Q2 2022 Andersons Inc Earnings Call
Good morning, and welcome to the Andersons 2022 second quarter earnings Conference call.
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I would now like to turn the conference over to Mike Holter. Please go ahead.
Thanks, Joe Good morning, everyone and thank you for joining us for the Andersons second quarter earnings call. We have provided a slide presentation that will enhance today's discussion. If you are viewing this presentation via our webcast the slides and commentary will be in sync.
This webcast is being recorded and the recording and the supporting slides will be made available on the investors page of our website at Andersons, Inc. Dot com shortly.
Please direct your attention to the disclosure statement on slide two as well as the disclaimers in our press release related to forward looking statements certain information discussed today constitutes forward looking statements that reflect the company's current views with respect to future events financial performance and industry conditions. These.
Forward looking statements are subject to various risks and uncertainties actual results could differ materially as a result of many factors, which are described in the company's reports on file with the SEC. We encourage you to review these factors with.
This presentation and today's prepared remarks contain non-GAAP financial measures reconciliations of non-GAAP measures to the most directly comparable GAAP financial measure are included within the appendix of this presentation.
On the call with me today are Pat Bowe, President and Chief Executive Officer, and Brian Valentine Executive Vice President and Chief Financial Officer.
After our prepared remarks, we will be happy to take your questions I will now turn the call over to Pat.
Thank you, Mike and good morning, everyone.
Thank you for joining our call. This morning to review our second quarter results.
We're thrilled to report this outstanding all time record quarter.
With all three of our segments, providing significant double digit improvement over the second quarter of 2021 we surpassed our prior quarterly record.
Renewables in plant nutrient also had year over year increases last quarter.
Trades first quarter of 2022 results lagged a strong 21 first quarter, but enabled us to accumulate grain ownership positions at good values.
With this Q2 result trade has rebounded strongly and nearly equaled their 2021 year to date results.
Trade group results reflect the corn and bean basis appreciate appreciation that we expected would occur after the Ukraine or impact on futures prices in the first quarter.
We had ownership in our grain terminal assets as earnings space income.
We had very strong results from our Midwest truck grain merchandising business.
Our food and specialty ingredients business lines also delivered strong results in the quarter.
Of note was our UK subsidiary feed factors.
Renewables had a record quarter, our ethanol plants delivered strong results from good overall margins.
We once again had good results from third party merchandising of ethanol low Ci renewable feedstocks and other co products.
We remain positive on the outlook in renewables.
Nutrient followed a record first quarter with another very strong quarter, we completed a favorable spring application season that included solid margins that more than offset volume decreases in our agricultural product lines.
Our well positioned inventory and good execution kept products flowing to customers in this supply constrained environment.
I'm now going to turn things over to Brian to cover some of our key financial items. When he's finished I'll be back to discuss our outlook for the remainder of 2022.
Brian .
Thanks, Pat and good morning, everyone. We're now turning to our second quarter results on slide number five.
In the second quarter of 2022, the company reported adjusted net income from continuing operations attributable to the andersons of $82 $2 million or $2.39 per diluted share.
This compares to $41.6 million or $1.26 per diluted share in the second quarter of 2021.
Gross profit increased 41% for the quarter exceeding $230 million.
Adjusted EBITDA for the second quarter of 2022 was $169 $3 million compared to adjusted EBITDA of $103 million in the second quarter of 2021.
Both of these measures exclude discontinued operations.
Trailing 12 months adjusted EBITDA was $412 million.
Our effective tax rate varies each quarter based primarily on the amount of income or loss attributable to the noncontrolling interests.
We recorded taxes for the quarter at a 13% effective tax rate.
We are now forecasting our full year effective tax rate between 18 and 21%.
Next we'll move to slide six to discuss cash liquidity and debt.
We generated quarterly cash flow from operations before changes in working capital of $134 $6 million in the second quarter of 2022 compared to $93 $1 million in 2021.
