Q3 2023 The Andersons Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Andersons 2023 third quarter earnings Conference call.
My name is Joe and I'll be your coordinator for today.
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Later, we will facilitate a question and answer session.
As a reminder, this conference is being recorded for replay purposes.
I will now hand, the presentation to your host for today, Mr. Mike Holter, Vice President corporate controller and Investor Relations. Please proceed.
Thanks, Joe Good morning, everyone and thank you for joining us for the Andersons third quarter earnings call. We have provided a slide presentation that will enhance today's discussion. If you are viewing this presentation from our webcast the slides and commentary will be in sync. This webcast is being recorded and the recording and the supporting slides will be made available.
On the investors page of our website at Andersons, Inc. Dot com shortly.
Please direct your attention to the disclosure statement on slide two as well as the disclaimers in our press release related to forward looking statements certain information discussed today constitutes forward looking statements that reflect the company's current views with respect to future events financial performance and industry conditions.
These forward looking statements are subject to various risks and uncertainties.
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 the GAAP to non-GAAP measures 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.
Third quarter results were solid for the company compared against last year's best ever third quarter.
Our renewables segment had a record third quarter and was significantly ahead of last year.
Trade results were down against last year's best ever trade Q3.
Included some atypical charges.
Nutrient and industrial results in this seasonally quiet quarter, where improve from 'twenty to 'twenty two.
Trade results for the quarter include improved results in our North American assets and in the recent investments and acquisitions in premium food and pet food ingredients.
Our merchandising results were solid in the quarter, but were negatively impacted by a currency related loss in Egypt.
With regard to this loss our international business strategy includes the supply of grain to dense population growth regions in Africa, and the middle East.
We enable this through repeatable trade flows with long term customers.
Within our merchandising portfolio.
Results in our Middle East North African business. This quarter were impacted by limited U S dollar currency liquidity in Egypt.
As a practice we sell in U S dollars.
This loss resulted from an unfortunate and unique situation, where we accepted a lower exchange rate from key customers for product already delivered.
Given our customers the limited ability to access U S. Dollars. This was an issue isolated to Egypt and our other Swiss merchandising business showed an improvement for the quarter.
Operating results from the renewables business were outstanding with a combination of strong crush margins and efficient operations.
Our ethanol production facilities continue to run well with improved ethanol yields and lower plant operating costs.
We continue to benefit from good merchandising, particularly renewable diesel feedstocks, where we increased sales volume and further diversified our product portfolio.
Our nutrient and industrial results in a seasonally low quarter reflect improved margins in our AG supply chain and manufactured products.
Brian will now cover some key financial data and after that I'll be back to discuss our outlook for the remainder of 2023.
Right. Thanks, Pat and good morning, everyone. We're now turning to our third quarter results on slide number five.
In the third quarter of 2023, the company reported net income from continuing operations attributable to the andersons of $10 million or 28 cents per diluted share and adjusted net income of $5 million or 13 cents per diluted share.
This compares to net income of $17 million or 50 cents per diluted share in the third quarter of 2022.
Overall gross profit of $158 million for the quarter was just below the $164 million in 2022 with renewables and nutrient and industrial showing increases offset by a year over year decline in trade.
For the year to date period gross profit of $528 million increased from $514 million in 2022.
Adjusted EBITDA for the third quarter of 2023 was $70 million compared to $83 million in the third quarter of 2022.
Trailing 12 months adjusted EBITDA totaled $374 million.
Our effective tax rate varies each quarter based primarily on the amount of income or loss attributable to noncontrolling interests.
We recorded Texas for the quarter at a 21% effective rate.
We expect our full year adjusted effective tax rate between 21 and 24%.
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 approximately $50 million in the third quarter of both 2023 and 2022.
Commodity prices have moderated since the highs of last year, resulting in a sharp decline in our short term borrowings from over $650 million at the end of the third quarter of 2000 $22 million to $14 million in 2023.
Our teams continue to actively monitor 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 number seven.
We continue to take a disciplined approach to capital spending, which we expect will be between 125 and $150 million for the year about half of which is typically related to maintenance capital.
