Q1 2023 The Andersons Inc Earnings Call
Speaker 2: Good morning, and welcome to the Anderson's 2023 first quarter earnings conference call.
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Speaker 2: Please also note that this event is being recorded today.
Speaker 2: I would now like to turn the conference over to Mike Holter, Vice President, Corporate Controller and Investor Relations. Please go ahead, sir.
Speaker 3: Good morning everyone and thank you for joining us for the Anderson's first 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.
Speaker 3: This webcast is being recorded and the recording and the supporting slides will be made available on the investors page of our website at andersonsinc.com shortly.
Speaker 3: Please direct your attention to the disclosure statement on slide 2, as well as the disclaimers in the press release related to forward-looking statements.
Speaker 3: Certain information discussed today constitutes forward-looking statements that reflect the company's current views with respect to future events, financial performance, and industry conditions.
Speaker 3: These forward-looking statements are subject to various risks and uncertainties.
Speaker 3: 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.
Speaker 3: 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.
Speaker 3: On the call with me today are Pat Bow, 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.
Speaker 3: I will now turn the call over to Pat.
Speaker 4: Thank you, Mike, and good morning, everyone.
Speaker 4: Thank you for joining our call this morning to review our first quarter results and for your continued interest in the Andersons.
Speaker 4: As we noted in yesterday's release, our adjusted results are comparable to last year, but the mix was different.
Speaker 4: Trade posted a significant improvement over last year, and our renewables business also exceeded 2022 on an adjusted basis. Our nutrient and industrial segment results declined significantly from last year's record first quarter.
Speaker 4: Our overall performance remains strong with trailing 12 months adjusted EBITDA totaling over $411 million.
Speaker 4: Great group results continued its strong, I'm sorry, its string of outstanding quarters with a very strong result spread across a number of profit centers.
Speaker 4: Performance in our assets was strong due to higher margins.
Speaker 4: Our merchandising teams also had a great quarter across many products and geographies.
Speaker 4: Our premium food and feed ingredients business also delivered better results.
Speaker 4: The operating results from our renewables business were also improved.
Speaker 4: We continue to benefit from good merchandising of ethanol and co-products and are growing our low CI renewable diesel feedstock merchandising volumes
Speaker 4: and its shutdowns. As we announced earlier, the Kansas plant has been placed into receivership and is on an extended shutdown.
Speaker 4: Nutrient and industrial results reflect a very slow quarter with buyers delaying fertilizer purchases as they monitor declining prices.
Speaker 4: We also believe that the increased interest rates have influenced the timing of customer purchases.
Speaker 4: This is in contrast to the first quarter of 2022 when fertilizer market prices were moving toward a record high and there were concerns regarding availability of supply.
Speaker 4: This drove buyers to lock in orders early and at significant margins for sellers.
Speaker 4: Brian will now cover some key financial data. After that, I'll be back to discuss our outlook for the remainder of 2023. Brian ? Thanks, Pat, and good morning, everyone. We're now turning to our first quarter results on slide number five.
Speaker 4: In the first quarter of 2023, the company reported a net loss from continuing operations attributable to the Andersons of $15 million, or $0.44 per diluted share, and adjusted net income of $7 million, or $0.20 per diluted share.
Speaker 4: This compares to $6 million or 18 cents per diluted share in the first quarter of 2022.
Speaker 4: Adjusted EBITDA for the first quarter of 2023 was $55 million, which was similar to the first quarter of 2022. Trailing 12 months, Adjusted EBITDA exceeds $411 million.
Speaker 4: Our effective tax rate varies each quarter based primarily on the amount of income or loss attributable to non-controlling interests.
Speaker 4: We recorded taxes for the quarter at a 9% effective tax rate.
Speaker 4: We still expect a full year adjusted effective tax rate between 22 and 25%.
Speaker 4: Next, we'll move to slide six to discuss cash, liquidity, and debt.
Speaker 4: We generated cash flow from operations before changes in working capital of $41 million in 2023, compared to $40 million in 2022.
Speaker 4: At quarter-end, we had over $1 billion in readily marketable inventory, which is partially financed by $638 million of short-term debt.
