Q3 2023 Otter Tail Corporation Earnings Call
[music].
Okay.
Yeah.
Good morning, and welcome to Otter tail corporations third quarter 2023 earnings conference call.
Today's call is being recorded we will hold a question and answer session. After the prepared remarks.
I'll now turn the call over to the company for their opening comments.
Good morning, everyone and welcome to our third our 2023 earnings Conference call. My name is Beth Adler and I'm Otter tail Corporation's manager of Investor Relations last night, we announced our third quarter financial results are.
Our complete earnings release and find the company lets call are available on our website at otter tail Dot com a recording of this call will be available on our website later today.
With me on the call today are chocolate violent otter tail corporations, President and CEO, Kevin <unk> Otter tail corporations, senior Vice President and CFO and Todd wallet Otter tail power Companys, Vice President of finance and CFO before we begin I want to remind you that we will be making forward looking statements. During the course of this call.
Noted on slide two these statements represent our current views and expectations of future events.
They are subject to risks and uncertainties, which may cause actual results to differ from those presented here. So please be advised about placing undue reliance on any of these statements.
Our forward looking statements are described in more detail in our filings with the Securities and Exchange Commission, which we encourage you to review audit.
Otter tail Corporation disclaims any duty to update or revise our forward looking statements due to new information future events developments or otherwise.
I will now turn the call over to Otter tail corporations, President and CEO, Mr. Chocolate Garland.
Thank you Brad good morning, and welcome to our third quarter 2023 earnings call.
Please refer to slide four as I begin my comments on our third quarter results.
Through the combined efforts of our employees and diversified business model, we delivered record setting quarterly earnings we generated earnings per share or $2.19 driven.
Driven by increased earnings from our manufacturing and plastics segments.
However, the reduction in corporate cost our electric segment earnings in the quarter were largely flat to last year.
But are up 7% on a year to date basis.
Based on our strong quarterly and year to date results and revised expectations for the remainder of the year. We are increasing our 2023 in diluted earnings per share guidance to a range of $6 76 to $6.96.
From a previous range of $5 77 to $6.
This increase was primarily driven by plastics segment performance continuing to remain stronger than previously expected.
In a moment, Kevin will provide a more detailed discussion of our third quarter financial results and our expectations for the remainder of the year.
Slide five shows our expected five year compounded annual growth rate in earnings per share with and without the impact of our plastic segment.
Through the end of 2023 based on the midpoint of our updated earnings guidance.
We expect to produce a compounded annual growth rate and earnings per share from 2018 through 2023 of 11% exclusive of our plastic segment.
The additional earnings and cash flows generated by our plastic segment over this time period provides additional strength to our already strong credit metrics liquidity and capital structure and allows for capital investment in our operating companies.
Turning to slide seven we illustrate otter tail power's efforts and working toward a cleaner energy future.
The Hoot Lake solar becoming operational in August of this year, we expect nearly 40% of otter tail Power's owned and contracted energy sources will come from renewable resources.
This represents an exciting milestone as we continue to transition to a cleaner energy future while still.
Maintaining reliability and affordability for the communities we serve.
Turning to slide 11 in March Otter tail power filed a supplemental integrated resource plan with each of our three state utility commissions.
Minnesota, We received initial comments from intervenors in September and final reply comments yesterday.
We anticipate a hearing with the Minnesota Public Utilities Commission in early 2024.
And we expect to receive initial comments from the North Dakota Public Service Commission sometime next week and anticipate an informal hearing later this year.
Slide 12 provides an overview and status update on our significant capital investment projects are.
Our team continues to effectively execute our project plans.
Turning to secure projects that.
Our completed on time and on budget.
I'll now provide a few details on several projects.
On slide 13.
An overview of Otter tail powers 49 megawatt Hoot Lake.
Solar project is provided.
The construction of the facility was completed on time and on budget and became fully operational in August.
The facility was constructed on a mirror the retired Hoot Lake coal plant property in Fergus falls.
How long is the Ut and unique opportunity to utilize existing transmission rights land and substation assets.
<unk> solar is the lease cost and third largest operating solar site in the state of Minnesota and its completion marks another step towards a cleaner energy future.
Slide 14 summarizes otter tail powers investments under tranche one of MISO is long range transmission plan.
Otter tail power will call two tranche one projects.
The Jamestown Allendale.
And the Big Stone, South Alexandria to Big Oaks, $3 45 kv transmission projects.
Our team is focused on project development and coordinating these complex projects with our co owners.
Both projects have FERC approval for construction work in progress recovery.
Ensuring the timely recovery of our capital investment.
In total we estimate otter tails capital investment in these projects will be approximately $420 million.
With 30% of the capital investment to occur before 2028.
These investments have very limited impact on our retail customer rates as they are allocated across the MISO Midwest footprint.
Our team continues to monitor developments at MISO regarding potential tranche two transmission projects.
MISO is currently indicating tranche two projects will be approved in 2024.
While we expect some investment opportunity for otter tail power rising from tranche two projects. Our five year capital plan does not include any estimates of future investments for these projects.
In addition to the transmission investment opportunities available through MISO is long range transmission planning.
MISO in the southwest power pool or SPP.
Recently partner to develop the joint targeted interconnection cure J T IQ portfolio projects focused on improving the reliability of the grid, where the two regional transmission organizations connect.
The Minnesota Department of Commerce on behalf of MISO and SPP applied to the U S Department of energy for funding to support the <unk> projects.
The Doe awarded.
Awarded 464 million to five of these projects one of which we are expecting to co developed with <unk> energy.
While these projects still need to go through the approval process with FERC.
We are optimistic about the eventual outcome.
Potential investment opportunity.
Similar to the MISO tranche two projects, we have not yet included this project in our five year capital forecast.
Turning to slide 15, we intend to Repower four of our legacy wind farms in 2024 and 2025.
With an investment of approximately $230 million.
Each project qualifies for renewed production tax credits with the passage of the inflation reduction Act.
And it is anticipated to lower customer bills, demonstrating otter tail powers continued focus and commitment to customer affordability.
Slide 16 provides an overview of otter tail Power's capital spending plan.
The plan includes $1 1 billion of capital investment over the next five year period and.
And produces a six 5% annual compound growth rate in rate base over this timeframe.
It is important to highlight that we have potential additional renewable investment opportunities after 2027 as outlined in our AARP.
As well as incremental transmission investment opportunities relating to MISO tranche, two and <unk> projects.
We anticipate approximately 80% of our capital investments will be recovered through existing rates or writers.
Slide 17 provides an overview of key regulatory matters for 2023.
Based on the results of our cost of service studies, we determined it prudent to file a general rate case in North Dakota.
We will be filing our case on November 2nd.
2023.
