Q3 2022 Otter Tail Corp Earnings Call
Okay.
Okay.
Good morning, and welcome to Otter tail corporations Q3, 2022 earnings Conference call. Today's call is being recorded and we will hold a question answer session. After the prepared remarks, I will now turn the call over to the company for their opening comments.
Good morning, everyone and welcome to our call. My name is Tyler increments I'm, the manager of Investor Relations at Otter tail.
Last night, we announced our third quarter 2022 financial results.
Our complete earnings release and slides accompanying this call are available on our website at otter tail 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.
Object to risks and uncertainties, which may cause actual results to differ from those presented here.
Be advised about placing 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.
For opening remarks, I will now turn the call over to Otter tail Corporation's President and CEO , Mr. Chuck Macfarlane.
Thank you Tyler good morning, and welcome to our third quarter 2022 earnings call.
Otter tail Corporation, and Chief financial results, our record financial results for the third quarter led primarily by another outstanding quarter in our plastics segment.
Please refer to slide four as I begin my comments on our third quarter results.
We achieved diluted earnings per share of $2, <unk>, which is an increase of 60% over the third quarter of 2021.
All segments produced double digit year over year earnings increases for the quarter.
Kevin will provide more detailed discussion of our third quarter financial performance.
Slide five reflects the earnings profile of our businesses with and without the impact of the plastics segment.
Through dependable earnings and steady growth in Otp, BTB and T O plastics and changes in the corporate cost center.
We have experienced the historic nine 8% earnings per share CAGR, excluding the plastics companies northern pipe and vinyl tech.
The additional earnings and cash flow generated by the plastic segment in 2021 and 2022.
Provide additional strength to our already strong credit metrics liquidity and capital structure and.
And provide for capital investment in our operating companies.
Otter tail power continues to work toward a cleaner energy future.
As shown on slide seven assuming forecast of dispatch occurs we are targeting to reduce carbon emissions from our own generation resources, approximately 50% from 2005 levels by 2025 and 97% by 2050.
Additionally, our owned and contracted energy generation will be more than 50% renewable by 2025.
Progress continues on Otter tail Power's 49 megawatt <unk> solar project.
Project construction began in May of 2022 and is expected to be completed in 2023.
All costs and benefits of the project are assigned to Minnesota customers.
Recovery for the $60 million investment has been approved through the renewable rider.
As we have shared on previous calls we have contracted contracts in place for thin film panels, which reduced supply chain risks related to the United States restriction on goods from the Shin Young region of China.
And the U S Department of Commerce Circumvention investigation.
Passage of the inflation reduction Act has increased the ITC on this project from 26% to 40%.
Otter tail power exercised its option to purchase the ash to Beulah three wind farm.
We anticipate closing on the transaction in January of 2023.
Since 2013, we've had a purchase power agreement in place to purchase the off take of this facility.
The agreement granted us the option to purchase the wind farm after 10 years.
Most regulatory approvals have been received for the transaction.
Slide 13 provides information on MISO is long range transmission planning projects, which otter tail power will be a participant in.
The tranche one portfolio includes 18 projects and represents approximately $10 3 billion of new transmission development.
In the MISO Midwest sub region.
This based on MISO estimates.
The Jamestown Allendale and Big Stone, South Alexandria transmission projects are located in Otter tail power service territory and Otter tail owns two of the endpoints substations.
<unk> total capital investment for the projects.
Estimated at $330 million with 40% of the capital investment expected to occur in the next five years.
On October 14th.
2022, a supplemental filing was made to the Minnesota, PUC, which included a request to amend the procedural schedule for Otter tail Power's integrated resource plan, which was filed in September of 2021.
We determined it was appropriate to request an extended procedural schedule based on the changes to the MISO seasonal capacity contract.
Increased reserve margin requirements.
<unk> loan additions and the passage of the inflation reduction Act.
These items could have an impact on the initial preferred five year plan, which requested authority to add dual fuel capability to a story a station to <unk>.
150 megawatts of solar at a yet to be determined site.
And to commence the process of withdrawing from our 35% ownership interest in the coal fired Coyote generating station by 2028.
If granted permission we plan to file an updated resource plan in March of 2023.
Our supplemental filing requested maintaining the original procedural schedule for adding dual fuel capability at a story of station.
We are now projecting six 4% compound annual rate base growth with our updated five year capital spending plan of $1 1 billion with 2000.
22 as.
As the base year this.
This compares with a 21% to 20, 659% compounded annual rate base growth provided last quarter.
Our manufacturing segment continues to experience volatile steel markets steel prices.
