Q2 2023 The Andersons Inc Earnings Call
Good morning, ladies and gentlemen, welcome to the Andersons 2023 second quarter earnings Conference call. My name is Anthony and I will be your coordinator for today.
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Later, we will facilitate a question and answer session.
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I will now hand, the presentation to your host for today, Mr. Mike Culture, Vice President corporate controller and Investor Relations. Please go proceed.
Thanks, Anthony 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're viewing this presentation via the webcast the slides and commentary will be in sync.
This webcast is being recorded and a recording and the supporting slides will be made available on the investors page 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.
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'll 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.
And for your continued interest in the Andersons.
I'm very pleased with our second quarter results.
We had our second best ever Q2 exceeded only by the second quarter of 2022, which was an all time record for the company.
Our nutrient and industrial segment results for our best in 15 years, and our renewables results were very strong as well.
While our trade results were down year over year due to the fact that last year's results were impacted by strong demand and market volatility in response to the Russian invasion of Ukraine.
On a year to date basis trade remains ahead of last year.
Trade group results for the quarter include strong merchandising earnings on good positions across several products and geographies.
Performance of our North American assets was lower than last year due to normalized grain elevation margins.
Recent investments in premium food and feed ingredients added to our results.
Operating results from our renewables business was very good due to a combination of strong crush margins and efficient operations.
We continue to benefit from good merchandising of ethanol and co products and further growth of our low Ci renewable diesel feedstock merchandising volumes.
Our plants are running efficiently and generated improved yields above last year.
Our nutrient and industrial results reflect improved volumes as we were well prepared for the planting season, which was delayed somewhat compared to last year.
As expected lower overall fertilizer prices compressed margins from the high levels, we saw in 2022.
But our increased sales pushed results higher.
Brian will now cover some key financial data and after that I'll be back to discuss our outlook for the remainder of 2023, 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 2023, the company reported net income from continuing operations attributable to the andersons of $55 million or $1.61 per diluted share.
And adjusted net income of $52 million or $1.52 per diluted share.
This compares to adjusted net income of $82 million or $2 39 per diluted share in the second quarter of 2022.
Gross profit for the quarter was $222 million compared with $231 million in 2022.
For the year to date period gross profit of $370 million in 2023 was up from $350 million in 2022, driven by improvements in trade and renewables.
Adjusted EBITA for the second quarter of 2023 was $144 million compared to $169 million in the second quarter of 2022.
Trailing 12 months adjusted EBITDA exceeds $386 million.
Our effective tax rate varies each quarter based primarily on the amount of income or loss attributable to noncontrolling interests.
We recorded taxes for the quarter at a 21% effective tax rate.
We still expect our full year adjusted effective tax rate between 22 and 25%.
Next we'll move to slide six to discuss cash liquidity and debt.
We generated cash flows from operations before changes in working capital of $118 million in the second quarter of 2023 compared to $135 million in 2022.
Commodity prices have moderated since the highs of last spring, resulting in a sharp decline in our short term borrowings from $1.2 billion in 2000 $22 million to $103 million at the end of June .
And with the current interest rate environment. Our teams are actively monitoring working capital levels to ensure appropriate customer service, while balancing interest rate exposure.
Next we'll take a look at capital spending and long term debt on slide seven.
We continue to take a disciplined approach to capital spending, which we expect will be approximately $125 million to $150 million for the year roughly half of which is typically related to maintenance capital.
Through June we have spent $76 million on capital expenditures.
Included in this spending are several growth projects expanding capabilities in our fertilizer renewables and premium food businesses.
Shortly after the end of the quarter, we closed on the acquisition of AC J International a growth opportunity for us in the pet food ingredients supply chain.
We are evaluating various growth projects in our pipeline, including additional M&A opportunities.
Our long term debt to EBITA currently is about 1.6 times, which is well below our stated target of less than two and a half times.
We have a balance sheet with capacity to support growth investments for those that meet our strategic and financial criteria.
Now, we'll move on to review of each of our businesses beginning with trade on slide number eight.
Trade reported pretax income of $5 million and adjusted pre tax income of $7 million in the second quarter of 2023 compared to $24 million in the same period 2022.
While trades quarterly results are down from the second quarter of last year, our year to date results are higher than last year.
Merchandising performance was mixed with some profit centers recording very strong results, while others did not have similar market opportunities compared with last year, which was impacted by a period of significant volatility following the start of the Russia Ukraine War.
Results in the North American assets were down following a good first quarter as elevation margins normalized.