Speaker 4: When markets surged higher after the Russia-Ukraine war started in 2022, we increased short-term borrowings to fund inventories and hedge positions.
Speaker 4: Commodity prices have moderated since that time. We continue to have adequate liquidity, and with the current interest rate environment, our teams are actively monitoring working capital levels to ensure appropriate customer service, while balancing interest rate exposure.
Speaker 4: We continue to take a disciplined approach to capital spending, which we expect will be approximately $125 million for the year, about half of which will be related to maintenance capital. Our long-term debt to EBITDA currently is about 1.4 times, which is well below our stated target of less than two and a half times. We are evaluating various growth projects in our pipeline, including additional M&A opportunities. We have a balance sheet that will support growth investments.
Speaker 4: for those that meet our strategic and financial criteria. Now we'll move on to a review of each of our businesses, beginning with the trade group on slide number 8.
Speaker 4: Trade reported pre-tax income of $39 million and adjusted pre-tax income of $24 million, compared to $4 million in the same period of 2022. Included in our reported results is a $17 million gain on an insurance claim.
Speaker 4: Merchandising profit centers include a variety of ag commodities, animal feed and propane. These businesses were able to capitalize on market dislocations, increasing their gross profit and pre-tax income when compared to the first quarter of 2022. The premium ingredients business also continued their solid results. Grades adjusted EBITDA for the quarter was $44 million, more than double the first quarter of 2022.
Speaker 4: Moving to slide 9.
Speaker 4: Renewables had a first quarter pre-tax loss attributable to the company of $38 million and adjusted pre-tax income of $6 million, which was slightly better than the first quarter of 2022.
Speaker 4: Included in our reported results is an $87 million non-cash impairment charge relating to element, of which $44 million is attributable to the Andersons.
Speaker 4: Our Renewable Segment results were solid despite low ethanol crush margins through the majority of the quarter.
Speaker 4: We began to see a significant improvement in crush margins in March, which has continued into the second quarter. Co-product merchandising continues to add to profitability, including growth in our renewable diesel feedstock merchandising volumes.
Speaker 4: Renewables had adjusted EBITDA of $22 million in the first quarter, down slightly from $24 million in the first quarter of last year.
Speaker 4: Turning to slide 10.
Speaker 4: The nutrient and industrial business reported a pre-tax loss of $10 million in the first quarter, compared to record pre-tax income of $11 million in the first quarter of 2022.
Speaker 4: The agricultural businesses experienced significant declines in fertilizer prices since last year and lower volumes due to limited customer engagement.
Speaker 4: The Bloomberg Green Markets Fertilizer Index declined almost 60% in the same period.
Speaker 4: Due to these falling prices, we recorded a $4 million charge to revalue certain nitrogen-based inventories.
Speaker 4: Nutrient in industrial had an EBITDA loss for the quarter of $1 million compared to EBITDA of $19 million in the first quarter of 2022.
Speaker 4: And with that, I'll turn things back over to Pat for some comments about our outlook for the remainder of 2023.
Speaker 3: Thanks, Brian .
Speaker 3: Our outlook for 2023 remains positive. Global supply and demand remain relatively tight today, but the impact of a large Brazilian crop and North American planting progress suggests that it could begin to change with a large 2023 US harvest. As always, weather through the key crop growing season will increase...
production in a carry market.
In our renewables segment, we are seeing significant improvement in ethanol crush margins to date.
We believe that our Eastern ethanol plants remain favorably located with expected lower corn costs through the summer.
while Western plants are facing a much higher corn basis level.
We continue to make investments in our plants to improve both the quality and yield of distillers corn oil, a low carbon intensive renewable diesel feedstock.
Although values of distillers' corn oil have declined along with the overall oilseed complex,
There are still several renewable diesel plant conversions coming online that will drive increased demand.
We are positioned to support these plants with our production and third-party supply agreements.
Finally, we're exploring other investments and alternatives to lower the carbon intensity of our ethanol production, including technology that would potentially capture benefits under the Inflation Reduction Act.
The nutrient industrial business outlook is mixed.
