increasing feedstock prices and stronger than expected export markets.
Our corporate costs increased primarily due to higher employee benefit costs in the first quarter of 2022.
Our business outlook on slide 29 reflects a 2022 earnings per share range of $5 15.
The $5 45.
Compared to the $3 78 to $4 eight.
We previously issued.
The midpoint of the revised guidance is $5 30, a share which reflects a 25% growth rate from our 2021 diluted earnings per share of $4 23.
We are maintaining our February 14, 2022 guidance for our electric and manufacturing segment.
We're increasing our plastics segment guidance and adjusting our corporate cost center guidance.
We are now expecting our 2022 net income from the plastics segment to be higher than 2021.
As mentioned the first quarter of 2022 performed ahead of our plans as market conditions from the fourth quarter of 2021 continued into 2022.
While PVC resin suppliers improved.
The price of PVC resin is now increasing driven by increased natural gas prices and the events related to the Russia, Ukraine conflict whichever.
Resulted in increasing global resin prices.
This has created an environment for U S resin producers to raise domestic prices are rising from strengthening export markets for PVC resin.
There have been supply constraints related to additives and other ingredients used to make PVC pipe.
This has prevented the PVC pipe manufacturers from being able to build inventories.
The demand for PVC pipe continues to be strong, resulting in sales prices of PVC pipe continuing to increase.
The updated guidance still reflects lower volume of pounds of pipe sold in 2022 drew.
Driven by the extremely low levels of finished goods inventory at the beginning of the year and the inability to build inventory levels during the first quarter.
We currently expect the market conditions being experienced to continue through the second quarter of 2022.
Resin prices are currently expected to decrease after July .
Given this and concerns over general economic conditions, we expect the last half of 2022 to see a decline in profitability as compared with the first half of the year.
But we could see further upside to our further.
Our current year earnings guidance should the market conditions.
Should the current market conditions continue beyond the first half of 2022.
Our corporate costs are now expected to increase in 2022, driven by higher incentive compensation costs.
<unk> from our strong financial performance.
And expected contribution to our foundation of $3 million, which is consistent with the 2021 contribution.
We also expect to have lower gains on our investments in 2022 as compared with 2021.
Our 2021 earnings mix was 59% from our manufacturing platform.
It is now expected to be 65% in 2022.
This change from our long term goal of 70% electric and 30% manufacturing platform.
Continues to be driven by our plastics segment and the unique market conditions in 2021 and 2022.
We currently expect to see a higher level of earnings from our manufacturing platform into 2023.
We then expect a higher level of earnings to be generated from our electric segment thereafter.
As shown on slide 33, we expect to deliver total shareholder return of 8% to 10% over the long term.
<unk> have a 5% to 7% compounded annual growth rate in earnings per share using 2020 as the base year, along with our current dividend yield.
Looking forward, we would expect to grow the dividend consistent with our long term earnings per share growth rate of 5% to 7%.
Our business model continues to serve us well and we remain 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.
We are now ready to take your questions.
Thank you ladies and gentlemen, if you have a question. Please press Star then one on your Touchtone telephone you take question has been answered or you wish to remove yourself from the queue. Please press the pound key.
We have the first question comes from the line of Chris <unk> of Siebert Williams. Your line is now open you may ask your question.
Hey, guys how are you.
Chris.
Chuck can you talk about the PVC expansion that you have in the works what goes into that first phase what are the common elements that make that much more expensive.
Phase.
Sure.
No.
The first consideration is we had to buy additional land.
Uh huh.
Of approximately doubling the acreage we have with the existing site.
And a lot of the.
Costs for.
Our second facility and other upgrades that we're going to make at the facility even.
Even without <unk>.
<unk> expansion.
It will be included in that in that first section so.
The second phase.
Has much fewer just really the line production.
Of our new line.
All the other infrastructure being in place already.
Okay.
Chuck can you also talk about.
The.
The equity build that you are getting from this extraordinary.