Slide 18 provides a summary of our planned rate case filing with the North Dakota Public Service Commission.
We will be proposing a rate.
Net increase in revenues of approximately $17 million or eight 4% based on a requested ROE of 10, 6% on an equity layer of 53, 5%.
The rate cases, driven by increases in our operating costs since our last case filing and the state of North Dakota, which was over six years ago.
Even with this increase otter tail power will continue to have some of the lowest rates in the country.
Turning to our manufacturing segment on slide 22.
End market demand is mixed but our existing customers continue to look to us to add value, resulting in incremental volumes from winning additional work with existing customers.
Within the recreational vehicle and lawn and garden end markets discretionary spending is being impacted by inflation and rising interest rates. However.
However, within the recreational vehicle end market, specifically, we have seen a shift to higher end models as buyers of these models seem to be better insulated from economic pressures.
Construction remains a strong end market for us as distributors are still experiencing low levels of inventory with a buildup of fleet replacement needs over the last few years.
The agriculture end market is stabilizing as inventory has started to build.
In the power generation end market continues to be healthy for us as demand remains high and inventory levels low.
Our BCD George expansion expected to cost approximately $20 million is currently underway, we expect to bring the additional capacity online in early 2025.
At T O plastics sales volumes in the horticultural end market decreased in Q3 as lead times have normalized and customers continue to work through inventory purchased early due to scarcity concerns, resulting in lower operating revenues this quarter as compared to the same time last year.
Slide 25 provides an overview of our plastic segment.
Sales volumes were relatively flat in Q3 compared to the same time last year and we believe distributor inventory Destocking is generally complete.
Slide 26 highlights historic resin costs in PVC pipe pricing.
The plastic segment produced stronger operating margins as our sales price to resin spreads have improved compared to the third quarter of 2022.
The sales price of PVC pipe has receded from historic highs and continues to do so.
This decline is at a pace slower than the reduction in cost of resin and other materials over the same timeframe.
Our updated PVC pipe pricing expectations as well as <unk>.
Related margins for the remainder of the year are the primary drivers for our increased 2023 earnings guidance that Kevin will expand.
The vinyl tech expansion in plant upgrade is underway and we anticipate the expansion will increase capacity by approximately 8% or 26 million pounds for the segment.
We currently expect to bring this new capacity online in the second half of 2024 at a cost of $50 million.
I'll now turn it over to Kevin to provide additional commentary on our third quarter results and our updated outlook for 2023.
Well. Thank you Chuck good morning, everyone.
We delivered record setting quarterly financial results with diluted earnings per share of $2 19.
Our financial results for the trailing 12 months ended September 32023.
Result in a 21, 8% return on equity on an equity layer of approximately 62%.
Please follow on slide 30, as I provide an overview of our third quarter segment earnings.
Electric segment earnings decreased approximately $300000 or 1% as compared to the third quarter of 2022.
This was driven by increased operating and maintenance expenses, primarily due to higher labor costs and strategic spending initiatives.
Higher depreciation expense and the impact of unfavorable weather.
These items were partially offset by increased rider recovery revenues from our Hoot Lake solar and Astra Beulah three investments increased commercial and industrial sales volumes and lower pension plan costs.
The manufacturing segment earnings increased $1 $2 million or nearly 20% compared to this same time last year.
Key elements driving this increase include the following.
ETD manufacturing has been successful in adjusting sales prices in response to the labor and non steel material cost inflation, resulting.
Resulting in higher profit margins in the third quarter of 2023 as compared to the same time last year.
Also sales volumes for <unk> manufacturing increased in the third quarter.
Driven by end market demand in the construction recreational vehicle and power generation end markets as well as incremental volumes from winning additional work with existing customers as they continue to look to us to add value.
Partially offsetting this increase T O plastics sales volumes within the horticulture end market declined in the third quarter of 2023 compared to the same time last year.
As customers continue their destocking efforts and returned to more normal buying patterns.
Plastic segment earnings increased $3 2 million or approximately 6% compared to the third quarter of 2022.
The increase in earnings is primarily due to increased profit margins for this segment as our sales price to resin spreads.
Proved in the third quarter of this year as compared to the same time a year ago.
Both the sales price of PVC pipe and the cost of resin continued to decline, but the sales prices declined.
At a rate slower than resin costs.
Sales volumes were largely flat as compared to the same time last year and we believe customers are generally through their destocking efforts.
Corporate costs declined $3 $6 million in this quarter compared to the same time last year.
This improvement resulted from lower employee health insurance claim costs.
And the investment income earned on our short term cash equivalents in the third quarter of 2023.
Operator: Good morning. Welcome to Otter Tail Corporation's third quarter, 2023 Earnings Conference Call. Today's call is being recorded.
Was higher due to improved yields and higher invested funds.
Moving on to our updated earnings guidance Slide 33 provides that updated.
Operator: We will hold a question and answer session after the prepared remarks. I will now turn the call over to the company for their opening comments.
Updated outlook.
We are increasing our earnings per share guidance to a range of $6 76 to $6 96.
Beth Osman: Good morning everyone and welcome to our third quarter, 2023 Earnings Conference Call. My name is Beth Osman and I'm Otter Tail Corporation's Manager of Invest Relations. Last night we announced our third quarter financial results. Our complete earnings release implies the company Miss Call are available on our website at Otter Tail.com. Our recording of this call will be available on our website later today. With the on the call today are Chuck MacFarlane, Otter Tail Corporation's President and CEO, Kevin Moug, Otter Tail Corporation, Senior Vice President and CFO, and Todd Wahlund, Otter Tail Power Company's Vice President of Finance and CFO.
A 17% increase from the midpoint of our previous guidance range of $5 70 to $6.
We are tightening the range of expected earnings for our electric segment and expect our utility to produce earnings growth of 6% over 2022.
We are increasing the manufacturing segment earnings guidance due to the strength of third quarter earnings as higher sales volumes margin improvement and higher research and development credits drove earnings growth at BTT.
Beth Osman: Before we begin, I want to remind you that we will be making forward looking statements during the course of this call. As noted on slide two, these statements represent our current views and expectations of future events. There are subject to risks and uncertainties which may cause actual results to differ from those presented here. So please be advised about placing undue reliance on any of these statements. Our 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 explains any duty to update or revise our forward looking statements due to new information, future events, developments, or otherwise.
We are increasing the earnings guidance for our plastic segment due to continued strength in sales prices and related operating margins of PVC pipe.
While sales prices and margins have begun to recede from historic highs.
Decline continues to be slower than we anticipated.
We expect sales prices to decline modestly over the fourth quarter, resulting in a decline in operating margins.
Additionally, we now expect stronger sales volumes in the fourth quarter as distributors are generally through their destocking efforts with demand rebounding in advance of a seasonal decline anticipated.