Rapidly decreased during the third quarter.
The lower steel prices have impacted our cost of material and scrap revenues.
We continue to monitor the impact of unpredictable customer supply chains may have on our shipping volumes.
T O plastics is increased sales prices and decreased freight cost, which led to increased gross profit margins despite higher material costs in the third quarter.
Our plastics segment again delivered extraordinary results as sales prices remained strong while resin prices decreased.
Demand for PVC pipe began to soften during the third quarter as distributors and contractors started to use up high priced inventory instead of buying additional PVC pipe.
Sales volume for the quarter decreased 15% due to softening demand.
The PVC price and volume reductions in the third quarter are the main factor for the revised 2022 earnings guidance, Kevin will expand on.
I'll now turn it over to Kevin to provide an overview of our third quarter results and our updated business outlook for 2022.
Thank you Chuck and good morning, everyone.
Another outstanding quarter with consolidated revenues up 21% and net earnings up 60% over the third quarter of 2021.
All reporting segments showed quarter over quarter earnings growth was the biggest increase driven by the plastics segment.
Please refer to slide 28, as I provide an overview of our third quarter 2020 to segment earnings.
The electric segment net earnings increased $2 3 million or approximately 10, 3% over the third quarter of 2021.
The increase in earnings was primarily driven by.
Retail megawatt hour sales were up 18, 4% quarter over quarter, driven by increased volumes from commercial and industrial customers.
Primarily due to a new commercial customer in North Dakota.
There was also an increase in fuel recovery revenues, resulting from higher purchase power and production fuel costs related to increased natural gas end market energy costs.
These items were partially offset by higher O&M costs related to increases in.
Maintenance costs, including those from the planned outage at Coyote station.
There wasn't there wasn't a planned outage in the third quarter of 2021.
Maintenance at our wind farm facilities.
<unk> management and higher MISO transmission tariff expenses.
Net earnings for the manufacturing segment increased $2 million from the same quarter, a year ago, driven by a 17% increase in sales volumes at BCD.
As end market demand remains strong and our customers' supply chains have begun to improve.
<unk> revenues were also impacted by a decline in scrap revenues due to lower scrap metal prices.
T O plastics also experienced higher sales prices and volumes.
Segment gross profit margins were positively impacted by increased sales volumes increased sales pricing.
And favorable cost absorption.
Both <unk> and T O plastics continue to do.
An excellent job of managing through the challenges of associated.
The current inflationary environment in managing challenging and volatile steel markets.
Implementing product price increases and passing through cost surcharges to customers.
Net earnings from the plastics increased $27 $6 million compared.
For the third quarter of 2021.
Increases in the price per pound of PVC pipe sold were partially offset by lower volumes, resulting in higher operating revenues and net income.
The lower sales volumes were due to customers using up more there.
Finished goods inventory instead of buying additional PVC pipe.
This was driven by multiple announcements during the third quarter as the.
Price of PVC resin was going to decline during the last half of the year.
Our corporate costs were impacted by increased employee healthcare costs increased professional service expenses.
And losses on our corporate owned life insurance policies.
These higher costs were partially offset by lower interest expense due to smaller amounts outstanding on our corporate credit facility and favorable effective income tax rates.
Our business outlook on slide 31 reflects a 2022.
Diluted earnings per share range of $6 42 to $6 72.
Compared to $6 83 to $7 13 range.
We previously issued.
The midpoint of the revised EPS guidance represents a 55% increase over 2021 earnings per share.
The revised guidance also reflects a 67% increase from the midpoint of our initial guidance in February .
The change in our initial.
2022 guidance to the current guidance is mainly driven by the plastics segment.
Which increased approximately 139% for the year.
It is also important to note that both our electric and manufacturing segment has experienced an uplift from the initial February guidance.
Changes in our segment.
And corporate cost center guidance are as follows.
2022 Electric segment earnings guidance is increasing due to favorable sales volumes from commercial and industrial customers and improve margins from favorable pricing.
Another driver of the increased guidance is lower than anticipated labor and non labor operating and maintenance costs, which are partially offset by higher planned contribution to our charitable foundation.
We are increasing our previous guidance for our manufacturing segment due to increased sales volumes, resulting from improving end market demand.
DTD, partially offset by lower scrap revenues.
Additionally, we are anticipating increased earnings at T O plastics.
Even by customer demand and improved gross profit margins.
The driver for the reduction in earnings guidance comes from the plastics segment.
Reduced demand for PVC pipe in the fourth quarter of 2022 was expense as expected.