PVC profitability can you just sort of.
Talk about what your thoughts are and what you might use that for.
Sure.
We've used.
Made contributions to our pension.
Plan, we have.
We're going to use it to.
Facilitate organic growth in both the utility.
And.
The manufacturing businesses to date.
We're continuing to look at other alternatives or options for that cash.
Okay.
As far as your outlook for the second half of the year for plastics.
Obviously, we've got some extreme inflation in energy prices at the moment, but what is it that you see on the horizon that would make you think that.
Sort of world.
Supply demand dynamics will change very much in the second half of the year.
Yeah, well I think we just see.
The increase in interest rates potentially putting some pressure on on housing.
Starts or new home construction, we haven't.
Seen that to date, we do think that the supply chain issues that really drove the.
The shortages of first resin additives and other things.
Are there the global supply export.
As you can imagine energy costs in Europe to make resin have gone up significantly in solar.
The value proposition of <unk>.
Buying it from the U S has moved up and Thats driving overall.
PVC resin costs up depending on.
Wow.
Conflict.
Whether it continues or how the energy balance and in.
In Europe .
Days out I think it could impact that going forward in the second half of the year.
Okay, I guess I would add to that Chris This is Kevin that the.
The current view from.
Chemical data.
Industry sources forecast resin prices that <unk> now forecasting that resin prices are going to start to decline. After July that usually is an indication that we will see sales prices start to decline as well.
So that's the current view that's baked into our thinking obviously in this world we're in that could change, but that's a.
A factor we're looking at as well.
Okay.
For BTG.
Are you looking for improvement in your OEM demand is there supply constraints improve.
Throughout the year is that your basic outlook.
Yes, yes.
Is there.
I guess a similar type question what is it that gives you confidence in that throughout the year.
So we have China has.
Significant lockdowns and Theres not much shipping taking place there. So what is it that makes you think that.
Supply constraints are going to continue for a while.
Well, we started to see some improvements.
In the supply chain.
And our customers from some of their other suppliers.
And so based on that some of the conversations are folks are having with our customers there looks to be over the next rest of the year. Some loosening up of the supply chain in terms of current performance here, we're seeing some of that as our.
Sales production here.
In the second quarter has been improving.
So there are some indicators, while it's certainly a risk.
Still for the year, we're starting to see some things that indicate that there is improvement in that piece of the supply chain.
With.
Not also expected higher interest rates.
Mentioned.
Steel prices.
Having some price sensitivity for customers and some of those end markets as well.
Yes, I mean, we're looking at clearly rising interest rates.
Inflation certainly are you would think wouldn't bode well for the consumer the consumers balance sheets. However are still pretty healthy their savings rates are strong.
There is a fair amount of backlog built up.
The Oems, particularly of Polaris.
For recreational vehicle equipment in that.
Pull through our customers continue to to buy that product when it becomes available to them.
So yes, it's a risk we're certainly watching it and considering it in our in our.
Sure.
Forecasts, but as we look today.
Based on affirming the guidance reaffirming the guidance for the segment.
We think that there is going to continue to be that kind.
Kind of pull through as supply chain improve the customer or the consumer I should say is still pretty healthy.
And but we're watching it it's a risk that we watch and monitor.
Thinking for 2022.
It's.
We're still seeing pretty good customer purchase of product one that product becomes available at our customers.
Do they still I assume also have some limited inventories as well that they need to replenish.
Yes.
Okay.
And one last thing.
Tax benefit.
<unk> what was that about.
The tax benefit for corporate is what youre, referring to yes, yes.
Yes, so when we look at our.
When we're looking at our budgeted or forecasted effective tax rate.
What happened was we were asking the utility too.
Kind of based on their level of earnings.
Book, an effective tax rate are off our manufacturing companies are booking it as if they are on a stand alone.
<unk>.
The effective tax rate and then when we prepared our consolidated tax return chart, sorry consolidated tax provision here at the first quarter of course, we had a much higher level of earnings.