Through September we have invested about $109 million.
Included in this spending are several growth projects expanding capacity in our premium food renewables and nutrient and industrial businesses.
In addition to the capital investments we closed on the acquisition of AC J International early in the third quarter.
Growth opportunity for us in the pet food ingredients supply chain.
We are evaluating several growth projects in our pipeline, including additional M&A opportunities and projects to lower the carbon intensity of our ethanol production.
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 significant capacity to support growth investments that meet our strategic and financial criteria.
Now I will move onto a review of each of our businesses beginning with trade on slide eight.
Trade reported pretax income of $8 million and adjusted pre tax income of $5 million compared to $41 million in the same period of 2022.
We had mixed operating results in our trade business portfolio, when compared to our record 2022 third quarter.
In the North American assets, we had improved third quarter results, which included additional wheat space income.
Investments in growth projects, including acquisitions, and additional food corn capacity were accretive to our premium food and pet food ingredient businesses.
This was mostly offset by a decline in our U K based organics business, which had record performance in 2022.
Aggregate results of our merchandising businesses were down from the third quarter of 2022, and a backdrop of a less dynamic U S grain market, although several product lines had improved performance.
As Pat mentioned earlier in the Middle East North Africa business, we sell in U S. Dollars. However, given the limited U S dollar currency liquidity, our customers in Egypt have experience, we elected to accelerate the monetization of certain Egyptian receivables and lower exchange rates.
This decision during the quarter also led to a revaluation of the remaining Egyptian receivables.
In total this resulted in a pretax charge of $19 million or <unk> 43 per share recognized in the third quarter.
Trades adjusted EBITA for the quarter was $21 million compared to $60 million for the third quarter of 2022.
Year to date trade adjusted EBITA is $92 million compared to $128 million in 2022.
Moving to slide nine.
Renewables had a best ever third quarter generating pre tax income attributable to the company of $26 million compared to $8 million in the third quarter of 2022.
Our current quarter earnings were outstanding due to strong ethanol crush margins combined with efficient operations at our four production facilities, which drove improved ethanol yields.
Operating costs decreased slightly year over year.
Merchandising results for renewable diesel feedstocks feed ingredients and third party ethanol trading improved nearly $5 million when compared with 2022.
Renewables had EBITDA of $60 million in the third quarter compared to $34 million in the third quarter of last year.
Year to date adjusted EBITDA of $157 million is $13 million ahead of $144 million last year.
Turning to slide 10.
The nutrient and industrial business reported a pretax loss of $8 million compared to a loss of $12 million in 2022.
Overall fertilizer margins increased in this seasonally slow quarter.
While volumes increased in our egg supply chain business volumes in specialty liquids were impacted by a month long rail disruption at one facility and manufactured products were lower on continued slow consumer demand.
Inventory adjustments that were taken in the third quarter of 2022 did not repeat.
Nutrient and industrial had positive EBITDA for the quarter compared to an EBITDA loss of $3 million in the third quarter of 2022.
And with that I'll turn things back over to Pat for some comments about our outlook for the remainder of the year.
Thanks, Brian.
We remain very positive about our 2023 EBITDA outlook.
And expect to meet or exceed the previously communicated it's around $50 million to $375 million range.
U S agricultural production remains high with a move to carry markets.
Off a strong harvest volumes, which is beneficial from a grain asset footprint.
Farm income is projected to decline from lower commodity prices, but should remain above the long term average.
At these levels, we believe farmers should still be incentive to invest in crop inputs.
With our broad portfolio.
AG products, we remain positioned to perform well into 'twenty 'twenty four.
Our trade business outlook remains positive.
Corn harvest is ongoing although a bit delayed in our eastern asset locations as it has been slower to dry down in the fields.
As of this call soybean harvest is nearly complete nationwide.
And the significant soft red wheat harvest as summer is already providing good space income, especially with the first V. S. R Tech starting in September.
And we didn't come opportunities should continue to expand into 2024.
The wet corn harvest in the east should lead to stronger try and income at our grain assets.