Investments in growth projects made in prior periods were additive to our premium food and pet food ingredient businesses.
Trades adjusted EBITA for the quarter was $27 million compared to $47 million for the second quarter of 2022.
Year to date, adjusted EBITDA is $71 million compared to $67 million last year.
Moving to slide nine.
Renewables had second quarter pretax income attributable to the company of $39 million and adjusted pre tax income of $32 million compared to $46 million in the second quarter of 2022.
Included in the prior year results are $9 million of USDA, Covid relief funds and $24 million of mark to market gains.
Our current quarter earnings were solid due to strong ethanol crush margins combined with efficient operations at our four production facilities, which drove improved yields.
Merchandising results for renewable diesel feedstocks feed ingredients and third party ethanol trading were also up compared with last year.
The total volume of vegetable oils merchandize increased 64% over 2022, as we continue to grow our renewable diesel feedstock business.
Renewables had adjusted EBITDA of $74 million for the quarter compared to $86 million in the second quarter of last year.
Yeah.
Turning to slide 10, the nutrients and industrial business reported its highest second quarter in 15 years with pretax income of $43 million compared to $38 million in 2022.
And overall volume increase of 21% driven by demand in our agricultural product lines led to an outstanding quarter. After a slow start to the year.
With fertilizer prices stabilizing at more historical levels, we were well positioned to serve our customers throughout the spring planting season.
Year to date sales volume has increased by 10%.
Although as expected margins declined in our AG products, given the significant year over year reduction in market prices.
Nutrient and industrial had EBITDA for the second quarter of $52 million compared to $47 million last year.
And with that I'll turn things back over to Pat for some comments about our outlook for the remainder of 2023.
Thanks, Brian .
We remain positive about our 2023 outlook.
And at the midpoint of the year, we're very pleased with our results year to date.
We knew that our record second quarter of 2022 results would not repeat given the several of the geopolitical and global market events that occurred last year.
That said our year to date results are very strong <unk>.
Improving U S crop conditions should influence the global grain supply outlook as well.
And as always weather through the key crop growing season will influence the final production.
At the recent rains in the Midwest is good news to U S farmers.
Our trade business outlook remains solid most of our dry areas have seen improvement in crop conditions in July .
And we are monitoring this closely.
Also in July we sourced more of the winter wheat harvest than we originally anticipated and it better qualities and our eastern assets.
Like last year, our Louisiana assets are well positioned for their early harvest.
With our balanced portfolio of merchandising and grain assets, we're able to optimize both volatility and crop dislocation as well as potentially shift with larger production and carry markets.
In our renewable segment ethanol crush margins remain historically strong.
And are above our early 2023 expectations.
We believe that our eastern ethanol plants are favorably located with expected lower corn cost through harvest.
We remain focused on improving our four production facilities for optimal efficiency and are making investments to increase our fermentation capacity.
We also.
To grow our supply arrangements from other producers distillers corn oil and other third party renewable diesel feedstocks.
We are evaluating a number of opportunities that will lower the carbon intensity of our ethanol production with potential benefits from the inflation reduction Act.
The outlook for this business remains strong.
Yeah.
The neutral and industrial business outlook has improved with strong second quarter results.
We expect to see solid farm incomes once again, which should continue to support purchasing of crop inputs, including our value added low salt starters and micro nutrients.
We also anticipate growth in our industrial product lines.
As always the timing of harvest and fall application season will influence fourth quarter demand.
So in conclusion I continue to be extremely proud of our team and their dedication to serving customers.
And we remain committed to our 2025 EBITDA goal.
$475 million.
In reaching that goal, we must successfully complete the internal growth projects and acquisitions that we have in our pipeline.
We will continue to remain disciplined in this approach.
We're pleased with the progress we're making on executing our long term growth strategy, and we'll continue to make decisions that benefit customers and maximize shareholder value.
Thank you in fact, well now turn it back over to our operator, Anthony who will take your questions.
We will now begin the question answer session.
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At this time, we will pause momentarily to assemble our roster.
Our first question will come from Ben B Avenue with Stephens you May now go ahead.
Hey, Thanks, Good morning, guys. Congratulations thank you Ben.
I've got a handful of questions I wanted to start on the renewables business really strong results here you talked about kind of continued momentum into the back half of this year with sustained strength in margins in the industry.
Can you talk a little bit Pat about your ability to Rd lock in some of those strong margins as we look out to <unk> and then when you look at the pieces that build up to a more robust backdrop your view on the sustainability of those dynamics.