As a result of multiple announced resin price reductions in both the third and fourth quarters.
This has caused distributors and contractors to reduce the amount of PVC pipe purchased from converters.
They consume their higher priced inventories.
Sales prices for PVC pipe are expected to remain elevated for the remainder of the year.
But the potential for a further decline in resin prices Andrew.
And reduced sales volumes could create downward pressure on sales prices for the remainder of 2022.
And into 2023.
We are.
Starting to see a slowdown in overall demand.
Rising interest rates are impacting housing starts as developers look to pull back on the number of lots they're developing.
Contractors have started to see some projects being canceled or delayed into 2023.
This is being driven by long lead times for some project materials as well as a speculation that material cost could be lower by mid 2023.
And distributors are starting to shed inventories this is taking longer than expected to get back to the normal level of inventories they expect to carry.
Our corporate costs are expected to increase in 2022, driven by investment losses on our investments in 2022 compared to 2021.
Increased health insurance costs in our self insured health plan and increased professional service costs.
We continue to monitor various economic indicators, such as single and multifamily housing starts.
Mortgage rates and consumer confidence levels to ensure we are well positioned when changes occur.
Additionally, we are actively managing the impacts of inflation across all of our operating companies.
We are acutely aware of the rising interest rate environment, our economy has experience.
We assess our exposure to rising borrowing cost as low risk.
Our variable rate debt consists of our two credit facilities.
We don't have any outstanding borrowings on the parent company facility and minimum amounts are drawn on the utility facility.
Our holding company long term debt is fixed rate and doesn't mature until December 2026.
And our utility long term debt.
He is also all fixed rate with maturities beginning in 2027 and extending to 2052.
And our current financing plan doesn't call for any equity over the next five year planning horizon.
New debt issuances arent scheduled until 2024.
The uplift in earnings driven by our plastic segment provides many benefits to our collective businesses and strategies in the form of our already strong balance sheet and credit metrics continued to get stronger.
They are generating significant levels of free cash flow, providing the ability to continue to invest.
Cros are operating segments without having to access the equity capital markets.
We currently expect to see elevated earnings from our manufacturing platform into 2023 with our earnings mix expected to move to approximately 65% from our electric segment and 35% from our manufacturing platform beginning in 2024.
As part of the shift in the earnings mix, we expect the normalized earnings.
From the plastic segment to be in the range of 36 million to $41 million.
Our business model continues to serve us well and we remain well positioned to fund our rate base growth opportunities at the utility with our strong balance sheet ample liquidity to support our businesses and strong investment grade corporate credit ratings.
We are now ready to take your questions.
Ladies and gentlemen, if you have a question. Please press star one one on your Touchtone telephone.
After the Q&A Chuck will return with a few closing remarks.
Please standby, while we compile the Q&A roster.
Yes.
Our first question comes from Brian Russo with Sidoti Brian Your line is open.
Yes, hi, good morning.
Hey, so just quickly on the.
Plastics.
Your revised guidance based on what you earned year to date implies kind of a.
Midpoint plastics fourth quarter, a 48 cents.
Down from 90.
In the fourth quarter 2021 and two.
If I understood your commentary.
Correctly.
Volumetric risk along with just due to the slowdown in housing et cetera.
Yes.
Distributors using their own inventory and then combined with.
Margin compression from resin price declines.
48, <unk> in the fourth quarter 'twenty two.
That seems high for a run rate as we go through 2023 before.
Normal.
Today, $65 35 rig on rig mix in 'twenty four.
Is that.
A good way to look at it.
Yes, I think it is Brian .
We certainly the fall off here.
Obviously, the third quarter was still strong, but compared to where we expected.
The business to perform in the third quarter. It was off somewhat from what our forecasts were.
Driven by these.
Multiple resin price reductions that were announced I think when we sat with you here at the end of the second quarter. We shared that there was an expectation that there would be 14 of resin price reductions over the last half of 'twenty two.
By the middle part of the quarter that had changed from 14 to 28 of reductions.
And we really started to see this fall off in demand so slightly impacted here in the third quarter compared to our expectations and really has impacted the fourth quarter here as compared to where we were at the end of the second quarter on their earnings call.
As we certainly interest rates mortgage rates I should say rising interest rate environment.
We are starting to see overall demand not just our demand, but overall demand across.
The industry.
Other converters to slow here.
We continue to look at how do we think these trends move into to 2023.
As we've talked about we certainly think that we're still going to see an elevated level of earnings not.
Not something.
Significant as what we're experiencing here this year.
And.