This delay could move some of our planned fourth quarter elevation income into early 'twenty to 'twenty four but overall, we're very pleased with the size and quality of the crop in our dry areas.
With our balanced portfolio of merchandising and grain assets, we're able to optimize both volatility and crop dislocation as.
As well as a potential shift with larger production and carrier markets.
We're projecting a solid finish to the year and trade, although not quite as high as last year's fourth quarter earnings.
In our renewable segment.
Crush margins have remained very strong.
With good industry fundamentals, we believe that our eastern ethanol plants are favorably located with expected lower corn costs post harvest.
We remain focused on improving and maintaining our four production facilities for optimal efficiency and are making investments to increase our fermentation capacity.
Production continues at a high level and we currently expect to exceed last year's fourth quarter earnings on a combination of strong plant performance and good merchandising.
In addition, our renewable diesel feedstock merchandising business continues to grow and show bottom line improvements.
Our renewables business is important to achieving our growth strategy targets and we are actively pursuing opportunities to further expand our renewable diesel feedstock business and lower the carbon intensity of our ethanol production with potential benefits from the inflation reduction Act.
The outlook for this business remains strong heading into 2024.
Yeah.
The new trend in industrial business outlook also remains positive while 2023 net farm income is forecasted to decline from last year's record high it remains above the historical average.
In corn producers should continue to value specialty products, which maximize yield.
As always the timing of harvest and market conditions, as well as market price and carrying costs will influence our fourth quarter demand. We currently project an improvement over last year's fourth quarter earnings.
So in summary, as we mentioned earlier, we expect to meet or exceed the previously communicated 2023 range.
$350 million to $375 million and adjusted EBITDA.
I'm very proud of our team's hard work and I am confident in our ability to execute against our strategy and I'm optimistic about the year ahead.
We remain committed to our 2025 EBITDA target of $475 million to be achieved through internal growth and acquisitions.
And we remain disciplined in our evaluation of growth opportunities.
We're pleased with the progress on our long term strategy and we'll continue to make decisions that benefit customers and maximize shareholder value.
And with that I'll be turning it over to Joe our operator to take your questions.
Thank you.
We will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
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At this time, we will take our first question, which will come from Ben Bienvenu with Stephens. Please go ahead.
Hey, Thanks, good morning.
Good morning, Pat I wanted to pick up.
Where you left off with respect to the 2025 EBITDA goal.
You're talking about $350 million to $375 million of EBITDA. This year can you help roughly bridge us from here to the $475 million in 2025, and how much of that is growth capex how much of it the M&A.
And maybe to extent you can you know timing of the random.
Terrific. That's very good question. Yeah. So you know things are playing out from an AG fundamentals standpoint, very well, especially leading by a renewables business, but the good crop and the outlook for storage income and other basic fundamentals are very solid going into 'twenty four.
Our plans for growth include I'd say half would be a base investments in our core businesses for growth and half of that being M&A. We've been very prudent up to this point about investments and not wanting to overpay for any particular one asset.
I think the higher interest rates may play out to be a benefit to being able to buy something that at a more reasonable price range. So we have some projects. We're working on that could be a help us move forward to achieve that goal. So we're staying very committed to achieving that target for the long range of 2025, So we feel good about.
That.
Okay fair enough.
Second question, Mike emphasized have record half through M&A.
Great great.
Could you compare contrast for us.
Fourth quarter of this year to fourth quarter of last year.
And what are the potential risks.
Or opportunities across each of your business lines as we think about monitoring.
Getting to the 350 million to 375 range at the low end or the top end Shaw.
Sure I'll get started and Brian can chime in I think the key point I think it was different than last year. The first one is got to be stronger ethanol fundamentals. So I think the thing that I've been around this ethanol business for over 30 years, you have to look at a lot of things that impact ethanol and its not just one item right. So obviously look at.
Corn basis in our plants and a good corn crop that we're bringing in right now.
Also you have to assume lower natural gas costs. We continue to have high income from corn oil and DDG is we have a steady consistent demand both domestically and abroad, we still on a relative oxalate level or are inexpensive for ethanol and driving demand has picked up especially non commuter related vacate.