Hi, relative commodity prices and business growth are the primary causes of our continuing higher working capital and related short term borrowing levels when compared to the second quarter of 2021.
The short term debt balance of $1 2 billion at June 30th is supported by readily marketable inventories of a similar amount and represents a $300 million reduction since March 31 2022.
At the end of the second quarter, we had available short term borrowing capacity of over $1 billion on our main credit facility.
We continue to have good support from our banks as they understand the key role that we play in the North American egg supply chain.
We continue to take a disciplined approach to capital spending, which we expect will be approximately $100 million for the year about half of which will be related to maintenance capital.
Our long term debt to EBITDA currently is about one five times, which is well below our stated target of less than two and a half times.
We continue to evaluate growth projects in our core agricultural businesses and invest in those that meet our strategic and financial criteria.
We also have an existing board authorization for a share repurchase program of up to $100 million and expect to begin using this authorization.
One other item of note just after the end of the quarter, we closed on the sale of the assets of the rail repair business for $55 million.
Now, we'll move on to review of each of our businesses beginning with trade on slide number seven.
Trade reported adjusted pretax income of $24 $4 million compared to adjusted pre tax income of $14 $1 million in the same period of 2021.
The food and specialty ingredients business had a really strong second quarter nearly doubling gross profit from the same quarter in 2021.
Trade more than recovered the mark to market basis losses that we highlighted in our first quarter comments as grain futures prices stabilized and basis values are appreciated during the second quarter.
In addition, our wheat ownership is now earning space income for our grain terminal assets.
Our merchandising businesses also improved there quarter over quarter results.
Currently crop conditions in our key draw areas are slightly better than USDA national averages.
Generally our eastern grain belt locations are seeing better locations, while our western locations are feeling some negative impacts from the extreme heat and drought conditions.
With global supply disruptions and the yield reductions could be significant and will continue to keep this market volatile.
Trades adjusted EBITA for the quarter was $46 5 million up from adjusted EBITDA of $32 $7 million in the second quarter of 2021.
Moving to slide number eight.
Renewables second quarter pretax income attributable to the company of $45 $9 million was nearly double the second quarter 2021 pretax income of $23 $5 million.
Our renewables segment results were very strong the best quarter ever for this segment.
Margins in our ethanol production facilities were very good and corn oil values remained high.
Our results also reflect the reversal of nearly $18 million in prior mark to market losses.
Together with some additional mark to market gains.
Third party ethanol DDG and renewable diesel feedstock merchandising activities also contributed to the strong quarterly results.
Finally second quarter earnings also include our $8 9 million dollar share of the USDA Biofuels producer recovery program distributed to our plants.
We received a total of $17 $6 million with the difference being our ethanol plant partner's share.
Renewables recorded EBITA of $85 $7 million in the second quarter of 2022 compared to $47 $2 million in the second quarter of last year.
Turning to slide nine.
The plant nutrient business reported pre tax income of $38 $3 million in the second quarter, which is $14 $3 million higher than the second quarter 2021 pretax income of $24 million.
Well positioned inventory and good margin per ton in our agricultural product lines more than offset volume declines.
Good support from our suppliers allowed us to continue to serve our customers during the busy spring application season.
While north American fertilizer prices remain historically high they have declined from the peak price levels that occurred in late March.
Plant nutrients EBITA for the quarter was $46 $8 million, an increase from $31 $6 million in the second quarter of 2021.
And with that I'll turn things back over to Pat for some comments about our outlook for the second half of 2022.
Thanks, Brian .
We believe that our AG business outlook remains strong.
We expect that global market fundamentals, including supply chain disruptions will exist for some time keeping commodity prices relatively high.
With this backdrop. It is important that North America continues to produce abundant crops in order to offset the conflict related shortfalls from the Black Sea and recent weather related crop reductions in Europe .
Our trade business outlook remains positive.
Worldwide supplies are projected to be tight through the 2023 harvest and we're pleased with our ownership positions at good values.
Storage income has returned for our wheat ownership.