And then those that will continue over the year to drop back then ultimately in 2004 to that new normal of earnings that were were talking about I think it's important to note that we continue to watch this.
Watch the market conditions watch the drivers.
<unk> stay on top of where we think this is going to shake out as we as we head into 'twenty three and we'll certainly have.
More and more clarity and color for you at the year end earnings call.
Okay got it understood and then just on.
The regulated utility you mentioned the step up right in the guidance.
Is that kind of a new level based on that we can work off of and grow the earnings power of the utility.
Due to <unk>, Inc.
Incremental ongoing C&I.
Customer demand and just to clarify the margins you referred to that on the C&I customers, that's driving the uplift and should carry forward into subsequent years.
Well the favorable pricing is one of our commercial customers. They elected to go to fixed rate energy pricing.
I believe their contract is for a year so.
It is possible Brian after the year, they could move back to more of a system marginal energy pricing that would impact.
Those margins.
So we got to be a little careful about thinking that that could continue when that contract is looked at annually.
Having said that we incrementally added about $80 million of Capex to the utility Capex plan here as we updated it for the quarter.
And as we look at the range, we certainly think that.
We would expect to continue to be able to grow off of this this range that we're sharing with you in the updated guidance.
Okay got it and the incremental $80 million of utility Capex is that related to.
Kind of the.
The initial development Capex on the two MISO projects.
You referred to.
And the presentation Brian .
It's included in that better estimates on that.
We have removed 150 megawatt.
Solar project, but have added.
Wind Repowering now that the.
Yeah.
Legislation is passed.
Repowering wind credits are back and available.
Those were the major items in there.
Okay, Great and then just one more on the manufacturing you're specifically BTT.
They are structurally are you operating at the <unk> business better so what seems to be widening margins.
In 2022.
Kind of sustainable as we move forward all else equal with the economic sensitivity of some of your.
End markets in recreation et cetera.
But as that.
Also re basing.
BTT and of the overall manufacturing higher based on.
Higher productivity and efficiencies.
Hi, Brian This is Chuck I think the bigger issue. If you go back to the second quarter and before that the customer take rates.
And we measure that is on a monthly basis, what they plan to order and what they took.
Was negatively impacted by other.
Suppliers are supply chain issues. They had another places saw what we thought we were going to build and they were going to take in that month.
Didn't occur.
The rate that it has historically because of other supply chain issues. They had that is beginning to be alleviated and getting back to more normal which.
You can imagine with MAA.
A.
Production setting if.
What you thought was going to be taken in and needed to be built was changed during the month that causes a lot of inefficiencies in the plant and as that take rate moves up.
Get better efficiencies and productivity.
Okay got it well thank you very much.
Thank you. Thank you.
As a reminder, if you have a question. Please press star one one on your Touchtone telephone please standby for our next question.
At this time I'm going to turn the call over to Chuck Chuck go ahead.
Thank you for joining our call and your interest in Otter tail Corporation, our strategic initiatives to grow our business and achieve operational commercial and talent excellence continue to strengthen our position in the markets we serve.
We remain confident in our long term ability to grow earnings per share in the range of 5% to 7% compounded annual growth rate using 2024 as a base after plastics transitional year of 2023.
With multiple resin price reductions and softening new home development during the third quarter, we have lowered our.
Our anticipated sales volume in the plastics segment.
And are adjusting our 2022 diluted earnings per share guidance range to $6 42 to $6 72.
From our previous guidance of $6 83.
$7 13.
We look forward to talking with you next year, when we review our 2022 results.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Yes.
Okay.
The conference will begin shortly.
As Johan during Q&A, you can dial one one.
[music].
Okay.
[music].
Yes.
Yes.
Okay.
[music].
Yes.
[music].
Sure.
[music].
Okay.
[music].
Okay.
[music].
Yes.
[music].
Okay.
[music].
Yes.
[music].
Yes.
[music].
Yes.
Yes.
Yes.
Okay.
[music].
Yes.
[music].
Okay.
Yes.
Yes.
Yes.
No.
[music].
Okay.
Okay.
[music].
Yes.
Okay.
Yes.
Sure.
Okay.
Okay.
Okay.
[music].
Right.
[music].
Okay.
Okay.
[music].
Sure.
Sure.
Okay.
[music].
Okay.
[music].
Okay.
Yes.
Okay.
[music].
Yes.
Yes.
[music].
Okay.
Yes.
Okay.
Okay.
Okay.
Yes.
Yes.
Thanks.
Yes.
Yes.
Okay.
Okay.
Okay.
Sure.
Okay.
Okay.
[music].