Across the organization, which then resulted in a larger benefit on a consolidated basis.
Coming through on the effective tax rate.
Okay. Thank you very much I appreciate the color guys.
Yes.
Thank you. The next question comes from the line of Tim Winter of Gabelli. Your line is now open you may ask your question.
Congratulations guys on extra another extraordinary quarter.
I guess I'm going to have to learn a little bit more about the PVC business.
And on that note can you maybe talk a little bit about the the landscape.
The PVC business weren't as vinyl tech and northern pipe fit into the overall size and scale.
Of that market and then.
More importantly.
What are some of the opportunities that this environment is presenting for year company Mimi, meaning.
Can they.
Consolidate smaller companies or are there are larger companies that are that are interested in and northern pipe or vinyl tech.
Yes, Tim Thanks for the comments this is Kevin.
There are certainly as we look across the.
Landscape of competitors.
We're.
Probably in the <unk>.
Half of the competition upper.
In terms of capacity size, there is a number of smaller players out there.
We certainly look at those.
Competitors in terms of size and capabilities there hasnt been much of a fit for us just because of the geographic locations that.
Don't necessarily make sense for us to look at and what we know about those parts of.
The country and the kind of the business those competitors would play in.
There is large larger competitors out there that certainly.
Probably are seeing our performance in looking at that and potentially could be have interest in is nothing that we're certainly aware of today.
But thats always certainly a possibility that could be out there.
Because there are a couple of larger publicly traded businesses in this space that.
I have expressed.
Interest in growing there.
Their business and certainly that could be a.
At some point in time, there could be a knock on the door, but nothing that we could certainly have seen to.
To date.
Maybe from you.
You start with a question on the overall size.
Break it into rigid pipe.
Area for the for the U S which includes.
Electrical conduit PVC.
PVC, but in.
In that space, we're probably 8% to 10% of the market.
Of total pounds of.
PVC pipe.
Again includes this.
Component of electric conduit in addition to water and wastewater.
Home PVC.
Been spicing in those types of things.
And maybe just.
Kind of repeating.
Okay. Thanks for that color.
Yes, Tim This is Kevin just maybe this is a little bit of.
A repeat of my earnings script comments, but in terms of an opportunity that we're looking at is just the expansion there.
The organic expansion of biotech in Phoenix, we did buy that land in the fourth quarter of.
'twenty one adjacent to the facility and now we're looking at further expansion of the property through an upgrade to our existing.
Office space and facilities as well as an additional extrusion lines. So that that's that's an.
Ganic opportunity for us here that we're working on.
Okay and just.
Two follow up questions to that one is.
Is the potential capital.
For the.
Spansion is that in.
The table on slide 31 or is it not included yet.
No Tim that would be in there.
<unk> two piece of course wouldn't be in there because thats outside the five year plan, but the phase one is predominantly covered in the current five year plan.
Okay.
Okay, and then can you just remind me how you guys consider your portfolio of businesses. There I believe you have an annual review process or is there.
Something more frequent than that.
Tim This is Chuck we have an annual review process, which we are in.
In <unk>.
All of them now and will occur over the next several months.
And we look at when we looked at our business mix, we looked at our portfolio.
Criteria.
We looked at.
Some of the parts.
Our valuation.
The value of each independent business at that time.
Okay, great well again congratulations.
Extraordinary numbers.
Thanks.
Thank you.
Thank you next question, we have the line of Sophie Karp of Keybanc. Your line is now open you may ask your question.
Hey, guys. Good morning, congrats on the quarter.
Thanks.
Yeah, So Jamie.
PVC.
Deterioration I guess for those of us.
The cameco.
Could you provide a little bit more color on what's causing particularly the spread expand in rates. So I think we're going to get the commodity situation my guess and such.
But.