And demand et cetera, and the outlook remains solid so we have good base fundamentals for ethanol that would've been stronger than one year ago.
But a lot of that in the bank already but fourth quarter looks very good same is true for fertilizer, we've had a very solid year in fertilizer.
A lot of the fourth quarter timing relates to when the harvest comes off in the farmers' ability to.
To apply fertilizer, but we've had really good shipments here recently, so we feel solid about how our fertilizer business looks and overall our grain fundamentals are.
We said we have a wheat income from storage that we didn't have a year ago that's better.
Volatility has been a little bit quieter than a year ago. So I think you've heard the marketplace people, maybe not quite as extremely bullish as we were a year ago because exports are softer out of the U S. But domestic trade is still very good and there is arbitrage opportunities. We had a very good harvest in Louisiana, that's behind US now so fundamentals for grain are are very solid so in.
In general we have a good backdrop to finish the year, Brian did you want to add anything to that.
That's summarized it well I mean, if I went high level I would say, we expect compared to last year's fourth quarter improvements overall in the renewable segment. Some improvement some modest improvement in our nutrient industrial segment still a strong strong quarter from trade, but maybe not quite as strong as last year.
Yours.
Fourth quarter, but we would expect it to be the strongest quarter of the year on a sequential basis.
For all the for all the factors that Pat mentioned.
Yeah.
Okay, great. Thanks, so much.
Yeah.
And our next question will come from Brian Wright with Ralph M. Can please go ahead.
Thanks.
Well I've got two questions I wanted to just start off with.
You talked about investments to increased fermentation capacity and just wanted to understand a little more of the detail behind that what youre willing to share.
Yeah. So I think the thing as we look at is efficiency in our facilities and are we able to add steep or fermentation capacity, which helps with a put through our facilities and also impacts your yields so both corn oil yields and overall ethanol yields and we've had these projects in the work for sometimes at two facilities.
Cities these aren't overnight.
Additions so we've been making these investments over time and I think what our ideas are with the inflation reduction act incentives. We're interested in carbon sequestration potential work active and a project to look at that one of our facilities right now and that in combination with making the plant is efficient for.
And energy standpoint, as possible is really what helps us when it comes to just operating costs, but also for Ci score reduction so our simple fundamental strategies the larger scale high efficient plants with low Ci scores will be winners. So we're taking active progressive steps to continue to invest our plan.
To do that so it's not one big step change for continued investments to hit that goal.
Okay great.
That's helpful. Thank you.
Can we just talk a little bit about like how to think about.
The currency impact and how we're comfortable that that dynamic is king.
Contained to the third quarter and just just can you can you help us with that.
Yes, Thanks, Brian that's a that's a fair question and I'll start out and then maybe Pat can add some some color. So I mean first and foremost I think it goes without saying, saying we are disappointed in the currency loss that we took in this quarter.
And we've already taken steps to ensure it doesn't happen again in the future. This one this one really was the result.
So I'm highly unusual events in it.
It's isolated really to a few deliveries, but within Egypt, and so it's it's not applicable to the rest of the Egyptian business, let alone the remaining international footprint.
As we've mentioned we made the decision during the quarter to accelerate the conversion of certain receivables in Egypt at lower exchange rates.
This led to a reevaluation of our remaining Egyptian receivables and so the remaining value of those receivables on our balance sheet at September 30th was about $36 million.
Our customers have continued to make good progress converting these receivables and we have more than 60% of it already converted or in the process of being converted so we don't we don't believe there is that really the remaining currency exposure will be anything material.
Depending on the ultimate exchange rates that it converts out at it could be call. It maybe another $5 million in the fourth quarter, but like I said nothing material and we feel like it's this one's behind us and we're taking and have taken the right steps to ensure it doesn't happen again in the future. So Pat I don't know any other color you want to provide on this one or the international strategy in general.
Yeah sure I think what I'd like to do is just kind of put in perspective. So let's go up about 40000 feet and look at the Big picture here and our long term strategic intent in regards to our international business.