Chuck MacFarlane: I will now turn the call over to Otter Tail Corporation's President and CEO, Mr. Chuck MacFarlane. Thank you, Beth. Good morning and welcome to our third quarter of 2023 earnings call. Please refer to slide four as I begin my comments on our third quarter results. Through the combined efforts of our employees and diversified business model, we delivered record-setting quarterly earnings. We generated earnings per share of $2.19 driven by increased earnings from our manufacturing and plastic segments. Along with the reduction in corporate costs, our electric segment earnings in the quarter were largely flat to last year, but are up 7% on a year-to-date basis.
In the latter part of the fourth quarter.
And finally, we are improving our guidance for corporate costs.
This relates to our third quarter results and an increase in expected earnings in our short term cash equivalents due to higher level of invested funds.
And increased yields on those investments.
Additionally, we expect lower employee health care costs through the remainder of the year.
We now expect our earnings mix for 2023 to be approximately 30% from our electric segment and 70% from our manufacturing and plastics segments net of corporate costs.
Chuck MacFarlane: Based on our strong quarterly and year-to-date results and revised expectations for the remainder of the year, we are increasing our 2023 diluted earnings per share guidance to a range of $6.76 to $6.96 from our previous range of $5.70 to $6. This increase is primarily driven by plastic segment performance, continuing to remain stronger than previously expected.
As anticipated mix deviates from our long term expected earnings mix of approximately 65% electric and 35% non electric as our plastic segment continues to produce.
Elevated earnings.
We continue to monitor various economic indicators, such as single and multifamily housing starts interest rates and consumer confidence levels to ensure we are well positioned across our portfolio when change occurs.
Chuck MacFarlane: In a moment, Kevin will provide a more detailed discussion of our third quarter financial results and our expectations for the remainder of the year. Slide 5 shows our expected five-year compounded annual growth rate and earnings per share with and without the impact of our plastic segment through the end of 2023 based on the midpoint of our updated earnings guidance. We expect to produce a compounded annual growth rate in earnings per share from 2018 through 2023 of 11% exclusive of our plastic segment.
Our diversified business model continues to generate strong financial results for our stakeholders and has put us in an enviable position.
The higher level of earnings and cash flows generated over the last two years continues to strengthen our balance sheet.
Looking to slide 32, our consolidated equity layer as of September 32023 was nearly 62%.
This compared to 59, 4% as of December 31, 2022.
And 53, 7% as of December 31, 2021.
Chuck MacFarlane: The additional earnings and cash flow is generated by our plastic segment over this time period provides additional strength to our ready strong credit metrics, liquidity and capital structure and allows for capital investment in our operating companies.
In September Fitch upgraded the credit rating of both Otter tail Corporation, and Otter tail power company in response to our strengthened financial position and credit metrics.
Chuck MacFarlane: Turning to slide seven, we illustrate our tail powers efforts in working toward a cleaner energy future. The Food Lakes solar becoming operational in August of this year, we expect nearly 40% of our tail powers owned and contracted energy sources will come from renewable resources. This represents an exciting milestone as we continue to transition to a cleaner energy future while still maintaining reliability and affordability for the communities we serve.
S&P maintained its credit rating for Otter tail power company.
We believe it is prudent to retain our excess cash given all the regulated investment opportunities existing at Otter tail power company not only in the current five year period, but beyond.
Additionally, our current cash position and balance sheet differentiates us from others in the utility sector as we have no equity needs over the next five years, despite our our sizable capex plans.
Chuck MacFarlane: Turning to slide 11, in March, Otter Tail Power filed a supplemental integrated resource plan with each of our three state utility commissions. In Minnesota, we received initial comments from interveners in September and filed reply comments yesterday. We anticipate a hearing with the Minnesota Public Utilities Commission in early 2024. We expect to receive initial comments from the North Dakota Public Service Commission sometime next week and anticipate an informal hearing later this year.
With our strong financial position and track record of being able to deliver our capital investments on time and on budget.
We feel confident in our ability to continue to execute on our rate base growth plans.
Our exposure to rising borrowing cost continues to be low risk.
We don't have any outstanding borrowings on our parent company facility and the amounts drawn on the utility facility, primarily relate to capital projects the.
The increased cost of these borrowings is fully considered in our updated 2023 guidance.
Chuck MacFarlane: Slide 12 provides an overview and status update on our significant capital investment projects. Our team continues to effectively execute our project plans, working to secure projects that are completed on time and on budget.
As of September 32023, our parent debt to total company debt is 9%.
The $80 million of 355% parent company note matures in December of 2026.
Chuck MacFarlane: I will now provide a few details on several projects. On slide 13, an overview of Otter Tail Power's 49 megawatt Food Lakes state solar project is provided. The construction of the facility was completed on time and on budget and became fully operational in August. The facility was constructed on and near the retired Hoot Lake coal plant property in Fergus Falls, allowing us the unique opportunity to utilize existing transmission rights, land and substation assets. Hoot Lake solar is the least cost and third largest operating solar site in the state of Minnesota and its completion marks another step towards a cleaner energy future.
And this is our only outstanding debt at the parent level.
Slide 39 reflects the collective strategies of our platforms and financial performance targets.
This business model continues to serve us well and we remain in the enviable position to fund our rate base growth opportunities at the utility with a strong balance sheet ample liquidity to support our businesses.
And strong investment grade corporate credit ratings.
Before we open the call for questions I want to take a moment to recognize Kevin.
Recently announced his retirement effective at the end of the year I.
I'd like to thank Kevin for his years of service and contributions to Otter tail Corporation, its employees and customers. Kevin has been a pillar of integrity for our company and has helped us Shepherd.
Chuck MacFarlane: Slide 14 summarizes Otter Tail Power's investments under Tronch 1 of Micell's long range transmission plan. Otter Tail Power will coal on two Tronch 1 projects, the Jamestown Ellendale and the Big Stone South Alexandria to Big Oaks 345 KV transmission projects. Our team is focused on project development and coordinating these complex projects with our coal. Both projects have FERC approval for construction work and progress recovery, ensuring the timely recovery of our capital investment.
Chuck MacFarlane: In total, we estimate Otter Tail's capital investment in these projects will be approximately 420 million, with 30% of the capital investment to occur before 2028. These investments have very limited impact on our retail customer rates as they are allocated across the MISO Midwest footprint.
Through challenging times and enviable financial success.
With the deepest gratitude, we congratulate Kevin and wish him all the best in his retirement.
Thanks for the kind words Chuck.
In my 27 years in working for Otter tail. It was filled with wonderful memories.
Challenges and accomplishments.
It has been an honor to work for the company alongside the employees across our electric and manufacturing platforms.
It has also been a privilege to have worked with all of you.
I value the relationships we have developed.