Currently we're very focused on growing conditions in North America.
<unk> for customer demand in our merchandising business and supporting our farmer customers grain marketing plans in these volatile markets.
Our international team is meeting the challenge of finding additional sources of supply amid a more complicated logistics due to the ongoing conflict in Ukraine.
Our Swiss trading team added last year has managed very well in these volatile markets.
We're investing in our north American facilities to provide better service to customers and meet their changing needs as well as continuing to evaluate acquisition opportunities in our pipeline that align with our strategy.
We know it will be challenging to match last year's outstanding second half results and our trade group as we had unusually strong third quarter elevation margins in certain regions.
We are however, preparing for a good harvest in our dry areas that should bring us good merchandising opportunities.
In our renewable segment increased ethanol exports are favorably impacting overall margins, we believe that our eastern ethanol plants are favorably located with expected lower corn cost through the fall well western plants are facing much higher corn basis.
We continue to see strong demand and good values for co products, particularly distillers corn oil, which supports our overall margins.
In addition, our renewable diesel feedstock merchandising business is performing well and adding to our results.
Board crush margins are favorable through the third quarter of 2022, and our outlook for the full year remains positive.
On the technology and innovation front, we recently announced an agreement with true separation technologies to commercialize their distillers corn oil refinement technology.
Our first module is being operated at our Denison, Iowa ethanol plant with excellent results and we will be installing additional commercial modules at our four other ethanol plants.
We will also provide the technology, along with our marketing services for corn oil to other ethanol producers.
Our plant nutrient business had a great finish to the spring application season.
With growers focused on the upcoming harvest our third quarter off season results are typically lower.
While we have seen some lowering of prices continued strong global demand and disruption should keep prices higher than the historical averages.
It remains uncertain, how the fourth quarter will play out strong farm income may drive purchasing decisions, while overall price levels could cause farmers to delay fertilizer purchases.
Overall, we're excited about our prospects for growth and the continued strong agricultural market fundamentals.
We remain committed to adding value for our customers managing risk and operating safely and efficiently.
Our strategy is focused on our key role in serving the needs of our customers in the North American AG supply chain.
With our strong balance sheet sustainable cash flows and strategic focus we expect to be able to grow profitably in these exciting AG markets.
Our pipeline contains a mix of capital projects and M&A that is centered around our grain renewables and fertilizer segments.
I'm very proud of our team and for our first half accomplishments and excited about our outlook for the balance of this year and growth prospects for the future.
With that I'd like to hand, the call back to Joe and we'll be happy to entertain your questions.
We will now begin the question and answer session.
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Please limit yourself to only a couple of questions and if you have more please re queue. At this time, we will pause momentarily to assemble our roster.
Our first question will come from Ken Zaslow with BMO. Please go ahead.
Hey, good morning, guys.
Good morning, Ken.
Couple of questions.
You alluded to the crop situation. It seems like the crop I mean, there might be a little bit down yield what is there any cause for concern.
In terms of how you think about how it's developing.
And in particular, given your asset it seems like you guys are in the right place to be able to collect corn.
Can you just give a little thought process of it.
Yes, that's a good question a good point of reference Ken because of crops improved a little bit with the government report that.
The yield was 174, nine USDA number and but conditions in the far west have been really impacted by.
Dry and hot weather, particularly impacting now into Missouri, and Kansas and Nebraska.
As you know most of our major storage asset assets are in the east.
Those conditions have actually improved in some cases, we feel really good about Illinois, Indiana, Ohio, Michigan assets and while it won't be a record production the crops look good.
Outlook on the forecast will be important here. The next month, but we feel real good about the position of our assets and the corn.
Soybeans tributary to those assets.
Yes.
Can you talk about also my second question is can you talk about the progress you're having in your trading businesses bulkier Swift as well as the renewable diesel whether renewable of.
Renewables side.
I'm trying to play out.
Sure, Yes, good point.