Sure, Yes, very good comments Ben that.
I think when we go back earlier in the year our outlook for ethanol margins have greatly surpassed what we originally thought there going to be so we've been.
Really pleased with driving demand I think.
Official numbers are up almost 2% on June through August . So this vacation driving that everyone seems to be doing let alone jet fuel demand et cetera is really driving the demand side.
We're not back to the pre Covid commuter miles that we had but we are seeing more of a return to work maybe.
Maybe pushing that a little bit but also the implied blending continues so we're getting good small increases in blending all the time, so stocks have been tight all year. We continue a steady export pace of that one three to one 4 billion gallons and so the outlook continues strong.
And now we'll be going into way.
Harvest period, where we will hopefully have.
A really good corn crop the rains have been outstanding here. This last month, so we're set up very well.
Your question about hedging in Florida, we always.
Trade our positions will put on forward.
Hedges when it makes sense, we've done some of that this past year to capture margin opportunities. We've done some of that but generally the market still pretty inverted to the spot and the spot spend the increased value. So there hasn't been any.
Big opportunities if anything we look further out into the first quarter, which is historically a lower price period as you go into winter. So we always look for opportunities in the winter months, if we could lock down a good margin there and so we'll we'll be keep our eyes open for that.
Okay, great very helpful.
And then you gave some comments that were helpful and kind of characterizing the trade business set up ahead, but I wanted to ask you you made a comment about lower basis values.
In the east versus the west for corn benefiting renewables.
When you look at kind of east versus west.
Conditions as they stand today, some of the benefits of assets in Louisiana and the Gulf.
Are there arbitrage opportunities around basis that exists that you see through new crop as well any comments there on the benefits of your asset base would be helpful. Sure absolutely and if I indicated about an east west split I didn't mean, it that way that historically like last quarter, we had seen the last couple of <unk>.
<unk> eastern values cheaper than the west is the west was really struggling with.
Bad weather and tight supplies last year, that's kind of equalized, a little bit so that east to west differential as it become more neutralized here in the last month or two as we get closer.
The effects coming harvest.
I think we're very excited about a couple of things and our merchandising business.
One as you know Ben were big players in the soft red wheat market with our eastern located assets are.
Tributary to the CME delivery point here in Toledo, we had surprisingly really good quality as well as good yields it surprised us because it was pretty dry it and we thought that yields might be sacrificed and they didn't and the soft red wheat crop came in very strong both here and into Canada.
In Ontario, So we feel very good about our ability to earn this goes back for you Ben in the analysts the variable storage rate. So suffered we'd market is close to 75% of carry at us, we're probably pretty highly likely chance of earning.
A variable storage rate tick if you remember the days, we do that that's a good thing for the Andersons. So while we talk about volatility in global markets. We do see a stable really good soft red wheat eastern crop.
That's a good values that will generate earnings for us.
On the corn and bean front, it's good that you mentioned dislocation regionally right. So you have to remember where we are.
Not solely like an export or we're really focused on a lot of domestic markets, both cattle and dairy and hog as well as supply in ethanol players and others and it's still quite a volatile out there in local truck markets and our team has done a great job navigating those markets here the last two months and we see that to continue.
You provide good opportunities for the rest of the year, So we're pretty confident about how.
Grain merchandising results will look how the balance of the year.
And the last point.
You don't mind me going there Ben it sits on the global look I know you all are watching things closely.
We had a big Brazilian crop it looks like the U S crop will be a good one this year now after some early concerns it's been very hot but as you know rain makes grain as we always say so just these hot wet conditions and is perfect for growing corn.
On the globe, though these recent activities in the Ukraine, and Russia continue to add you know gasoline to the fire here.
So as you know there is a situation theres a bridge called the Kirk Bridge K E. R. CH that connects.
Russia to Crimea, and it's very critical for grain movements out of Russia, Russia Crane movements have been still been huge which is good to supply the needy countries, especially in Africa and the middle East. The challenge is that spreads has been bombed a couple of times before by Ukraine, and if that were to be.
Destroyed or damaged share so that will impact, especially wheat exports.
And the other side of that coin the Russians had twenty-five drone strike. This morning 15 of those hit in Ishmael. This isn't Ukraine, it's right on the.
The Danube.
Port location for barge loading, destroying some grain and food grain facilities and being right on the Romanian border. As you. All know also causes concerned about that Romania, being a NATO and an EU country. So the bottom line on wheat and European Situation's related to Russia.
