Q1 2025 Otter Tail Corp Earnings Call
Speaker Change: Good morning and welcome to Otter Tail Corporation's first quarter, 2025 Earnings Conference Call.
Speaker Change: Today's call is being recorded. 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.
Tyler Nelson: Good morning and welcome to our first quarter earnings conference call. My name is Tyler Nelson. I am
Speaker Change: Our complete earnings release and slides accompanying this call are available on our website at ottertail.com. A recording of this call will be available on our website later today.
Speaker Change: With me on the call are Chuck McFarlane, Otter Tail Corporations President and CEO and Todd Wahlund, Otter Tail Corporations Vice President and CEO .
Speaker Change: 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.
Speaker Change: They are subject to resonant certainties which may cause actual results to differ from those presented here, so please be advised against placing undue reliance on any of these statements.
Speaker Change: 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 displays any duty to update or revise our forward-looking statements due to new information, future events, developments, or otherwise.
Speaker Change: I will now turn the call over to a corporation's president and CEO , Mr. Chuck McFarlane.
Chuck MacFarlane: Well thank you Tyler and good morning and welcome to our first quartering school. Please refer to slide 4 as I begin my remarks with an overview of our first quarter highlights.
Chuck MacFarlane: I am proud of our team's effort and execution during the first quarter of the year, our financial results in Q1 met our expectations and we are on target to achieve our annual earnings
Chuck MacFarlane: Otter Tail Power, officially completed its North Dakota Rake case, implementing base rates in March. In addition, the team achieved an important milestone in working towards bringing a new large load onto our electric system.
Chuck MacFarlane: During the quarter we also completed the expansion of our BTD Georgia facility, an important project to enable future growth in our Southeast market.
Chuck MacFarlane: Slide 5 provides a summary of our first quarter financial results and the expectations for the remainder of the year.
Chuck MacFarlane: We produce diluted earnings per share of $1.62 in the first quarter, a decline from the first quarter of last year, but in line with our expectations and on target to achieve our 2025 annual earnings guidance.
Chuck MacFarlane: Our electric segment produced earnings growth in Q1, but as expected earnings from our manufacturing and plastic segments decline based on industry conditions impacting these businesses.
Chuck MacFarlane: Our businesses are faced with a heightened level of uncertainty as we monitor developments in the U.S. trade policy and macroeconomic conditions.
Chuck MacFarlane: Overall, we are well positioned to weather this period of uncertainty given the strength of our balance sheet, including ample liquidity and an experience management team.
Chuck MacFarlane: Despite this uncertainty, we are affirming our 2025 earnings guidance with a midpoint of $5.88 per share. In a moment, Todd will provide a more detailed discussion of our first quarter financial results as well as our outlook for the remainder of the year.
Chuck MacFarlane: Slide 6 outlines the uncertainty present in the current operating environment and the potential impacts to our business.
Chuck MacFarlane: We are actively monitoring the landscape of trade and tax policy and will respond to changes as necessary with the goal of minimizing the disruption to our businesses but also taking advantage of potential opportunities.
Chuck MacFarlane: The tariff exposure to Otter Tail Power is primarily on the materials and components used in our capital investments.
Chuck MacFarlane: Increase cost, good impact at timing, or the requested amount of recovery on our investments.
Chuck MacFarlane: and a customer impact would be spread over the life of the asset.
Chuck MacFarlane: Many major components are sourced domestically or from suppliers with some degree of supply chain flexibility. Certain components are sourced from Mexico or Canada and are currently exempted from additional tariffs as they are covered under the USMCA.
Chuck MacFarlane: We are working with our supplier partners to minimize tariff impacts.
Chuck MacFarlane: Substance the all of the raw material inputs used in our manufacturing and plastic segment businesses are domestically sourced thus limiting our tariff exposure.
Chuck MacFarlane: Domestic steel prices have increased following the implementation of tariffs on imported steel. We expect higher steel prices will impact our raw material costs in the second half of 2025.
Chuck MacFarlane: But the earnings impact should be minimal as we are able to pass this cost increase onto our customers.
Chuck MacFarlane: We are monitoring for end market demand changes if tariff produce elevated inflation or broad economic disruption.
Chuck MacFarlane: Turning to tax policy changes, we are closely monitoring for changes in the tax credit legislation expanded by the Inflation Reduction Act or IRA.