We mentioned before on calls we started a renewable diesel trading desk, well over a year ago, and that's based off our corn oil production volume and also sourcing other Cornwall and other vegetable fats and greases, we've been able to grow that business.
Theres, a very bullish outlook for demand.
Renewable diesel feedstock.
I mentioned in my comments, we've added a technology.
With <unk>, our technology provider do we own the license to sell to others. So we'll not only be doing it at our own plants, but we'd like to extend that to others in the industry that further cleans up corn oil specification that can be then chip directly and not have to be treat treated at an R&D facility.
So we think Thats a good technology and we're also looking for other areas, where we can grow and the overall renewable feedstock space. So it's and it's an exciting time for that segment and we think Thats a good area for our business to grow.
The other part of the question was on.
Yeah. So Ken this is Bryan you had asked about Swiss and what I would say is our Swiss office and also even the other acquisition bolt on that we had last year that we would now call southwest feed I would say those are performing about as expected. So they're kind of on track and performing in line with the expectations, We had and I wanted to compliment the team there obviously, we do.
Shipments into Africa, Middle East and a lot of those supply chains were disrupted in.
And moved around we work very closely with our customers to supply them and the team has adapted and done very well.
And we're excited to see some of the.
Multilateral agreements to try to get trade flows out of Odessa and get the ports opened to help supply those very much in need countries in the middle East and Africa. So that's a bright spot for our industry overall.
But our team is in the in Switzerland has really done a nice job.
And can I just ask one more the new technology can you talk about like what type of return characteristic how does that change.
Not this year, but like in the next year to two years, how does that add incremental EBITDA and then I'll leave it there I appreciate the time zones.
Sure and.
Cornwell, Ken right now just at purification step can add an additional 10 cents per pound.
Prices and we've demonstrated that in proven that with customers. So we want to quickly build those modules again. These are not huge big plants. These are additions to our existing plants. They are actually on skids that you bring into facility. So we plan to get those built out and it made commitments for capital to build at our.
Other existing plants and also to be able to sell those to other corn oil producers with that we would provide our oil merchandising experience I just talked about earlier the renewable diesel place so we'd like to build our book of corn oil and that would add additionally to.
Bottom line profits for us.
I appreciate it thank you guys and congratulations on a great quarter.
You very much.
Yeah.
Our next question will come from Ben <unk> with Lake Street Capital markets. Please go ahead.
Alright, Thanks for taking my questions and congratulations on a really great quarter here.
Wanted to kind of focused in on the kind of noncash elements of the.
The quarter and I guess over the last year or so.
My first question is kind of on a high level. If you can address the within the TTM EBITDA number of $412 million how much of that for 12 is made up of of noncash gains and then how much and then really what what do you guys, where do you guys end the second quarter and kind of what are you expecting here for kind of the rest of.
2022 from noncash gains and losses.
Yes.
This is Bryan I think if we had to characterize what proportion is noncash gains I would say, it's actually a pretty small amount I would put it probably in the range of $5 million to $10 million.
Because a lot of what we saw even as we talked about in the renewable segment is the reversal of previous noncash mark to market losses that have come through so end of quarter, we probably had in that range of $5 million to $10 million hung up on the balance sheet.
That will come through but beyond that not a ton of noncash <unk>.
To market stuff in there.
Alright, that's great. Thanks.
I'm sorry go ahead.
As Pat Ben the second part of your question was more about outlook for second half.
As I mentioned, we're very positive on the outlook for ethanol board crush margins have stood up well and as summer driving season.
Is declining as we go into back to school now.
But we're optimistic about the margins in ethanol.
Remember that fourth quarter last year, and Thats, what I'll add a big number so it might be.
<unk> ladder to climb to match those but we're very optimistic for finishing out the year in ethanol.
Mentioned in PM, we tend to make most of your money during the season.
Spring application season, and then you kind of hang on for the balance of the year, but in the fourth quarter last year. We had very good sales last year I mentioned farmer income is good which is a plus.