Thank you.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
Thanks.
Sure.
Yes.
Okay.
Okay.
Okay.
Yes.
Sure.
[music].
Yes.
Yes.
[music].
Okay.
[music].
Okay.
Thank you.
[music].
Yes.
Yes.
Okay.
Okay.
Okay.
[music].
Okay.
Yes.
Okay.
Okay.
Thank you.
Sure.
[music].
Yes.
Okay.
[music].
Okay.
Sure.
Okay.
[music].
Okay.
Okay.
Okay.
Okay.
[music].
Okay.
[music].
Okay.
[music].
Yes.
Yes.
Great.
Yes.
Okay.
Yes.
Thanks.
Yes.
Okay.
[music].
Okay.
[music].
Okay.
Yes.
Okay.
Okay.
[music].
Okay.
[music].
Okay.
[music].
Yes.
Yes.
Yes.
Yes.
Okay.
Okay.
Yes.
Yes.
[music].
Okay.
Okay.
[music].
Yes.
Yes.
[music].
Thanks.
Yes.
[music].
Hi.
Sure.
[music].
Good morning, and welcome to Otter Tail Corporation Q3, 2022 earnings Conference call. Today's call is being recorded and we will hold a question answer session. After the prepared remarks, I will now turn the call over to the company for their opening comments.
Good morning, everyone and welcome to our call. My name is Tyler increments and the manager of Investor Relations at Otter tail last night, we announced our third quarter 2022 financial results.
Our complete earnings release and slides accompanying this call are available on our website at otter tail Dot com.
A recording of the call will be available on our website later today.
With me on the call today are tucked 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.
Subject to risks and uncertainties, which may cause actual results to differ from those presented here.
So be advised about placing 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.
For opening remarks, I will now turn the call over to Otter tail Corporation's President and CEO , Mr. Chuck Macfarlane.
Thank you Tyler good morning, and welcome to our third quarter 2022 earnings call.
Otter tail Corporation, and Chief financial results, our record financial results for the third quarter led primarily by another outstanding quarter in our plastic segment.
Please refer to slide four as I begin my comments on our third quarter results.
We achieved diluted earnings per share of $2, <unk>, which is an increase of 60% over the third quarter of 2021.
All segments produced double digit year over year earnings increases for the quarter.
Kevin will provide more detailed discussion of our third quarter financial performance.
Slide five reflects the earnings profile of our businesses with and without the impact of the plastics segment.
Through dependable earnings and steady growth at Otp, BCD and T O plastics and changes in the corporate cost center.
We have experienced the historic nine 8% earnings per share CAGR, excluding the plastics companies northern pipe and vinyl tech.
The additional earnings and cash flow generated by the plastic segment in 2021 and 2022.
Provide additional strength to our already strong credit metrics liquidity and capital structure and.
And provide for capital investment in our operating companies.
Otter tail power continues to work toward a cleaner energy future.
As shown on slide seven assuming forecast of dispatch occurs we are targeting to reduce carbon emissions from our own generation resources, approximately 50% from 2005 levels by 2025 and 97% by 2050.
Additionally, our owned and contracted energy generation will be more than 50% renewable by 2025.
Progress continues on Otter tail powers 49 megawatt <unk> solar project.
Project construction began in May of 2022 and is expected to be completed in 2023.
All costs and benefits of the project are assigned to Minnesota customers.
Recovery for the $60 million investment has been approved through the renewable rider.
As we have shared on previous calls we have contracted contracts in place for thin film panels, which reduced supply chain risks related to the United States restriction on goods from the Shin Young region of China.
And the U S Department of Commerce Circumvention investigation.
Passage of the inflation reduction Act has increased the ITC on this project from 26% to 40%.
Otter tail power exercised its option to purchase the ash to Beulah three wind farm.
We anticipate closing on the transaction in January of 2023.
Since 2013, we've had a purchase power agreement in place to purchase the offtake of this facility the agreement granted us the option to purchase the wind farm after 10 years.
Most regulatory approvals have been received for the transaction.
Slide 13 provides information on MISO is long range transmission planning projects, which otter tail power will be a participant in.
The tranche one portfolio includes 18 projects and represents approximately $10 3 billion of new transmission development in.
In the MISO Midwest sub region.
This based on MISO estimates.
The Jamestown Allendale and Big Stone, South Alexandria transmission projects are located in Otter tail power service territory and Otter tail owns two of the endpoint substations.
<unk> total capital investment for the projects.
Estimated at $330 million with 40% of the capital investment expected to occur in the next five years.
On October 14th.