The support and confidence you have provided me during my 10 years most depreciated.
The company is in wonderful hands and so on January one I will hand, the football to Todd wall and as my successor.
Chuck MacFarlane: Our team continues to monitor developments at MISO regarding potential Tronch 2 transmission projects. MISO is currently indicating Tronch 2 projects will be approved in 2024. While we expect some investment, opportunity for Otter Tail Power rising from Tronch 2 projects, our five-year capital plan does not include any estimates of future investments for these projects.
He is well prepared to move into the role as he has served as VP of financial planning and Treasury.
At the corporate level VP of finance and planning for our manufacturing platform and most recently as Chief Financial Officer, and VP of finance for Otter tail power company.
Chuck MacFarlane: In addition to the transmission investment opportunities available through MISO's long-range transmission planning, MISO and the Southwest Power Pool or SPP, recently partnered to develop the joint targeted interconnection Q or JTIQ portfolio projects focus on improving the reliability of the grid where the two regional transmission organizations connect. The Minnesota Department of Commerce on behalf of MISO and SPP applied to the U.S. Department of Energy for funding to support the JTIQ projects. The DOE awarded 464 million to five of these projects, one of which we are expecting to co-develop with Excel Energy. While these projects still need to go through the approval process with FERP, we are optimistic about the eventual outcome and potential investment opportunity.
Thank you Kevin to extend my congratulations and best wishes to you in your retirement.
Our leadership has been an outstanding model to follow and I appreciate all your guidance and coaching over the years.
I am grateful for the opportunity to continue your legacy of excellence in execution on a solid growth strategy.
We are now ready to take your questions.
Thank you.
Reminder, please press star one one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one again.
After the Q&A Chuck will return with a few closing remarks.
One moment please.
And our first question comes from the line of Chris Allen.
With Siebert Williams Schenk and company.
Chuck MacFarlane: Similar to the MISO Tronch 2 projects, we have not yet included this project in our five-year capital forecast.
Hey, everybody how are you.
Good morning, Chris Good morning.
Chuck can you talk about the IRB process, what are you hearing from intervenors so far.
Chuck MacFarlane: Turning to slide 15, we intend to repower four of our legacy wind farms in 2024 and 2025 with an investment of approximately 230 million. Each project qualifies for renewed production tax credits with the passage of the Inflation Reduction Act, and it is anticipated to lower customer bills, demonstrating Otter Tail Power's continued focus and commitment to customer affordability.
So on the Minnesota filing, which we have filed comments reply comments yesterday.
We have comments from the clean energy organization.
Most of the office of the Attorney General and Minnesota Department of Commerce.
The.
Environmental.
And our renters.
Chuck MacFarlane: Slide 16 provides an overview of Otter Tail Power's capital spending plan. The plan includes 1.1 billion of capital investment over the next five-year period and produces a six and a half percent annual compound growth rate in rate base over this time frame. It is important to highlight that we have potential additional renewable investment opportunities after 2027 as outlined in our IRP, as well as incremental transmission investment opportunities relating to MISO Tronch 2 and JTIQ projects. We anticipate approximately 80 percent of our capital investments will be covered through existing rates or riders.
Brought up issues the retirement timing.
Coyote and Big Stone.
Is it related to the proposed <unk> regulations.
In front of the EPA.
<unk> for that.
There is also some comments in there about otter tail's use of.
Renewable energy credits to meet the.
Minnesota Clean energy standard.
By 2040.
And then.
Yes.
Chuck MacFarlane: Slide 17 provides an overview of key regulatory matters for 2023. Based on the results of our cost of service studies, we determined it prudent to file a general rate case in North Dakota. We will be filing our case on November 6, in 2023. Slide 18 provides a summary of our planned rate case filing with the North Dakota Public Service Commission in which we will be proposing a rate net increase in revenues of approximately 17 million or 8.4 percent based on a requested ROE of 10.6 percent on an equity layer of 53.5 percent.
Some comments.
Bye.
The OAG.
Similar comments the DLC.
Reviewed our our modeling and.
Inputs.
And did not have substantial comments on their own modeling at that time.
Okay.
Okay great.
Kevin.
Can you sort of talk about the plastics business.
Have you got any.
Sort of update on your thoughts on the glide path.
A more normal time.
Yes, Chris.
As we both said in our comments.
Chuck MacFarlane: The rate cases driven by increases in our operating costs are last case filing the state of North Dakota, which was over six years ago. Even with this increase, Otter Tail Power will continue to have some of the lowest rates in the country.
Glide path down.
Just.
Taking longer than we would have expected we as we I think we mentioned on the.
The second quarter call, we are starting to see downward pressure in the residential commercial market, particularly in the northern territory.
Chuck MacFarlane: Turning to our manufacturing segment on slide 22, end market demand is mixed but our existing customers continue to look to us to add value, resulting in incremental volumes from winning additional work with existing customers. Within the recreational vehicle and lawn and garden end markets, discretionary spending is being impacted by inflation and rising interest rates. However, within the recreational vehicle end market specifically, we have seen a shift to higher end models as buyers of these models seem to be better insulated from economic pressures.
As some competitors drop prices as they were looking to pick up some market share declines in our municipal.
Water market, while there theyre softening they arent softening to the levels that we.
<unk> when we updated our guidance at the end of the second quarter.
As we look today into.
Clearly conditions or <unk>.
Stronger than we expected middle of the year.
As evidenced by the strong third quarter and another uplift in the guidance for 2023.
Chuck MacFarlane: Construction remains a strong end market for us as distributors are still experiencing low levels of inventory with a build-up of fleet replacement needs over the last few years. The agricultural end market is stabilizing as inventory has started to build. The power generation and market continues to be healthy for us as demand remains high in inventory levels low.
We arent seeing anything today any kind of catalyst that says there should be any precipitous drop in pricing as we head into.
2024.
And we continue to monitor those conditions will certainly provide.
An update on the when we give 2024 guidance in February.
Chuck MacFarlane: Our BTD George expansion, expected to cost approximately 20 million, is currently underway. We expect to bring the additional capacity online in early 2025. A teoplastics sales volumes in the horticulture end market decreased in Q3 as lead times have normalized and customers continue to work through inventory purchased early due to scarcity concerns, resulting in lower operating revenues this quarter has compared to the same time last year.
Where those conditions are but we think that the path to a more normal view of earnings is probably longer than what we had previously expected. We said in the second quarter call that we <unk>.
Expect that we'll see some type of normalization in the last half of 2024.
Think that glide path is still there, Chris but it could continue to be longer.
It starts to come back in the last half of 'twenty, four and 'twenty five still.
Chuck MacFarlane: Slide 25 provides an overview of our plastic segment. Sales volumes were relatively flat in Q3 compared to the same time last year and we believe distributor inventory destocking is generally complete.