Specifically the spread so the resin price can go up and down but you've seen this extraordinary expansion the spread the PVC prices, what kind of dynamic in the value chain is driving that and why do you expect that to change when commodity prices come down I guess, that's my first question.
Yeah, So Kevin I'll start with that I think what we're seeing in terms of this extraordinary increase in sales prices as it's the demand that has been driving it. If you look back to when these resin shortage has started back in February of <unk>.
February of 'twenty, one when we had the.
The severe cold weather snap in the country.
The resin.
Manufacturers declared force majeure and puts constrains on resin supply all the demand never went away and that started to drive sales prices for the PVC pipe up and it just continued.
Throughout 'twenty, one and was even further exacerbated by the hurricane.
Ida which.
Kind of.
Restarted another concern over supply.
And while us and.
PVC pipe competitors, we're certainly getting resin.
Demand was so strong that sales prices just continued to move up.
And that just continued through through 'twenty, one we expected those.
<unk> two.
Continue into the first quarter of 'twenty two.
New.
Piece.
Supply chain challenges popped up in the first quarter with these additives, particularly stands 10 stabilizer.
Is used in the manufacturing process and it helps to prevent the pipe from discolor ring.
There was a shortage of 10 stabilizer in the first quarter and then that caused.
Couldnt really.
Make as much PVC pipe with the 10 stabilizer shortage.
Still demand is strong sales prices continued to move up.
PVC pipe converters like ourselves, we're able to find an alternative product.
Replacement of the Tin stabilizer that product is excepted to make PVC pipe in terms of specifications.
Slow the production capacity of the lines down somewhat based on the nature of the product and so it continued to.
Prevent converters from raise are building more inventories.
Yes.
The end users continued to have a strong demand for the product to continue to build their projects that they are working on and that has just continued to drive up the sales prices here.
Through the first quarter.
Our visibility into the second quarter. The reason, we expect that with are starting to see a forecasted decline in resin prices. After July is.
Historically as resin prices start to decline.
<unk> sales prices because.
The end users the distributors and then the construction contractors that are using the pipe.
Recognize that there is a decline in raw material prices and would expect to see them sales prices decline as well.
So history that has proven to be true throughout history, and that's what we're expecting based on the information we have today could happen in the last half of the year.
Thank you that's very helpful color I appreciate it so basically what you're saying is if there's a lot of pent up demand.
For our final product.
Additional material.
The material supply challenges.
Driving this shortly.
Glenn let me commodity RASM.
Basically more available right now.
So if we entertain those thoughts right I'm just kind of curious if you've given that you're close to the situation, where maybe there's a dislocation becomes somewhat sticky right to the upside and the relative size of your manufacturing platform business.
Steve.
30% for a longer period of time a CRO.
The Bayou would that situation then.
What's on that.
As Sofia, Kevin again.
Sure.
Chuck mentioned the portfolio review process, we're going through we're in the midst of our strategic planning process.
Today and expect to continue that over the next couple of months, we have our two day planning session with our board in June .
And we're looking at is we're looking at our updated financial plans Theres certainly.
New market information that has recently come out from <unk>.
Independent sources that follow the PVC.
Industry that starts to show that over the longer term, we could expect to see.
Stronger prices, both on the resin side and on the sales side and.
Kind of a new information to us and we're taking all that into account.
Our updated financial plans to see what that looks like in terms of earnings mix going forward.
I think we'll be able to have a better view for you as a part of our second quarter earnings call. Once we get a chance to.
On a complete the strategic planning process review that with the board.
See what these this kind of this new industry information. That's recently come out how we think that affects us over the long term.
Thank you.
That's all from me.
Thank you again, if anyone would like to ask a question. Please press Star then one on Touchtone telephone again Dolby Star one on your telephone keypad.
The next question comes from the line of Brian Russo of Sidoti. Your line is now open you may ask your question.
Yes, hi, good morning.
Okay.
Hey, so when we look at.
Obviously the.
Meaningful outperformance of the plastics and the first quarter and your comments.