Exports is quite volatile and I think probably the most important thing that the market is watching right now and of course, we're watching that closely.
What it does mean is that volatility at a macro sense coming back to the Andersons I think as it plays right into our hands for merchandising opportunities.
Do you have a very long winded answer than to tell you about what's going on in the market, whether and geopolitics, but that's that's exciting news of what's happening today.
That's great Super helpful.
One more question for me and it's for Brian .
The balance sheet.
It's amazing what a difference a year makes.
The balance sheet leverage has come down considerably and I think typically seasonally you know your short term borrowing comes down into the back half of the year, which would imply that things maybe deleverage more.
How should we be thinking about your appetite for balance sheet leverage you talk about your targets, maybe help us think about what you'd like to do there.
Yeah. It's a good question Youre right in third quarter is typically where we would see the largest decline some of that has changed a little bit now that we have more of the with our Swiss office in the international and some of the merchandising and the larger loads there, but I would say generally speaking.
We feel good about where we're positioned today, we feel good about our ability to do growth projects be it capital expenditures and M&A and we kind of we feel really good about where we're positioned in and expect to use it as appropriate for the right types of projects.
When we talk about this later, we executed on two acquisitions here in the last six months that are accretive and we're feeling good about those I call them in our previous call base hits and doubles, but it would be smaller to midsized acquisition. So we're excited about that.
One point I think it's interesting to note about balance sheet is obviously corn and bean prices are off the peak a year ago as his fertilizer quite a bit but farmer selling is quite a bit less so last year when the market rally we had a pretty good book on a farmer business and this year the farmer's been reticent to sell till he sees what is crop is.
So our absolute ownership levels are lower to me that provides an opportunity for us as we go into harvest. So I think that's a good position to be in.
Very good that's great. Thank you all so much.
Our next question will come from Brian Wright with Roth Capital Partners. You May now go ahead.
Thanks, Good morning, Congrats on the result.
Just taking a step back and you talked about the exploring growth.
In merchandising up renewable diesel food stocks and also the.
Investments and lower carbon intensity. So I just wanted to talk think about it in terms of prioritization of capital allocation and how you see that number one and number two just kind of how you see those opportunities between organic versus inorganic.
Brian Thanks for the question, it's an important clarification. So there's really two strategies in our overall renewables business. We have two paths. We're taking strategically one is on the we created a renewable diesel feedstock trading desk, a couple of years ago and build that business up we continue to grow that.
And our volumes get bigger each quarter, we'd like to do more in that space and if there were a bolt on acquisitions or potentially to do things in that space, we would like to do that.
Well, we're not going to get we're not going to build a $3 billion Noah renewable diesel plant, we're talking about focus on the feedstock side.
<unk> optimize our corn oil production with investments in our ethanol plants to feed that and we're looking for other opportunities to continue to grow the Rd feedstock not just virtual but also our fats and Hugo So it's an area of growth for us. So that's one plank of the strategy.
And the other point is about our ethanol assets themselves. So we've talked before about we feel our four plants are very.
Large competitive low cost facilities, we've invested consistently over the years to make them that way now we want to do additional investments to make them lower their carbon footprint are lowered their ci scores. So.
So we have some opportunities we mentioned we're doing some work right now a different energy projects in the plants as well as a fermentation increases our capacity and we're working on projects for capturing carbon capturing and sequestering carbon nothing.
Nothing we can announce at todays call, but things we're working on so the two different products. One is on renewable diesel feedstocks. The other one is how do we make our battleships in the ethanol business stronger and lower Ci and we want to continue to focus on it because we think long term the most efficient.
Plants, where the best yields the lowest Ci scores are going to be winners. So we're just plugging away and making those plants better through.
Through investing in them and that's where a good chunk of our capital will be going.
Great. Thank you and then just a follow up on the on the two assets. Its two acquisitions in a short amount of time in that space.
How to think about that or do you feel like you've got a footprint there.
You're comfortable with or is that an opportunity as well.
Yes, it's a good question I guess, what I'd say on that one Brian as we we feel really good about the bridge and ACG AC J acquisitions, they are very complementary with our existing pet food ingredient business.
We feel really good about what that brings and just to kind of put that in context, I would say the the incremental EBITDA you could think of from the combination of those two is probably call it $10 million plus or minus on an annual basis, and we'd love to do more but we feel really good about bringing those two teams into our fold.
But yeah, it's a space, where there's a lot of growth a lot of you know theres better margin opportunities and we'd like to grow it further.