Season demand is pushing fertilizer prices locally higher now into the spring.
but we don't expect margins to equal last year's peak levels. With strong farm income and high expected planting, we did see increased customer engagement in April , but have regions of the U.S. still waiting to plant?
We anticipate growth in our industrial product lines and have seen good engagement in our specialty liquid fertilizers.
After a slow start in the first quarter, we expect volumes and margins to improve, but not to the levels of 2022.
Overall, in summary, we are positive about our outlook for the remainder of 2023.
I'm very proud of our team and their efforts in serving our customers and growing our company.
We remain committed to the 2025 EBITDA goal of $475 million that we presented in our February earnings call.
We have several internal growth projects and continue to evaluate external opportunities, which will contribute to our 2025 goal.
We remain disciplined in our approach, ensuring that opportunities fit within our stated strategic and financial guidelines.
We're excited about our future prospects and will continue to make decisions that benefit customers and maximize shareholder value. Thank you and with that we'll turn the call back over to our operator to facilitate your questions.
We will now begin the question and answer session.
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And our first question here will come from Ben Bienvenu with Stevens. Please go ahead with your question.
Hey, good morning. Good morning, Ben. I want to start with a question on the renewable segment. You talked about some momentum building as we head into the second quarter. Can you talk a little bit about the supply-demand backdrop? I would imagine, given where margins were in the first quarter, that you wouldn't have put a large book on for the second quarter. So are you poised to enjoy a bit of the
So our Q1 numbers were in line with what they were last year, but it really started, margins started improving at the end of the quarter. And then here in April and May have really taken off to some really good levels. With industry shutdowns going on right now, we've completed all our shutdowns. We have one that is coming online here still this week.
We're in really good position for running this spring. We've seen driving demand pick up a little bit and exports continue at a solid pace. So the ethanol market is quite tight with really good margins. As you pointed out, we did not have much of a book on early for the second quarter just because margins rallied here just recently.
So we have good opportunities with spot pricing in the ethanol business. So we have a much more bullish outlook on ethanol than we probably talked about a quarter ago. So that's probably the biggest news that's happened here recently. We're feeling pretty good about that demand outlook. Like you said, it's hard to forecast when you talk about a year out with crop conditions and energy markets, a lot of things that can happen.
But the backdrop is very solid and we feel we're in really good position to enjoy strong margins. So the outlook for ethanol is very good.
Okay, that's great. My second question just is about the build in production of renewable diesel. We've heard of projects delayed, but it sounds like some of that is beginning to pick up steam. I'm curious to hear what you guys are seeing in the market there and maybe your view on how the balance of the year unfolds.
Along the same lines, we got a little bit of an update or at least some industry reporting around deliberations on the RVO. Any views that you guys have as we head into the summer around what a final RVO in June might look like and what that might pretend for?
your renewables business broadly and renewable diesel and D4 more specifically.
Sure. And Ben, you've been far as close on what we've been doing. Committed to the feedstock side of the renewable business. Like you said, there's some major refiners that have projects that are underway and will be coming up in a staggered startup pace over the next couple of years. And I think maybe the supply got a little bit ahead of it. Look, Ben.
especially on the soybean oil side. So soybean oil and the oil seed complex you know tempered a little bit here recently from a from a very high price level right which impacted corn oil etc. But the good news for us we've been very committed to this feedstock business and have been adding
origination of different supply agreements to that besides our own oil production. We're looking for opportunities to grow in that segment and we're pretty bullish on the long-term outlook for feedstocks in general. And so we're committed to seeing that growth be a big part of what we're doing in renewables overall. So overall that you know that's a good steady
progression in which that a whole new demands category that wasn't in this industry just a few years ago so we're still very excited about renewable diesel overall.
Your question about RVO, I think none of it is known per se, but I think it's still very optimistic that this administration is committed to.
clean air and all things that support a green environment. And have been very supportive under the recent tax act to have some support for all things that are leading to a cleaner energy pipeline. So we don't expect to see any surprises or curveballs as far as that holding back supply for this new segment. So we're pretty.
on the elements facility. First question, was there a proverbial straw that broke the camel's back on this one or was the decision to put this into receivership just kind of an accumulation of all the various challenges that you've seen in that from that facility over the last few years?