2022, a supplemental filing was made to the Minnesota, PUC, which included a request to amend the procedural schedule for Otter tail Power's integrated resource plan, which was filed in September of 2021.
We determined it was appropriate to request an extended procedural schedule based on the changes to the MISO seasonal capacity contract.
Increased reserve margin requirements.
<unk> loan additions and the passage of the inflation reduction Act.
These items could have an impact on the initial preferred five year plan, which requested authority to add dual fuel capability to a story a station to <unk>.
150 megawatts of solar at a yet to be determined site.
And to commence the process of withdrawing from our 35% ownership interest in the coal fired Coyote generating station by 2028.
If granted permission we plan to file an updated resource plan in March of 2023.
Our supplemental filing requested maintaining the original procedural schedule for adding dual fuel capability at a story of station.
We are now.
Projecting six 4% compound annual rate base growth with our updated five year capital spending plan of $1 1 billion with 2000.
'twenty two.
As the base year.
This compares with a 21% to 20, 659% compounded annual rate base growth provided last quarter.
Our manufacturing segment continues to experience volatile steel markets steel prices.
Rapidly decreased during the third quarter.
The lower steel prices have impacted our cost of material and scrap revenues.
We continue to monitor the impact of unpredictable customer supply chains may have on our shipping volumes.
T O plastics is increased sales prices and decreased freight cost, which led to increased gross profit margins despite higher material costs in the third quarter.
Our plastics segment again delivered extraordinary results as sales prices remained strong while resin prices decreased.
Demand for PVC pipe began to soften during the third quarter as distributors and contractors started to use up high priced inventory.
Instead of buying additional PVC pipe.
Sales volume for the quarter decreased 15% due to softening demand.
The PVC price and volume reductions in the third quarter are the main factor for the revised 2022 earnings guidance, Kevin will expand on.
I'll now turn it over to Kevin to provide an overview of our third quarter results and our updated business outlook for 2022.
Well, thank you Chuck and good morning, everyone.
Another outstanding quarter with consolidated revenues up 21% and net earnings up 60% over the third quarter of 2021.
All reporting segments showed quarter over quarter earnings growth was the biggest increase driven by the plastics segment.
Please refer to slide 28, as I provide an overview of our third quarter 2020 to segment earnings.
The electric segment net earnings increased $2 3 million or approximately 10, 3% over the third quarter of 2021.
The increase in earnings was primarily driven by.
Retail megawatt hour sales were up 18, 4% quarter over quarter, driven by increased volumes from commercial and industrial customers.
Primarily due to a new commercial customer in North Dakota.
There was also an increase in fuel recovery revenues, resulting from higher purchase power and production fuel costs related to increased natural gas end market energy costs.
These items were partially offset by higher O&M costs related to increases in.
Maintenance costs, including those from the planned outage at Coyote station.
There wasn't there wasn't a planned outage in the third quarter of 2021.
Maintenance at our wind farm facilities.
<unk> management and higher MISO transmission tariff expenses.
Net earnings for the manufacturing segment increased $2 million from the same quarter a year ago.
Driven by a 17% increase in sales volumes at BTT.
As end market demand remains strong and our customer supply chains have begun to improve.
<unk> revenues were also impacted by a decline in scrap revenues due to lower scrap metal prices.
T O plastics also experienced higher sales prices and volumes.
Segment gross profit margins were positively impacted by increased sales volumes increased sales pricing.
And favorable cost absorption.
Both <unk> and T O plastics continue to do.
An excellent job of managing through the challenges of associated.
The current inflationary environment in managing challenging and volatile steel markets.
Implementing product price increases and passing through cost surcharges to customers.
Net earnings from the plastic increased $27 $6 million compared.
For the third quarter of 2021.
Increases in the price per pound of PVC pipe sold were partially offset by lower volumes, resulting in higher operating revenues and net income.
The lower sales volumes were due to customers using up more there.
Finished goods inventory instead of buying additional PVC pipe.
This was driven by multiple announcements during the third quarter the.
The price of PVC resin was going to decline during the last half of the year.
Our corporate costs were impacted by increased employee healthcare costs increased professional service expenses.
And losses on our corporate owned life insurance policies.
These higher costs were partially offset by lower interest expense due to smaller amounts outstanding on our corporate credit facility and favorable effective income tax rates.
Our business outlook on slide 31 reflects a 2022.
Diluted earnings per share range of $6 42 to $6 72.
Compared to $6 83 to $7 13 range.
We previously issued.
The midpoint of the revised EPS guidance represents a 55% increase over 2021 earnings per share.