Still think theirs.
As we see it today on a longer glide to get back to normal.
Okay great.
And Chuck can you just remind us of the procedural.
Chuck MacFarlane: Slide 26 highlights historic resin costs and PVC pipe pricing. The plastic segment produced stronger operating margins as our sales price to resin spreads have improved compared to the third quarter of 2022. The sales price of PVC pipe has receded from historic highs and continues to do so. This decline is at a pace slower than the reduction in cost of resin and other materials over the same time frame.
Sir schedule in North Dakota is it still a seven month statutory review.
Yes, Chris it is.
<unk>.
So.
In many cases in North Dakota, there are settlements that occur before that seven months, but.
A fully litigated case.
<unk> seven month window.
Chuck MacFarlane: Our updated PVC pipe pricing expectations as well as related margins for the remainder of the year or the primary drivers or increase 2023 earnings guidance that Kevin will The vital thick expansion and plant upgrade is underway and we anticipate the expansion will increase capacity by approximately 8% or 26 million pounds for the segment. We currently expect to bring this new capacity online in the second half of 2024 at across the 50 million.
Okay and in the rate case.
Can we presume that test years.
Something in 2024 and is the $17 million is that the base revenue request.
The 2017 as the net.
No no.
Process, we have a number of riders that would roll into base rates, but the net new revenue request is is the $17 million and we do use 2024, North Dakota has.
Forecast test year.
Okay great.
Kevin Moug: I'll now turn it over to Kevin to provide additional commentary on our third quarter results and our updated outlook for 2023. Well thank you Chuck.
Great.
Good luck with the retirement, we're going to Miss you. Thanks for the details everybody.
Thanks, Chris we'll see it.
Kevin Moug: Good morning everyone. We delivered record setting quarterly financial results with the mood earnings per share of $2.19. Our financial results for the trailing 12 months ended September 30, 2023. Result in a 21.8% return on equity on an equity layer of approximately 62%. Please follow on slide 30 as I provide an overview of our third quarter segment earnings. Electric segment earnings decreased approximately $300,000 or 1% as compared to the third quarter of 2022.
Thank you and as a reminder, if you have a question. Please press star one one on your telephone.
And our next question comes from the line of Sophie Karp with Keybanc capital markets.
Hey, Good morning. This is actually Michael stepping in for <unk>. Thanks for taking my question.
I was just wondering on the manufacturing segment.
If you could remind us how much capacity that Georgia expansion project will add.
In terms of dollar size Mike.
Just the total capacity additions.
Kevin Moug: This was driven by increased operating and maintenance expenses primarily due to higher labor costs and strategic spending initiatives, higher depreciation expense and the impact of unfavorable weather. These items were partially offset by increased driver recovery revenues from our Hoot Lake Solar and asked to view the three investments increase commercial and industrial sales volumes and lower pension plan costs. The manufacturing segment earnings increased $1.2 million or nearly 20% compared to the same time last year.
Yes, I think it's adding collectively around.
$40 million of capacity.
Yes.
We would estimate that current capacity and sort of revenue for that site would be between 60 and $65 million.
<unk>.
An upgrade of an additional 40.
And then how much visibility do you have.
They're with.
Those same customers and are you expecting a slowdown there in the near term.
In terms of Georgia.
Kevin Moug: Key elements driving this increase include the following. ETD manufacturing has been successful in adjusting sales prices in response to the labor and non-steel material cost inflation. Resulting in higher profit margins in the third quarter of 2023 has compared to the same time last year. Also sales volumes for BTV manufacturing increased in the third quarter driven by end market demand in the construction, recreational vehicle and power generation end markets as well as incremental volumes from winning additional work with existing customers as they continue to look to us to add value.
Yes.
On the manufacturing segment, there you talked about that.
Additional business from current customers.
Yes, I mean, we've seen really continued healthy growth with John Deere across our footprint of plants Mike.
We continue to experience growth with.
Polaris as well and then.
And in the southeast and Dawsonville.
We continue to because of that acquisition, we did in 2015 and the growth there.
Continue to see good growth with companies like Stanley Black <unk> Decker caterpillar as well.
Kevin Moug: Partially offsetting this increase, TO plastic sales volumes within the horticulture end market declined in the third quarter of 2023 compared to the same time last year. This customers continue their destocking efforts in return to more normal buying patterns. Plastic segment earnings increased $3.2 million or approximately 6% compared to the third quarter of 2022. The increase in earnings is primarily due to increased profit margins for the segment as our sales price to resin spread improved in the third quarter of this year as compared to the same time a year ago.
Got it thanks, Scott and then I'll turn it back to the North Dakota rate case filing.
Is there anything specific that will stand out.
And a new mechanism if you will be exploring.
Michael One thing we may have looked at as a implementing some form of a sales adjustment.
I would not consider decoupling, but we have.
Large.
Customers in North Dakota.
And ability to adjust.
On item on a sales basis is something we will bring forward.
Kevin Moug: Both the sales price of PVC pipe and the cost of resin continue to decline but the sales price is declined at a rate slower than resin pipe. Sales volumes were largely flat as compared to the same time last year and we believe customers are generally through their destocking efforts. Corporate costs declined $3.6 million in this quarter compared to the same time last year. This improvement resulted from lower employee health insurance claim costs and the investment income earned in our short-term cash equivalence in the third quarter of 2023 was higher due to improved yields and higher invested funds.
We don't have currently have decoupling.
In North Dakota.
Great. Thanks for answering my questions and best of luck, Kevin start seeing you guys in a couple of weeks.
Thanks, Mike.
Thank you one moment please for our next question.
And our next question comes from the line of Brian Russo with Sidoti.
Yes, hi, good morning.
Good morning, Brian.
Hey, I apologize if I missed this earlier, but where are you in the development of your tranche MISO tranche one transmission projects.
Sure Brian Chuck we have.
Two projects.
Kevin Moug: Moving on to our updated earnings guidance, slide 33 provides that updated outlook. We are increasing our earnings per share guidance to a range of $6.76 to $6.96, 17% increase from the midpoint of our previous guidance range of $5.70 to $6. We are tightening the range of expected earnings for our electric segment and expect our utility to produce earnings growth of 6% over 2022. We are increasing the manufacturing segment earnings guidance due to the strength of third quarter earnings as higher sales volumes, margin improvement, and higher research and development credits.
One in North Dakota that goes from.
Our existing Jamestown substation two way.
So <unk> substation on bi.
<unk> and we are in the process of.
Routing securing easements are options for these notes from those types of things in that facility and then one that goes from our Big Stone, South which is just.
Outside of Minnesota, and South Dakota to Alexandria, Minnesota.
And we have in Minnesota, there's a process, where you file a certificate of need that has been filed.