So when you think about it consumptive demand for grains in the U S and Europe is flat and basically growing at the low population growth rates while.
Africa, the Middle East you know populations continue to grow and demand for grain and foodstuffs continues to increase. So this is what I like to call. It skate to where the puck is gonna be strategy.
And we've sold grain exports to this region for many years, but we did it through third party companies, who would then sell onto the end customers. So in a sense, what we did with our Swiss office is cut out the middleman and we're selling directly to the end use customers in that region. We feel it's really important to be close to the customer and build.
Solid long term relationships, especially in this region, where demand is going to continue to grow for years to come and Brian.
The details where we normally sell in U S dollars, but the situation in Egypt became very difficult for any of our customers access exchange for U S dollars and thus we agreed to this conversion rate. It was an unfortunate situation and as a result, a lot of highly unusual confluence of events.
We are now only doing business in U S dollars. So that's not a repeatable accident have taken steps to make sure that we don't have that happen again.
And remember that would your merchandize vessels of grain. They can hold 40 up to 60000 tons at that time, a panamax of soybeans was worth over $40 million. So this is normal in our industry as far as the volumes and shipments that were happening.
And the balance of our international business is performing very well, so kind of an isolated incident related to Egypt.
We won't reoccur, so I just want to re enforced at our long term strategy of our Swiss office and our customers in that region. We're very much committed to we think this is a strong place to be for the long term for our company and this was an unfortunate event, but it's isolated and we're continuing to move forward with that strategy.
Great. Thank you so much.
And our next question will come from Ben Clevie with Lake Street Capital. Please go ahead.
Alright, excuse me thanks for taking my questions. A couple for me first of all a clarifying question on both the press release and your prepared remarks, you called out the renewable segment had $5 million of incremental merchandising business.
On a year over year basis that $5 million on.
Revenue number or a profitability number.
That would be that would be the EBT number so profitability number.
Okay, great. Thank you.
And then Brian Youre looking at a pretty classy problem right now in your balance sheet.
The 400 plus million dollars of cash on hand.
I'm wondering if you can talk about how you are looking now at the decision between building a cash war chest for M&A in these capex projects versus paying down some of the.
Paying down some of your long term debt.
Situations.
We haven't had to deal with for several years now.
What well houses calculus, playing out in your head right now.
Yes, I think it's a great question.
I think right now we have a we have a robust pipeline of projects that we're looking at and when we think about even some of the things that Pat talks about in the renewable segment. Some of these when you start to talk about carbon capture and sequestration and some of these are can be larger projects. We also are looking at M&A when we think of.
Our balance sheet and the debt position, we feel we feel really good about our current long term debt position I mean, our our long term debt right now.
Call it roughly 70% of it is fixed at rates below 5%.
So I think a combination of being able to.
Deploy capital into growth investments and M&A.
We also have a share repurchase authorization that is still in effect.
We will continue to evaluate and taking that balanced approach.
Maybe to build on that I wanted to go back on the example, then this last year I talked about singles and doubles of bolt ons, either capital or acquisitions, we did.
On investment our food corn business was last year that we sell onto a CPG companies mainly in the chips space that's been executed.
Executed well on time and is providing additional income right now so accretive right out of the shoots as well as to M&A projects. We completed this year in bridge Agri and ACG pet food ingredients business are both performing very well, it's nice to have those integrated and earning above plan right out the beginning again they work.
Big but they're incremental and higher return assets, we would love to continue to do projects like that.
Got it.
Very helpful from both of you. Thank you for that.
Plenty more discussed that's probably a good place to leave it thanks for taking my questions and I'll get back in line.
And this concludes our question and answer session I'd like to turn the conference back over to Mike Holter for any closing remarks.
Thanks, Joe we want to thank you all for joining US. This morning. Our next earnings conference call is scheduled for Wednesday February 21, 2024 at 11, a M. Eastern time, when we will review our fourth quarter results as always thank you for your interest in the Andersons and we look forward to speaking with you again soon.
Yeah.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.