The revised guidance also reflects a 67% increase from the midpoint of our initial guidance in February .
The change in our initial.
2022 guidance to the current guidance is mainly driven by the plastics segment.
Which increased approximately 139% for the year.
It is also important to note that both our electric and manufacturing segment has experienced an uplift from the initial February guidance.
Changes in our segment.
And corporate costs in our guidance are as follows.
2022 Electric segment earnings guidance is increasing due to favorable sales volumes from commercial and industrial customers and improve margins from favorable pricing.
Another driver of the increased guidance is lower than anticipated labor and non labor operating and maintenance costs, which are partially offset by higher planned contribution to our charitable foundation.
We are increasing our previous guidance for our manufacturing segment due to increased sales volumes, resulting from improving end market demand.
DTD, partially offset by lower scrap revenues.
Additionally, we are anticipating increased earnings at T O plastics.
By customer demand and improved gross profit margins.
The driver for the reduction in earnings guidance comes from the plastics segment.
Reduced demand for PVC pipe in the fourth quarter of 2022, who is expense as expected.
As a result of multiple announced resin price reductions in both the third and fourth quarters.
This has caused distributors and contractors to reduce the amount of PVC pipe purchased from converters.
They consume their higher priced inventories.
Sales prices for PVC pipe are expected to remain elevated for the remainder of the year.
But the potential for a further decline in resin prices Andrew.
And reduced sales volumes could create downward pressure on sales prices for the remainder of 2022.
And into 2023.
We are starting to see a slowdown in overall demand.
Rising interest rates are impacting housing starts as developers look to pull back on the number of lots they are developing.
Contractors have started to see some projects being canceled or delayed into 2023.
This is being driven by long lead times for some project materials as well as a speculation that material cost could be lower by mid 2023.
And distributors are starting to shed inventories this is taking longer than expected to get back to the normal level of inventories they expect to carry.
Our corporate costs are expected to increase in 2022, driven by investment losses on our investments in 2022 compared to 2021.
Increased health insurance costs in our self insured health plan and increased professional service costs.
We continue to monitor various economic indicators, such as single and multifamily housing starts mortgage rates and consumer confidence levels to ensure we are well positioned when changes occur.
Additionally, we are actively managing the impacts of inflation across all of our operating companies.
We are acutely aware of the rising interest rate environment, our economy has experience.
We assess our exposure to rising borrowing cost as low risk.
Our variable rate debt consists of our two credit facilities.
We don't have any outstanding borrowings on the parent company facility and minimum amounts are drawn on the utility facility.
Our holding company long term debt is fixed rate and doesn't mature until December 2026.
And our utility long term debt.
He is also all fixed rate with maturities beginning in 2027 and extending to 2052.
And our current financing plan doesn't call for any equity over the next five year planning horizon, and new debt issuances arent scheduled until 2024.
The uplift in earnings driven by our plastic segment provides many benefits to our collective businesses and strategies in the form of our already strong balance sheet and credit metrics continued to get stronger.
We are generating significant levels of free cash flow, providing the ability to continue to invest across our operating segments without having to access the equity capital markets.
We currently expect to see elevated earnings from our manufacturing platform into 2023 with our earnings mix expected to move to approximately 65% from our electric segment and 35% from our manufacturing platform beginning in 2024.
As part of the shift in the earnings mix, we expect the normalized earnings.
Our plastic segment to be in the range of 36 million to $41 million.
Our business model continues to serve us well and we remain well positioned to fund our rate base growth opportunities at the utility with our strong balance sheet ample liquidity to support our businesses and strong investment grade corporate credit ratings.
We are now ready to take your questions.
Ladies and gentlemen, if you have a question. Please press star one one on your Touchtone telephone.
After the Q&A Chuck will return with a few closing remarks, please standby, while we compile the Q&A roster.
Yes.
Sure.
Our first question comes from Brian Russo with Sidoti Brian Your line is open.
Yes, hi, good morning.
Hey, so just quickly on the.
Plastics.
Your revised guidance based on what you earned year to date implies kind of a.
Midpoint plastics fourth quarter, a 48 cents.
Down from 90.
In the fourth quarter 2021 and two.
If I understood your commentary.
Correctly.
Volumetric risk along with just due to the slowdown in housing et cetera.
Yes.
Distributors using their own inventory and then combined with.
Margin compression from resin price declines.
<unk>.
48, <unk> for us in the fourth quarter 'twenty two.
That seems high for a run rate as we go through 2023 before.
Normal.
To that $65 35 rig on rig mix and 24.
Right.