Good morning, Ben. And thank you for bringing that up. I think it's not a straw that broke the camel's back as you used, but just accumulation of challenges. This plant opened in 2019. This is a joint venture with ICM, a very strong ethanol technology player. And this plant is located in Western Kansas, Colwich, Kansas.
And there was challenges to the plant. We had some operational challenges at the beginning. But then there were market-based challenges. The shift by the California low carbon fuel standard credits really shifted quite dramatically. And the Western corn basis has been about as high as it's been in many years. So those two really impacted profitability, which struggled on this facility. Nobody in Texas knows what they can but at least one person here today, one woman. And that platform is extremely important,
in recent times and thus it was required to make debt payments. This is a separate arm's length joint venture and the company recorded non-cash pre-tax impairment charge on these long-lived assets and we now have that facility in receivership and are working through that through the receiver. So we're still very bullish on the rest of our ethanol business.
especially in the east, were very well positioned. And these are large, strong, low-cost facility that we are happy to compete with. Just this venture didn't work out. So we've communicated that in a release here earlier this month.
very well positioned, and these are large, strong, low cost facility that we are happy to compete with, that just this venture didn't work out. So we've communicated that in a release here earlier this month. And Ben, this is. Let's due the
I was going to say, just to add to that, from kind of a framing it from a financial perspective, it's actually been a small drag the past few years. And so net, we had made the comment, no change to our longer term forecasts. And if anything, maybe even a slight pop.
challenges associated with the California tax credit specifically.
How does this experience with the California market kind of inform your growth strategy for the renewable sector generally going forward? If at all, was this kind of a unique situation or do you think there's kind of broader lessons that you're taking from this as you look at the balance of the renewable segment?
Yeah, good question. I think, overall, I think this is a unique situation. And as you know, we've been a major player in the ethanol space for quite some time. We're very committed to the renewable segment overall. We were early to the renewable diesel feedstock business, and we see that having a lot of potential for growth.
If anything, with the Inflation Reduction Act and other acts that relate to renewables overall, we're quite bullish on the segment. We think technologies will help improve that when you look long term about low CI ethanol production and carbon sequestration as well as the
overall in renewables. Got it, very good. And one last question for me, pivoting over the trade segment, for some time you've been talking about the momentum and the kind of premium food feed division within that segment. Can you help me understand the magnitude of that business today and the degree to which you're focused on growing that business?
ingredients and specialty pet food ingredients. We made an acquisition in 2022 with a company, Bridge Agri. And that's done well. And that's also in the pet food segment that's been accretive. That's for our turnings. We're still looking for bolt-ons in that segment of food and pet food. That's a niche that we've done well in.
We'd like to continue to grow in that area. Even includes things like lentils and pulses that have benefited from new demand from plant-based materials in that segment. So are they huge needle movers by one? No, but overall, the accumulation of several moves there could be really.
accretive to our earnings. So we continue to look to bolster that portfolio. Overall, I think it's really interesting to note our merchandising business in the first quarter was really strong, and that we can benefit from both a point-to-point trading in a successful Occ unbeatable Dec operative.
We had a Western drought challenge market where we moved grain and benefited with good margins there. As well as now we're starting to see carry in the wheat market and we're making money the old-fashioned way by storing wheat in the soft red wheat market that looks like we're going to have a big harvest. And so we're kind of benefiting from both sides of the equation.
So it's quite different than the backdrop after the war disruptions last year. There's still disruptions, but the market sort of settled down a little bit with a bigger Brazilian crop. But the opportunity is still there, and the margins look like they're going to be very good to continue through this year. And Ben, just to add a little bit of context on your question about sizing, the premium...
specialty area.
Great. That's very helpful from both of you. Thank you for that. More to talk about, but that's probably a good place to leave it. I'll get back in line. Thanks for taking my questions.
And our next question will come from Eric Larson with Seaport Research Partners. Please go ahead with your question. Okay.
So, I don't ask ethanol questions very often, but I think it's relevant here. Number one, we now have the E15 that's going to be produced this summer again, like it was last summer. It looks like it might be permanently in a year from now. Right?