Chuck MacFarlane: Thus far, there has been a certain level of bipartisan support in Congress for maintaining renewable energy credits under the IRA.
Chuck MacFarlane: Our current expectation is that a partial repeal of the IRA is possible.
Chuck MacFarlane: At this point, we are uncertain as to how the tax policy may change, but we are not expecting potential changes to impact our near-term renewable investments.
Chuck MacFarlane: including our Wind Repowering Projects and our Solway Solar Project as we expect these investments to qualify under existing technology-specific rules.
Chuck MacFarlane: Tax Credit Transferability may be a component of the IRA that is at risk to be modified. As a reminder, all benefits of tax credits, including when transferred, are fully returned to our retail customers.
Chuck MacFarlane: To this point, we have not needed to transfer any tax credits and don't expect to in the near term.
Chuck MacFarlane: We are able to monetize tax credits generated by Auto Tail Power to offset the tax obligations of other businesses flowing these tax credits back to Auto Tail Power's customers.
Chuck MacFarlane: We anticipate transferability will continue to be available for existing and in-process projects.
Chuck MacFarlane: Over the long term, I am confident our team will effectively respond to any changes in tax policy ensuring we continue to select the appropriate capital investments to provide reliable and affordable energy to our customers.
Chuck MacFarlane: Now turning to an update on our electric platform on slide 8. As I mentioned, Otter Tail Power concluded its North Dakota General Rate Case with a final compliance filing and implementation of final rates in March.
Chuck MacFarlane: As we have previously discussed, this was a fully settled case that was approved by the North Dakota Commission late last year. Overall, we view the outcome of the case to be constructive, balancing the interests of all stakeholders.
Chuck MacFarlane: As we look forward, we anticipate a rate case filing in South Dakota in the middle of 2025.
Chuck MacFarlane: In addition, our team is currently evaluating the potential filing in Minnesota, which if filed would most likely happen late this year.
Chuck MacFarlane: We last filed a rate case in South Dakota in 2018 and in Minnesota in 2020.
Turning to slide nine.
Chuck MacFarlane: We are affirming our electric segment capital investment and rate-based growth projections through
Chuck MacFarlane: We expect this customer-focused investment plan to produce a compounded annual growth rate and rate base of 9%, and we expect to convert that rate base growth into earnings per share growth and approximate one-to-one ratio.
Chuck MacFarlane: Slide 10 and 11 provide an overview of ongoing and future capital projects that will not touch on a few key updates.
Chuck MacFarlane: Our advanced metering infrastructure project is substantially complete as we have updated over 170,000 meters, allowing us to offer energy and cost saving options to our customers and improving their overall service experience.
Our Wind Repowering Project continues to progress well.
Chuck MacFarlane: We completed the equipment upgrades at the first of four on-wind energy centers in the fourth quarter last year and construction continues with expected completion of the other three by the end of this year.
Chuck MacFarlane: We continue to anticipate the project will lower customer bills through available tax credits and increased energy output. An excellent example of investing capital that serves both our customers and investors.
Project Development and Work
on regulatory planning continues on our two solar projects.
Chuck MacFarlane: which collectively will add up to 345 MW of solar generation to our portfolio.
Chuck MacFarlane: We believe these solar facilities fit the requirements of our approved Minnesota Integrated Resource Plan and represent an opportunity to provide increasingly clean electric service that is also cost effective to our customers.
Chuck MacFarlane: Turning to slide 11, the development work continues on three MISO Tronch-1 projects, Otter Power will come on.
Chuck MacFarlane: We have encountered some landowner and local government resistance to citing and certain permitting for one of the projects which has delayed our development progress.
Chuck MacFarlane: Our team continues to engage with landowners, seeking their feedback and input while working towards a solution.
Chuck MacFarlane: Our team is scrutinizing the project timeline to maintain our planned completion date.
Chuck MacFarlane: Development work has begun on our Myself Tronch 2.1 projects. We're working closely with our co-owners on
Chuck MacFarlane: Project Planning and Regulatory Matters, including filing the first refusal notices with our state commissions in the first quarter.
Chuck MacFarlane: These projects continue to be important developments to enhance the reliability and efficiency of the electric grid. These investments are expected to have very limited impact on our retail customer rates as these costs are allocated across the entire Myself footprint.
Chuck MacFarlane: Turning to slide 12, Otter Tail Power remains well positioned to attract and support large loads.