<unk> with with Excel because this line ultimately.
Kevin Moug: Drill earnings growth at BTD. We are increasing the earnings guidance for our plastic segment due to continued strength in sales prices and related operating margins of PVC pipe. While sales prices and margins had begun to recede from historic highs, the rate of decline continues to be slower than we anticipated. We expect sales prices to decline modestly over the fourth quarter, resulting in a decline in operating margins. Additionally, we now expect stronger sales volumes in the fourth quarter, as distributors are generally through their destocking efforts with demand rebounding in advance of a seasonal decline anticipated in the latter part of the fourth quarter.
Emanates in a second circuit on existing line.
And to the north.
Worst quarter of the twin cities.
And then once the certificate of need is reviewed by the commission and we also would put in for our routing permit we have public meetings with land owners. One round, we will do we'll do another round of that as the potential.
<unk> routing window narrows.
Those processes so.
Because of the kind of a two step process.
You'll get a certificate of need first followed by a route permit in Minnesota that process generally takes a little longer than in North Dakota, where it is.
Kevin Moug: And finally, we are improving our guidance for corporate costs. This relates to our third quarter results in an increase in expected earnings and our short-term cash equivalence due to higher level of invested funds and increased yields on those investments. Additionally, we expect lower employee health care costs through the remainder of the year. We now expect our earnings mix for 2023 to be approximately 30% from our electric segment and 70% from our manufacturing and plastic segments net of corporate costs.
Sort of a single certificate of need and routing process.
Okay, Great and then just also on the utility what was the EPS impact of weather.
Versus normal.
In the third quarter.
I was <unk> I believe.
Okay.
And then just lastly on <unk>.
It was a penny okay.
Alright.
Got it was too.
Going into Q3 of 'twenty two.
Okay, Great and then just on the manufacturing side, specifically BTT.
Kevin Moug: This anticipated mix deviates from our long-term expected earnings mix of approximately 65% electric and 35% non-electric as our plastic segment continues to produce elevated earnings. We continue to monitor various economic indicators such as single and multi-family housing starts interest rates and consumer confidence levels to ensure we are well positioned across our portfolio when change occurs. Our diversified business model continues to generate strong financial results for our stakeholders and has put us in an enviable position.
How would you characterize the third quarter performance I suspected it exceeded your expectations, which is why you raised.
The midpoint of that segment guidance and then also if you could just talk about the.
Backlog of $107 million, which is down year over year for module 41 billion and I know there are two components. One is just.
<unk>.
Prices prices steel right. So it doesn't necessarily indicate slowdown of business, but I just thought you could.
Kevin Moug: The higher level of earnings and cash flows generated over the last two years continues to strengthen our balance sheet. Looking to slide 32, our consolidated equity layer as a September 30, 2023 was nearly 62 percent, as compared to 59.4 percent as of December 31, 2022, and 53.7 percent as of December 31, 2021. In September, Fitch upgraded the credit rating of both Otter Tail Corporation and Otter Tail Power Company in response to our strength and financial position and credit metrics.
To elaborate on that trend.
Sure as it relates to the third quarter, when we talked about both the ability to continue to get.
Price increases to help offset.
Increasing labor and other non material related costs of the company is.
Continued to excel very well into being able to do that.
We saw stronger volumes as well as we mentioned that helped drive the.
Increased profitability quarter over quarter and the other item that happened in the quarter Brian.
Kevin Moug: S&P maintained its credit rating for Otter Tail Power Company. We believe it is prudent to retain our excess cash given all the regulated investment opportunities existing at Otter Tail Power Company, not only in the current five-year period, but beyond. Additionally, our current cash position and balance sheet differentiates us from others in the utility sector, as we have no equity needs over the next five years, despite our sizeable cat-backs plans. With our strong financial position and track record of being able to deliver our capital investments on time and on budget, we feel confident in our ability to continue to execute our rate-based growth plans.
As referenced in the press release and I indicated in my guidance comments as the RMB amount of R&D credits that were recorded in the third quarter at at DTD. So we do.
A fair amount of R&D work for our customers. That's one of our I would call. It our core competencies at BTT has that helps keep customers.
Engaged with us.
And we do we estimate what we what we expect our R&D credits to be for the year.
Then when we once we finish up for example, we finished up 2022.
We then engage an outside firm to do an R&D credit study for us.
Kevin Moug: Our exposure to rising borrowing costs continues to be low risk. We don't have any outstanding borrowings on our parent company facility and the amount drawn on the utility facility primarily relate to capital projects. The increased cost of these borrowings is fully considered in our updated 2023 guidance. As of September 30, 2023, our parent debt, the total company debt, is 9%. The $80 million $3.55% parent company note matures in December of 2026, and this is our only outstanding debt at the parent level.
In 2000.
In this case 23, and they come in and they look at the nature of the products nature of I should say products, while products projects that we did during the year.
And what was the nature with a more complex was it more materials.
Those types of things and we saw.
About $1 million uplift in R&D credits in the third quarter that we hadn't fully anticipated. It was driven primarily by increased work that we did for one of our customers that was.
I'll call it heavier tight steel and more complex projects that we're working on so we were able to.
Kevin Moug: Flight 539 reflects the collective strategies of our platforms and financial performance targets. This business model continues to service well and we remain in the enviable position to fund our rate-based growth opportunities at the utility with a strong balance sheet, ample liquidity to support our businesses and strong investment-grade corporate credit ratings.
Recognize an additional amount of R&D credit over and above what we had been estimating for that.
And then.
As the inflation reduction act allowed for another method two.
To recognize R&D credits and we that new method that was under the inflation reduction Act.
That allowed us to.
Chuck MacFarlane: Before we open the call for questions, I want to take a moment to recognize Kevin.
Get additional R&D credits as well as a result of that Locke, Lord and soon the IRA.
Kevin Moug: We recently announced his retirement effective at the end of the year. I'd like to thank Kevin for his years of service and contributions to autotail cooperation, its employees, and customers. Kevin has been a pillar of integrity for our company and has helped us shepherd through challenging times and enviable financial success.
And then so there was a pick up there in our estimate of where we thought it was going to be and then as we revised our estimate in 'twenty three based on that new method.
That also provided was part of that million dollars uplift and I think we've got it listed as <unk> impact on slide on the earnings walk slide in the earnings call materials and.
Kevin Moug: With the deepest gratitude, we congratulate Kevin and wish him all the best in his retirement. Thanks for that kind words, Chuck. My 27 years of working for autotail is filled with wonderful memories. James, Challenges and Accomplishments. It has been an honor to work for the company alongside the employees across our electric and manufacturing platforms. It has also been a privilege to have worked with all of you, and I value the relationships we have developed. The support and confidence you have provided me during my tenure is most appreciated.