Maybe Brian just to kind of hit on that a little bit more is our stated strategy around two segments. Besides the overall grain merchandising business, which we've historically been in for 75 years, we've been pushing growth in two areas pet food and food ingredients. So on the food ingredient side, we've been a long term supplier.
<unk>, our food grade corn to chip manufacturers.
And we have added capacity and added capabilities to those assets, both in Illinois, and Nebraska to have more capability in that food space. So we'd like to expand that footprint. That's a very stable consistent supply business that we like and then on the pet food ingredient side, we've been in that business.
For quite a bit of time, we want to add additional products and capabilities, but one cautious thing we have I think you've seen in the past pet food companies got very high priced in some multiple very high multiples were paid for ingredient companies and we don't want to do that we're seeing very discipline to keep things that are inside our wheelhouse and things.
We know how to do and can buy at fair value. So with the case of bridge in a C. J. We're excited about those two bolt on acquisitions and they fit that criteria exactly in the pet food ingredients space.
Yeah.
Great. Thank you so much.
Our next question will come from Ben <unk> with Lake Street Capital You May now go ahead.
Alright, Thanks for taking my questions first question.
On the renewable diesel initiatives that you've discussed on the call first of all Brian Thanks for providing a little bit of color on the volume increases year over year that was super helpful and I appreciate the magnitude of that.
And I'm wondering if you can talk about your strategy within renewable diesel and in particular, how your strategy is informed by various tax incentives I mean, the renewable fuel standard changes seem to get people in the space up in a tizzy.
Recently and I'm wondering if you first of all the heartache on that and then also how how changes in these incentive really formulate your strategy in renewable diesel going forward.
Okay. Thanks.
Very very good points I think the interesting thing for us.
We're not being as soybean crusher ore.
And R&D manufacturing.
And a lot of the big players who have crush plants makes a lot of sense they've expanded the partnered with key renewable diesel players that that makes a ton of sense. The point is there's a lot of opportunities. Besides that right. There is a much bigger space and people really think about when you talk about the whole used cooking oil space and fast increases and then corn.
Oil and other vegetable oils. So we feel that's the place that it fits really well for the Andersons. So we're continuing to add on our footprint. We already have in Cornwall and have built out suppliers of that so none of that really has a direct correlation to tax incentives because it's that's related more to the Rd manufacturer, we're really focused on.
And ingredient supplier and a diverse ingredient supplier both from the product type as well as a geography. So that's really our focus and we think we can get a lot bigger than that and it isn't one big huge investment.
I think it will be probably more mid sized ones that we could bolt on if we can make that work well.
Very different.
The ethanol side as we talked about earlier so the two.
Tax incentives under the tax code were both a 45 to <unk> 45, Q. There's a time element. There. So people are working quickly to get new technologies in the ethanol plants. So that's I think that's different.
Because then the Rd side. So we are working on that and those.
Tax incentives make a difference to the payback of those projects.
Yes.
Gotcha Gotcha and then.
Both Pat both you and Brian talked about fermentation expansion in the renewable segment.
Can you kind of characterize the magnitude of this that you are looking at and then also degree to which you want to kind of.
Implementation capacity kind of around the edges that existing plants versus looking at it entirely.
Higher new facilities.
Its the latter so it in running.
The good news ive been around these facilities for over 30 years, it's not just fermentation. It's any bottlenecks that prevent you from reaching peak crush capacity at our facilities in some cases, one facility that might be a firm capacity to get you a more put through.
Focus on yield and specifically on corn oil yield of course, the most valuable product we have right now so any ounce a corner or we can squeeze out we're doing we've put in place the troops in technology at our facilities. Our last one is going in as we speak and so the other opportunities it's not like an incremental <unk>.
X percent of capacity band that where it's more about debottlenecking facilities to make them run more consistently so that that's what we're in the middle of working on right now how do you make them again, the most efficient highest yielding and then lowest ci. So Dci story is a longer term game right. This isn't we're in early innings of a long.
Baseball game here on.
On the renewable side and lower NCI. So we just we need to play the game smart make good bets and these early inning periods.
Got it got it very good that makes it makes a lot of sense.
Alright, well I'm I think I'm in good shape, congratulations to you all in a really great quarter and thanks for taking my questions and I'll get back in line I appreciate the comments. Thanks Beth.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to my culture for any closing remarks.
Thanks, Anthony we want to thank you all for joining US. This morning. Our next earnings conference call is scheduled for Wednesday November eight at 11, a M. Eastern 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.
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