We have the potential that SAF is going to get approved for ethanol. And I'd really like to touch base on that a little bit. I know that they're still in the approval process for using ethanol to provide, you know,
sustainable aviation fuel. What is the outlook for that? I mean it seems like there's some positives here. We know that driving is getting a little bit better, but you know all the discussion of EVs is I think overdone. It seems like really the outlook for ethanol for the next couple of years could actually be a little bit better.
than what I think the market is thinking. Can you talk a little bit about that outlook?
I think Eric made some very good points there just to summarize some of those points you made obviously with administration's moves on e15 and making that more of a permanent or year-round blending of ethanol is very positive for the industry our exports continued at a solid pace and we think ethanol exports could
surpassed last year's level. And that's a pretty broad group that we're shipping to in spite of a strong dollar. And driving demand is increased as you go into the summer driving season. The outlook is quite good. There's been some challenges. Like we talked about shutdowns in the industry, some people have had trouble getting supplies of equipment with some of the supply chain challenges that are out there.
We're in very good shape with our plants. And I mentioned we finished our shutdowns. And our last one finishing this week, we're ready to run well. So we're excited about the outlook for this year. Your longer term question about SAF, and it's interesting to think about all developments of new technologies in ag over time. The beautiful part about this is this is a one-to-one replacement when you talk about SAF. Like renewable diesel, it's not a ge cabbage at all.
but it's going to be something that's going to be a good potential new demand for this industry over time. And we're excited to participate in that. There's a lot of big partnerships and alliances that are going to take place. And we hope to be part of this new demand that's going to be created in the aviation market. So in general, like you said, the outlook may be better now than maybe we thought about this marketplace just a couple of years ago.
You know we lost 10 to 12 percent in corn prices in April . You know they've been coming down. We've been on competitive I think around the globe.
I lost a little bit of Chinese demand here last week. But it's interesting in that it looks like demand has picked up pretty sharply in the last several days because of lower pricing. And I'm seeing some basis values that still would suggest corn supplies are...
are tighter than maybe what all of us might believe. You know, can you talk, there's a lot going on in corn right now. The Mississippi's shutting down again in parts because it's flooding and that hurts basis, it hurts exports. Can you just kind of put all those points together and talk about corn for a minute and...
that happened and the supply chains were disrupted and I think the whole world, I realize, a lot of us knew for a long time that Ukraine is a very important supplier to the world market.
thus the global export grid had to adjust, which it did, which was a strong impact to US elevations and exports initially. What's changed a little bit is that the Chinese approved Brazilian sources for corn, you know, they had some phytosanitary restrictions that were lifted.
Brazil's had a big crop. Originally people thought 120 and now it's up to 125 to 130 million metric tons of Brazilian production. So that's good. The world needs a good solid corn supply but the US exports probably were impacted by that short term as you mentioned.
China, who was an early buyer, has cancelled some of the US purchases and probably pulling that from Brazil. So that's just a normal shift we've seen over the years.
I think the backdrop is more on the supply side which we pointed out is important. The grower is pretty much you know sold out for old crop and old crops can be very tight still so that's what's kind of keeping basis levels firm. The board did a lot of work as you mentioned you know down over 50 cents in the last 10 days or 12% so flat prices have dropped and that's
Between that and and the tight supplies. I think we're going to have firm and inverted corn markets to end this crop year Now next year, it's quite a bit different outlook is that the farmer hasn't sold a lot for new crop Still waiting to get the crop planted.
We've had good planting progress in the west. And in general, we're above the five-year average. But it's very regionally different. Been pretty wet and cold out in the east, Indiana, Ohio, Michigan. But we have an outlook now for really good weather here in the next 10 days. And we will see planting really progress. And in your neck of the woods in the Dakotas and Minnesota, it's been a lot of snow cover in a late morning.
for us, which is good, is wheat crops in very good shape and wheat looks to be in really good condition in Canada and in the eastern wheat belt, so we're feeling really good about soft red wheat production. So overall the market backdrop slightly different and one other point I think that's interesting
that we're bumping into higher crop insurance floors. So because the timing when crop insurance as you well know Eric was set at higher levels that will change some of the marketing plans for growers as they you know sell against a crop insurance floor. So the market has a good solid base underneath it.
even with a strong production going into the year. So it's a really good setup. We're gonna have volatile markets to continue. I think that's good opportunities for us. We like to have this volatility and we'll have big production. So if we get the crop planted, which we think we will here this month, and you have good growing, we have good, you know, pre planting moisture across most of the belt.