And so those are the drivers of Q3 results.
That.
Largely contributed to our uplift in the earnings guidance.
Okay. Thank you Brian productivity side.
And the second quarter call, we indicated we had.
In the process.
Prior quarters, <unk> was trying to increase employee levels of 20% 25%.
I'm all in.
During the third quarter, while we continue to recruit.
Chuck MacFarlane: The company is in wonderful hands, and so on January 1, I will hand the football to Todd Wahlund as my successor. He is well prepared to move into the role as he has served as VP of Financial Planning and Treasury. At the corporate level, the VP of Finance and Planning for our manufacturing platform, and most recently as Chief Financial Officer in VP of Finance, Fraudertale Power Company. Thank you, Kevin. I too extend my congratulations and best wishes to you and your retirement. Your leadership has been an outstanding model to follow, and I appreciate all your guidance in coaching over the years.
More stabilized our employee level, so we saw improving productivity of the overall workforce there.
Okay, Great and then just on the on the backlog the trends.
You are seeing there.
Year over year and is there any read throughs.
Yes in terms of backlog the primary difference there in the backlogs is just because of the steel pricing between the years, Brian is what's driving that but.
In terms of what the.
The work we are seeing from our customers. They continue to look to us for.
Provide services that there are other supplier base, either is not providing timely or not providing quality type work. So they continue to look to BTG.
Todd Wahlund: I am grateful for the opportunity to continue your legacy of excellence and execution on a solid growth strategy.
Operator: We are now ready to take your questions. Thank you. As a reminder, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Not only currently but on a go forward basis to deliver the product that they need for their therein.
And.
And used product, whether it be in recreational vehicle or agar construction, but that big.
The biggest difference would be in the steel price between the years.
Operator: After the Q&A, Chuck will return with a few closing remarks. One moment, please.
Okay understood that backlog part of the reduction would certainly be not a big piece, but it would be in there or is that just we've seen a decline in the quarter.
Christopher Ellinghaus: In our first question comes from the line of Chris Ellinhas with Seabird William Shank in Company. Hey, everybody. How are you? Good. Morning, Chris.
Horticultural.
And market backlog between this year and at the same time.
A year ago.
Okay, great appreciate it.
Chuck MacFarlane: Chuck, could you talk about the IRP process? What do you hear him from interveners so far? Well, in the Minnesota filing, which we filed comments, reply comments yesterday, we have comments from the Queen Energy Organization, the Minnesota Office of Attorney General, and the Minnesota Department of Commerce. The environmental interveners brought up issues on the retirement, timing of Kyle and Big Stone as related to the proposed CO2 regulations and the EPA replied to that.
Well, thank you very much and Kevin all the best and good luck in the future.
Thank you Brian I appreciate it.
Chuck MacFarlane: There is also some comments in there about auto-tales use of renewable energy credits to meet the Minnesota Queen Energy Standard by 2040 and then some comments, you know, by the OIG had very similar comments, the DOC, and we reviewed our modeling and inputs and did not have substantial comments on their own modeling at that time.
Thank you with no other questions I will now turn the call back over to Chuck for his closing remarks.
Thank you for joining our call and your interest in Otter tail Corporation.
Based on our third quarter and year to date results as well as our continued strength within our plastic segment. We are raising our 23 earnings per share guidance to the range of $6 76 to $6 96.
Operator: Okay, great.
An increase of approximately 17% from our previous guidance range of $5 70 to $6.
Over the long term I believe we are well positioned with our utility growth strategy and predictable earnings stream complemented by our strategic manufacturing and plastics businesses to achieve our financial targets.
We expect to produce long term compounded growth in earnings per share of 5% to 7% and to increase our dividend in the range of 5% to 7% annually.
Thank you again for joining our call and we look forward to speaking with you next quarter.
Thank you for participating this concludes today's program and you may now disconnect.
Okay.
[music].
Kevin Moug: Kevin, can you sort of talk about the plastics business? Have you got any sort of update on your thoughts on the glide path to a more normal time? Yeah, Chris, as we both said in our comments that this glide path down is just taking longer than we would have expected. As I think we mentioned on the second quarter call, we are starting to see downward pressure in the residential commercial market, particularly in the northern pipe territory as some competitors drop prices as they were looking to pick up some market share with the clients in the municipal water market while they're softening.
Okay.
[music].
Okay.
[music].
Kevin Moug: They aren't softening to the levels that we expected when we updated our guidance at the end of the second quarter. As we look today into clearly conditions are stronger than we expected the middle of the year. We as evidenced by the strong third quarter and another uplift in the guidance for 2023. We don't see anything today, any kind of catalyst that says there should be any precipitous drop in pricing as we head into 2024.
Kevin Moug: We continue to monitor those conditions, we'll certainly provide an update on the, you know, when we give 2024 guidance in February, where those conditions are, but we think that the path to a more normal view of earnings is probably longer than what we had previously expected. You know, we said in the second quarter call that we expected, we'll see some type of normalization in the last half of 2024. I think that glide path is still there, Chris, but it could continue to be longer while it starts to come back in the last half of 24 and 25. I still think there's a, as we see it today, a longer glide to get back to normal.
Operator: Okay, great.
Chuck MacFarlane: And Chuck, can you just remind us of the procedural, you know, sort of schedule in North Dakota? Is it still a seven month statutory review? Yes, Chris, it is. So, and, you know, in many cases in North Dakota, there are settlements that occur before that seven months, but, you know, a fully litigated case has approximately a seven month window. Okay. And in the rate case. Can we presume the test year is something in 2024 and is the 17 million is that the base revenue request?
Chuck MacFarlane: The 17 is the net new, you know, or in a process we have a number of riders that would roll into base rates but the net new revenue request is the 17 million and we do use 2024 North Dakota has, you know, forecast test year.
Operator: Okay, great.
Operator: Good luck with retirement, we're going to miss you. Thanks for the details everybody. Thanks, Chris, we'll see you at EI. Thank you. And as a reminder, if you have a question, please press star 1-1 on your telephone.
Sophie Karp: And our next question comes from the line of Sophie Karp with Keybank Capital Markets. Hey, good morning.
Michael Seppanen: This is actually Michael Seppanen for Sophie. Thanks for taking my question. I was just wondering on the manufacturing segment, if you could remind us how much capacity the Georgia expansion project will add? In terms of power size, Mike, just total capacity addition. Yeah, I think it's adding collectively around 40 million of capacity. Yeah, and we would estimate that current capacity and sort of revenue for that site would be between 60 and 65 million.
Michael Seppanen: So an upgrade of an additional 40. And then how much visibility do you have there with those same customers and are you expecting a slow down there in the near term? In terms of Georgia, just in the manufacturing segment there, you talked about the additional business from current customers. Yeah, I know we've seen really continued healthy growth with John Deere across our kind of footprint of plants. Mike, we continue to experience growth with Polaris as well.