A good way to look at it.
Yes, I think it is Brian .
We certainly fall off here.
Obviously, the third quarter was still strong, but compared to where we expected.
The business to perform in the third quarter. It was off somewhat from what our forecasts were.
Driven by these.
Multiple resin price reductions that were announced I think when we sat with you here at the end of the second quarter. We shared that there was an expectation that there would be 14th of resin price reductions over the last half of 'twenty two.
By the middle part of the quarter that had changed from 14 to 28 of reductions.
And then we really started to see this fall off in demand so slightly impacted here in the third quarter compared to our expectations and really has impacted the fourth quarter here as compared to where we were at the end of the second quarter on their earnings call.
As we certainly interest rates mortgage rates I should say rising interest rate environment.
We are starting to see overall demand not just our demand, but overall demand across.
The industry other converters to slow here.
We continue to look at how do we think these trends move into to 2023.
As we've talked about we certainly think that we're still going to see an elevated level of earnings not not.
Something as significant as what we're experiencing here this year.
Yes.
And then those that will continue over the year to drop back then ultimately in 'twenty four to that new normal of earnings that were were talking about I think it is important to note that we continue to watch this.
Watch the market conditions watch the drivers.
<unk> stay on top of where we think this is going to shake out as we as we head into 'twenty three and we'll certainly have.
More and more clarity and color for you at the year end earnings call.
Okay got it understood and then just on.
The regulated utility you mentioned the step up right in the guidance.
Is that kind of a new level based on that we can work off of and grow the earnings power of the utility.
Due to <unk>, Inc.
Incremental ongoing C&I.
Customer demand and just to clarify the margins you referred to that on the C&I customers, that's driving the uplift and should carry forward into subsequent years.
Well the favorable pricing is one of our commercial customers. They elected to go to fixed rate energy pricing.
I believe their contract is for a year so.
It is possible Brian after the year, they could move back to more of a system marginal energy pricing that would impact.
Those margins.
So we got to be a little careful about thinking that that could continue when that contract is looked at annually.
Having said that we incrementally added about $80 million of Capex to the utility Capex plan here as we updated it for the quarter.
And as we look at the range, we certainly think that.
We would expect to continue to be able to grow off of this this range that we're sharing with you in the updated guidance.
Okay got it and the incremental $80 million of utility Capex is that related to.
Kind of the tissue.
The initial development Capex on the two MISO projects.
You referred to.
And the presentation Brian .
It's included in that better estimates on that.
We have removed 150 megawatt.
Solar project, but have added.
Wind Repowering now that the.
Yeah.
Legislation is passed.
Repowering wind credits are back and available.
Those were the major items in there.
Okay, Great and then just one more on the manufacturing you're specifically BTT.
They are structurally are you operating at the BCD business better so what seems to be widening margins.
In 2022.
Kind of sustainable as we move forward all else equal with the economic sensitivity of some of your.
End markets in recreation et cetera.
But as that.
Also re basing.
BTT and of the overall manufacturing higher based on.
Higher productivity and efficiencies.
Hi, Brian This is Chuck I think the bigger issue. If you go back to the second quarter and before that the customer take rates.
And the way we measure that is on a monthly basis, what they plan to order and what they took.
Was negatively impacted by other.
Suppliers are supply chain issues. They had another places saw what we thought we were going to build when they were going to take in that month.
Didn't occur.
The rate that it has historically because of other supply chain issues. They had that is beginning to be alleviated and getting back to more normal which.
You can imagine with MAA.
A.
Production setting if.
What you thought was going to be taken in and needed to be built was changed during the month that causes a lot of inefficiencies in the plant and as that take rate moves up.
Get better efficiencies and productivity.
Okay got it well thank you very much.
Thank you. Thank you.
As a reminder, if you have a question. Please press star one one on your Touchtone telephone please standby for our next question.
At this time I'm going to turn the call over to Chuck Chuck go ahead.
Thank you for joining our call and your interest in Otter tail Corporation, our strategic initiatives to grow our business and achieve operational commercial and talent excellence continue to strengthen our position in the markets we serve.
We remain confident in our long term ability to grow earnings per share in the range of 5% to 7% compounded annual growth rate using 2024 as a base after plastics transitional year of 2023.
With multiple resin price reductions and softening new home development during the third quarter, we have lowered our.
Our anticipated sales volume in the plastics segment.
And are adjusting our 2022 diluted earnings per share guidance range to $6 42 to $6 72.
From our previous guidance of $6 83 to $7 13.
We look forward to talking with you next year, when we review of our 2022 results.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.