And we do need to produce good crops. So that will pretend to say, we'll see good fertilizer sales question is fertilizer prices still very high even though they've slipped. Some so we're kind of a little bit cautious about fourth quarter.
Fertilizer that I did put that in there remains to be seen category too. If we could match last year's really strong fourth quarter shipments of fertilizer, but we're still very positive coming off of a great season.
When it comes to our trade business, we've talked about.
We were able to accumulate grain at really good basis ownership when the futures market rallied and basis weekend, we'll be able to merchandise that drain here in the next quarters, we're optimistic about the production tributary to our assets surprisingly, we're not that far away from.
Harvest in Louisiana already so I mean, the follow up just around the corner. So we're feeling good about how we're positioned also like our ethanol business. We had a very strong fourth quarter in 2021, so to lap that would be a tall order, but we're very fundamentally solid fundamentals across each of.
The three business segments.
Perfect. Thanks. Thanks, that's very helpful patent, Brian Thanks for that kind of quantifying that.
The mark to market adjustment, so I think theres a lot of.
I'm totally sympathetic to the pendulum swinging one quarter to the next with those noncash adjustments, but it's really helpful. For you to quantify that just really highlight how.
Yes.
How overwhelming the cash element is to that the EBIT number.
My My second question I will get back in queue. It kind of touches on pad something you were just talking about here in the fertilizer space.
Hearing a lot of a lot of talk in the industry. The farmers are kind of looking ahead a year more so than they usually are given the challenges in the supply chain, particularly around the fertilizer business.
I'm wondering if you can kind of talk about one if that's something that you are seeing in the market today and then two what if anything is Anderson is doing differently to set.
Set themselves up for a year ahead of time, given the challenges in the space right now and how much farmers are focusing on those inputs that does it for me I'll get back in queue. Thanks, a lot everybody.
Yes, Thats a very good points about the farmers in North America. So as we said it's critical for our U S growers to have really peak production as the declines because of the Ukraine.
The worst situation as well as coming into it we had a tight F&D rate with some weakness in South America production recent really hot dry weather in Europe has not helped so our mother nature in the past year has not been great globally. So U S production is more critical than ever.
As farmers and their income levels are as high as they've been in some time, which gives them the ability to invest into good production, which would mean being good stewards of the land and put it in proper nutrients. We think that the farmers will do just that and we've been in very good shape as we are 95% domestic.
Slide I should say North American supplied between Canada, and Florida et cetera are primarily our rail distribution network. So we've had.
The right amount of products in the right position at the right time, so our job is to make sure. We do that again in next fertilizer season, and Thats. Our plan to do just that and we're working with growers on the timing and price risk management, the flat price fertilizer market and when they should.
Load up and lock in inventories for the next season. So there's a lot of good discussions happening at a kitchen table is all around the Midwest right now about the application of fertilizer like you said a year out these decisions that growers make.
Go out 123 years, so we're working closely with them on their marketing plans on grain as well as their long term sustainability and carbon plans and the best economic decisions that they can make for their for their farm. So it's a good time for American farmers and but the markets are volatile and they need to be very.
<unk> agile right now.
Again, if you have a question. Please press Star then one.
Our next question will come from Eric Larson with Seaport Research partners. Please go ahead.
Yes, thanks, good morning, everyone.
Great quarter congratulations.
Yes.
It's growing nicely in the second quarter.
Really nice basis appreciation, some reversals of mpls, but I'm looking at your grain inventories.
Seems to me that.
Your <unk> are still well over a $1 billion.
That should give you some really great visibility on your merchandise thing for your second half maybe even into your first quarter of next year can you can comment on that.
Yes, Eric I think some of the fundamentals as you all know.
It changed on wheat with the widening of wheat spreaders spreads traditionally we are a soft red wheat storage terminal market player in <unk>.
To make deliveries against the CME contract as well as being a good supplier to wheat, millers et cetera. So we've been able even though production in wheat was off a little bit the quality was very good and we've been able to blend and make very good quality wheat for our customers, but also to be able to earn storage income on wheat, so the amount of tonnage.