Michael Seppanen: And then in the southeast in Dawsonville, we continue to, because of that acquisition we did in 2015 and the growth there, we continue to see good growth with companies like Stanley Black and Decker, Caterpillar as well. Got it. Thanks.
Operator: Then turn it back to the North Dakota rate case filing. Is there anything specific that will stand out? You know, any new mechanisms you'll be exploring?
Chuck MacFarlane: Mike, one thing we may look at is implementing some form of a sales adjustment. I would not consider decoupling but we have large customers in North Dakota and an ability to adjust on a sales basis is something we'll bring forward. We don't have currently have decoupling in North Dakota. Good.
Operator: Thanks for answering my questions. Thank you. One moment please for our next question.
Brian Russo: Our next question comes from the line of Brian Russo with Sedoti. Yeah, good morning. Brian.
Chuck MacFarlane: Yeah, I apologize if I missed this earlier, but where are you in the development of your trance, a MISO trance one transmission projects? Brian, Chuck, we have two projects. One in North Dakota that goes from our existing Jamestown substation to a Jellinill substation owned by MPU. And we are in the process of routing, securing easements or options for easements for those types of things in that facility. And then one that goes from our big stone south which is just outside of Minnesota and South Dakota to Alexandria, Minnesota.
Chuck MacFarlane: And we have in Minnesota, there's a process where you file a certificate of need that has been filed jointly with Excel because this line ultimately emanates in a second circuit on existing line down to the northwest corner of the Twin Cities. And then once the certificate of need is reviewed by the commission, then we also would put in for a routing permit. We have public meetings with landowners. One round will do another round of that as the potential routing window narrows in those processes.
Chuck MacFarlane: So because of the kind of a two-step process, you get a certificate of need first that followed by a route permit in Minnesota. That process generally takes a little longer than in North Dakota where it's sort of a single certificate of need and routing process.
Operator: Okay, great. And then just also on the utility, what was the EPS impact of weather versus normal in the third quarter? I was two cents, I believe. Okay.
Operator: And then just lastly on manufacturer. Okay, all right. Got it. It was two cents negative to Q3 and 22. Okay, great.
Kevin Moug: And then just on the manufacturing side, specifically, BTD, how would you characterize the third quarter performance? Did it? I suspected exceeded your expectations, which is why you raised the midpoint of that segment guidance. And then also, if you could just talk about the backlog of $107 million, which is down year over year from $141 million, I know there are two components. One is just prices of steel. So it doesn't necessarily indicate slow down to business, but I just thought you could elaborate on that trend.
Kevin Moug: Sure, you know, as it relates to the third quarter, you know, we talked about both the ability to continue to get price increases to help offset increasing labor and other non-material related costs. So the company has continued to excel very well in being able to do that. We saw stronger volumes as well as we mentioned that helped drive the increased profitability quarter over quarter. And the other item that happened in the quarter, Brian, it's referenced in the press release and I indicated it in my guidance comments is the amount of R&D credits that were recorded in the third quarter at BTD.
Kevin Moug: So we do, you know, a fair amount of R&D work for our customers. That's one of our, I would call it our core competencies that BTD has that helps keep customers engaged with us. And we do, we estimate what we expect our R&D credits to be for the year. And then once we finish up, for example, we finished up 2022, we then engage an outside firm to do an R&D credit study for us in this case, 23.
Kevin Moug: And they come in and they look at the nature of the products, nature of, I should say, products, projects that we did during the year. And, you know, what was the nature were they more complex? Was it more materials? Those types of things. And we saw about a million dollar uplift in R&D credits in the third quarter that we hadn't fully anticipated. It was driven primarily by increased work that we did for one of our customers that was, I'll call it heavier tight steel and more complex projects they were working on.
Kevin Moug: So we were able to recognize an additional amount of R&D credit over and above, but we had been estimating for that. And then as the inflation reduction act allowed for another method to recognize R&D credits. And we, that new method that was under the inflation reduction act, that allowed us to get additional R&D credits as well as a result of that law, you know, that law that's in the IRA. And then, so there was a pickup there in our estimate of where we thought it was going to be.
Kevin Moug: And then as we revised our estimate in 23 based on that new method, that also provided was part of that million dollar uplift. And I think we've got it listed as two cents impact on the earnings walk slide and the earnings call materials. And so those are the drivers of Q3 results that, you know, largely contributed to our uplift in the earnings guide.
Kevin Moug: James. Okay, Brian. Productivity side. You know, when we had the second quarter call, we indicated we had, you know, in the process, the three prior quarters, BKD was trying to increase employee levels of 20 to 25%. I'm out. And during the third quarter, while we continue to recruit, we have more stabilized their employee levels. So we saw, you know, improving productivity of the overall workforce there. Okay, great.
Kevin Moug: And then just on the backlog, the trends, you know, you're seeing there, year over year, and, you know, is there any re-throughs? Yeah, in terms of backlog, you know, the primary difference there in the backlogs, is just because of the steel pricing between the years, Brian, as was driving that. But, you know, in terms of, you know, what, you know, the work we're seeing from our customers, they continue to look to us for provide services that their other supplier base, you know, either is not providing timely or not providing quality type works.
Kevin Moug: They continue to look to BTD, you know, not only currently, but on a go forward basis to deliver the product that they need to, for their, you know, their end use product, whether it be in recreational vehicle or ag or construction. But, you know, that big, the biggest difference would be in the steel price between the years. Okay, I'm wondering if that backlog part of the reduction would certainly be not a big piece, but it would be in there as just we've seen a decline in the agricultural and market backlog between this year and at the same time a year ago.
Operator: Okay, great, appreciate it. Well, thank you very much, and Kevin, all the best and good luck in the future. Thank you, Brian, appreciate it. Thank you.
Chuck MacFarlane: With no other questions, I will now turn the call back over to Chuck for his closing remarks.
Chuck MacFarlane: Thank you for joining our call and your interest in audit of corporation. Based on our third quarter and year-to-date results, as well as our continued strength within our plastic segment, we are raising our 23 earnings per share guidance to the range of $6.76 to $6.96. An increase of approximately 17% from our previous guidance range of $5.70 to $6.00. Over the long term, I believe we are well positioned with our utility growth strategy and predictable earnings stream, complemented by our strategic manufacturing and plastic businesses to achieve our financial targets. We expect to produce long-term compound growth in earnings per share of 5 to 7% and increase our dividend in the range of 5 to 7% annually.
Operator: Thank you again for joining our call and we look forward to speaking with you next quarter. Thank you for participating.
Operator: This concludes today's program, and you may now disconnect.