US production should be good and and volatility will be there. We like both big crops and volatility. So that's a good thing for the Anderson's. Yeah, perfect. No, I'm good summary and and you're right, you know, the the the crop insurance floor here is a big deal right now. It really is. I'm glad you brought that up. So just a few follow-up questions regarding that. Look, you talked about an inverted curve for this year.
maybe 24 is a little different. We haven't got this year's planted yet, so 24 we don't even need to discuss. But an inverted curve is very positive for you guys. It's a good environment. You did exceptionally well with an inverted curve last year. Where do you sit with your mark-to-market positions on. r
so I can't make perfect forecasts. But the bottom line here is the outlook for trade still is a relative positive for you for calendar 23. Where am I missing it?...
So we don't see any major mark to market, big moves that are going to impact us. I think you're assuming you're talking about basis levels as we're hedgers and are very conservative when it comes to risk management and do a very good job with that. We're optimistic about those opportunities for margin improvements in our trade side of our business. We've done very well. We had a really good start to the trade. We've had a really good start to the trade.
the timing of that is setting up to to do well. Now how farmers sell and what's going to happen with progress of the crop a lot of that needs to needs to come you know in the next couple months but we see a backdrop from a merchandising stand but is you know just as good as last year with really good opportunities for us.
I think the trading of grain is a good setup for us and a good backdrop going into the next crop year. Okay, good. Final question on wheat. You got some traditional carry coming. What a surprise, huh? So are you getting a good, solid crop this year in your section in your area of the country?
Absolutely. So I mean we had a really good winter for soft red wheat and especially the Canadian crop in Ontario. So all that that's tributary to our Toledo assets will be really good for for the Anderson's as we've had Kerry move back into the soft red wheat market.
We think as production comes in that that caries can even widen and can be additional storage opportunities for us. So wheat won't be an aggressive export or tradable market for soft red wheat, but will be good for storage and carry and the quality looks very good.
We're pretty optimistic about the soft red wheat crop.
Parts of the hardware and wheat market are dry, right? So I think there's still going to be a good trade that happens. And we like that opportunities in the west where we trade for quality premiums in hard wheat and some blending that happens in the hard wheat country. So a good backdrop overall on wheat for us this year.
OK, I'll leave it at that. I'll leave it one final question. Is there anything I didn't ask that's important that you'd like to point out here? I think overall, we're in a very good position. So we talked about last year was we had two record years in 21 and 22. I think you heard that from others in the marketplace as well. It's hard to say, hey, we're going to.
I have a third record year in a row given the backdrop of the global markets, but even withstanding that, it's going to be a very solid year. What has played out better, ethanol margins are higher than we expected. So for sure, second quarter and in the third quarter, we're looking at a much stronger ethanol margin environment than maybe we anticipated earlier.
We've mentioned several times coming off a big fertilizer run-up last year and then a big rundown in prices. I mean fertilizer prices are down almost 60%. It's hard as a wholesale distributor to make significant margin improvements in a weak market where the farmer hasn't engaged much in purchases. So first Carter was rough on fertilizer.
we expect the second quarter to rebound, but it will be lower than last year in fertilizer, coming off a record year. But on balance ethanol better, grain very solid, and then just a little bit weaker in our fertilizer.
Overall, for the Andersons, real strong year. All right, Pat and Brian , thanks guys for all the insight. Appreciate it.
for the Andersons, real strong year. All right, Pat and Brian , thanks guys for all the insight, appreciate it. Thank you.
for any closing remarks. Thanks, Joe. We wanna thank you all for joining us this morning. Our next earnings conference call is scheduled for Wednesday, August 2nd, 2023 at 11 a.m. Eastern Time.
and second quarter results. As always, thank you for your interest in the Andersons, and we look forward to speaking with you again.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.