And wheat is up as we are unable to capture those carriers, we have been shipping quite regularly both export and domestically on corn and beans.
So that will continue and then we'll anxiously look forward to the arrival of new crop like I said, Louisiana, just around the quarter corner and the markets are inverted the inverted so it's a good opportunity.
Our Louisiana assets just like it was last year. So in general we're positive about the outlook for grain merchandising.
Okay. Good.
A question on fertilizer I know you folks are have been relatively conservative in.
And.
On your on your inventories your pipeline for fertilizers, just because you obviously don't want to get caught with a lot of high cost inventory in NAFTA.
So now with a pretty recent with a fairly sizable drop in fertilizer prices.
Have you have you.
Have you are you are you putting more fertilizer in inventory for sale this fall or.
How are you positioning yourself for the fertilizer market.
I think Eric it's important to note that we have very large fertilizer warehouse and good distribution network of rail assets. So we can work with our key suppliers year round and be able to take good quantities. When they are able to ship them and have home for the product and that that provides an advantage for us we feel.
So in that regard would probably.
Business as usual in spite of normal.
Rail disruptions have been happening in the last year and a half we've done a good job of that we plan to do that as well. So we will have ample inventories available for our farmer customers.
Volume was off a little bit last year, I think that was somewhat tied to high prices and.
I think this year with farmer income has been strong and the need for a good production, we're probably a little bit more optimistic to return to maybe more normal volumes. So bottom line, it's business as usual, we're not reliant on a.
Russian product our imported product from a foreign country that can get disrupted we're very focused on having the right quantity at the right time and place and not too much.
To your point being when the markets have trimmed down here in the last quarter on fertilizer, which is probably good thing we needed a little correction, but it's still going to be firm.
Markets for fertilizer products as we go forward.
Got it and then my final question and then I'll get back in queue. So you guys have a 100 million share buyback program.
You have now received another $55 million from the sale of your.
Your rail repair business the stock was close to 30.
One from 59 so.
Ah why haven't you kind of been starting on that share buyback earlier.
Yes, that's a question we thought you might ask Eric.
As you know there is a variety of factors that go into whether or not we repurchase and the related timing.
And the only thing I'd say is we have we have a plan in place to execute under that under that authorization.
Okay.
Let me just throw one more question in there.
Ethanol.
The blending economics are really good it looks like no driving miles have come down, but youre at the exports have been very good.
Pat can you just give us a little bit better good feel feel about how.
Kind of all of those factors.
We will continue to be.
Of tailwind for you in the second half.
I think it should be a tailwind for us.
We're estimating about one 6 billion gallons of exports it potentially could be maybe even higher than that if.
We get right port conditions et cetera, but the market is set up really well.
Particularly for our plants, our corn basis outlook is probably more attractive than some others in the industry.
Unfortunately, our Kansas plant and coal, which has a very high basis levels were not unusual with others in Kansas, Nebraska in those western locations, where corn basis has really spiked because of the weather conditions are we.
We could see some softening of production in some western assets as the corn prices and natural gas prices are very high.
That hasn't really been realized yet I think because ethanol producers.
Besides receiving the government program.
Program money.
Want to run solid for cash.
We're optimistic about corn oil values and our hydro feed as well as our other co product values remaining very strong and that's been very supportive for the industry and more importantly, the government.
Being a little bit more pro under the bite administration.
Towards renewables and the outlook from legislation is more positive. So there's in general are feeling the tail wins across the ethanol industry.
Alright, thanks, guys Congrats again.
Thank you very much.
This concludes our question and answer session I would like to turn the conference back over to Mike Holter for any closing remarks.
Thanks, Joe we want to thank you all for joining US. This morning. Our next earnings conference call is scheduled for Wednesday November <unk> 2022 at 11, a M. Eastern daylight time, when we will review our third quarter results as always thank you for your interest in the Andersons and we look forward to speaking with you again soon.
Yeah.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.