Regarding the second half of 'twenty two versus the first half of 'twenty two just from a quarterly dispersion should we.
Yeah.
Kind of assume that the second quarter.
Earnings and margins in plastics match.
What you reported in the first quarter.
Yes, Brian This is Kevin Thats, a fair assumption.
Okay. So then we can almost back in to what the second half of 2022 would look like which would be maybe 40 plus million.
Earnings.
And I'm trying to kind of triangulate.
What normalized.
Full year earnings might look like in plastics and I think in 2020.
Net income in plastics was $27 million.
Are you kind of revisiting the $27 million.
Kind of a normalized.
Market in.
And spreads for that business.
Going forward or is that still.
Something we should be mindful of when looking past the significant outperformance in unique market dynamics of 2022.
Yes, Brian Kevin again.
We're really looking at that.
That kind of a longer term view.
Like I mentioned, we're we've started recently to see.
Some new in the industry information coming out about views of where resin prices are kind of headed over the next five years, what impact that has on margins and sales prices and so we're starting to look at that understand it and as we're updating our five year financial.
Plans here, how do we think that affects the earnings mix.
Organization.
And what is that longer term view of kind of what normalized earnings for plastics could be.
So yes, we are.
Telling you I guess I think we will have more information for you sometime we would expect hopefully to have a better update at the second quarter earnings call. Once we get a chance to.
Put all this information together together get through our strategic planning process review that with the board.
We expect to have further updates for you.
Okay.
Yes.
This longer term view has been contemplated in respect to your planned vinyl tech facility expansions right. So you clearly have a bullish view.
On the plastics market.
Yes.
We clearly have opportunity on the southwest part of the countries.
Very extremely populated extremely growing lots of construction.
Construction activity that happens in that part of the country and we just think that there's some good opportunities one to just improve the plant operations and logistics and make that facility more efficient than it is today.
Then we also have the opportunity to expand that.
One extrusion line and the first phase that's 26 million pounds.
<unk> line I referred to.
Okay, and then the <unk>.
Reference to the <unk> utility manufacturing mix.
Correct me, if I'm wrong, but did you say that.
You won't.
Turn to that level in 2023, but thats the longer term mix.
Well, what we said is we expect 2023 to continue to be stronger earnings mix towards the manufacturing platform.
And that after that we would expect to see the electric segment earnings return to a higher level of the percentage of total earnings, but we didn't give a specific percentage.
Brian and Thats again, what we're working through with this updated strategic plan.
How that affects the financial plan and earnings mix going forward.
Understood and then just lastly on the regulated utility in the IOP.
Are you is there a upward pressure on the.
The dollar amount of investments you have included in your Capex.
Based on supply chain issues and inflationary.
Pressures.
Hi, Brian This is Chuck yes.
We have put some but not we have not.
Put in new numbers on.
Potential increases inflation on transmission or the.
Solar installation in the out years.
And so.
We are sort of locked up the numbers on the.
The Hoot Lake solar which is the near term projection.
<unk> got all of them.
Major contracts in place.
And we do have the inflation worked into those.
Okay, great. Thank you very much.
Thank you.
Thank you I'm showing no further questions at this time I would now like to turn the conference back to Mr. Chuck Macfarlane Otter tail corporations, President and CEO Sir.
Thank you for joining our call and for your interest in Otter tail Corporation with continued execution on our rate base growth and efficiency improvement opportunities at the utility and emphasis on operational and commercial performance and our manufacturing platform. We remain confident in our ability to deliver long term shareholder value.
Based on our strong first quarter performance and our updated view for the remainder of the year. We are raising our 2022 diluted earnings per share guidance to $5 15 to $5 45.
From our previous guidance of $3 78 to $4 eight.
We appreciate your interest in Otter tail Corporation, and we look forward to speaking with you next quarter.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you all for participating you may now disconnect.
Okay.
Okay.
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Okay.
Yes.
Okay.
Sure.