Chuck MacFarlane: We have over 1000 megawatts of potential new large loads in our pipeline. This is a significant opportunity relative to our existing 1000 megawatt system.
Chuck MacFarlane: We aim to bring one to two large customers online in the next one to three years with the goal to grow with them in support of their electric service needs.
Chuck MacFarlane: As I previously mentioned, we did receive an important milestone in the first quarter executing a service agreement with a new customer. We are now working to receive regulatory approval for this new loan along with other steps necessary to command service.
Chuck MacFarlane: We are excited about the opportunity to support this unique customer locating next to our big stone plant.
Chuck MacFarlane: The customer load is expected to be approximately 155 megawatts, comprised of 3 megawatts of non-firm load and approximately 152 megawatts of non-firm load.
Chuck MacFarlane: The firm load will be supplied by Otter Tail Power generation through the electric grid. The non- firm load will be served by market energy and operate during certain periods.
Chuck MacFarlane: We are targeting and in-service state later this year, subject to obtaining required regulatory approvals and construction of the distribution assets necessary to serve the low.
Chuck MacFarlane: We have and we will continue to be thoughtful in our negotiations to ensure that we are appropriately mitigating any potential adverse implications of adding new large load to our existing customer base.
Chuck MacFarlane: Adding new loads, if appropriately managed, will not only benefit us, but also our current customers, as it enables us to spread out our existing fixed costs, thereby benefiting our existing customers.
Chuck MacFarlane: We remain committed to maintaining affordable electric service rates for our customers and have demonstrated the ability to do so for many years.
Chuck MacFarlane: As slide 13 illustrates, Otter Tail Power is some of the lowest electric rates in the nation with our 2024 rates 30% below the national average and 16% below our regional peers.
Chuck MacFarlane: I will now transition to our manufacturing platform starting on slide 15
Chuck MacFarlane: with an overview of industry conditions served by our manufacturing segment.
Chuck MacFarlane: Both BTDE and Teoplastics continue to confront end market demand headwinds in most of the markets we serve. We are seeing some stabilization in the construction and law and garden end markets as dealer inventories are normalizing.
The recreational vehicle and agriculture markets continue to be challenged.
Chuck MacFarlane: with a high level of new and used inventories in the channel and softening commodity prices weighing on farming income, specifically impacting the ag economy.
Chuck MacFarlane: The horticulture market served by teoplastics is also stabilized, however the extent and timing of sales volume recovery remains unclear.
Chuck MacFarlane: Distributor and customer inventories are at low levels, and our business is well positioned to respond to them as demand returns.
Chuck MacFarlane: Low priced import competition continues to be a challenge, tariffs on these products may create an opportunity for increased sales volumes.
Chuck MacFarlane: We continue to monitor and market conditions along with the general economic environment.
Chuck MacFarlane: Well, there is a heightened level of uncertainty. Our management teams are experienced in operating through periods of dynamic, microachnomic.
and Industry Conditions.
Chuck MacFarlane: We continue to tightly manage costs and be prudent in our capital spending.
Chuck MacFarlane: Well, we are also being ready to respond when market conditions improve.
Chuck MacFarlane: Despite this downturn cycle, we remain confident in the segment's long-term fundamentals. We expect to focus on reassuring manufacturing operations to the U.S., which could be aided by changes in tariff policy.
Chuck MacFarlane: as well as the existing housing shortage and power demand growth to support volumes over the long term.
Chuck MacFarlane: Additionally, we expect large equipment manufacturers to continue to look to outsource and increasing portion of their work, once end market conditions improve.
Chuck MacFarlane: Slide 16 provides an overview of our plastic segments pricing and volume trends.
Chuck MacFarlane: Our sales prices of PVC pipe have steadily declined since peaking in mid-2022.
Chuck MacFarlane: Decreasing 11% in the first quarter of 2025, compared to the same period last year.
Chuck MacFarlane: Sales volumes increased 13% in the quarter from the combination of strong distributor and end market demand and the incremental volume from our capacity expansion completed in late
Chuck MacFarlane: Our new large diameter line at our Phoenix location is operating as we expected, and we are pleased with the output in the first full quarter of operations.
which was driven by increased domestic supply of PVC resin.
Chuck MacFarlane: We are monitoring ed market conditions that could negatively impact our sales volumes specifically those that impact residential or commercial development.
Chuck MacFarlane: Turning to slide 17, our manufacturing platform remains well-positioned to support future growth opportunities.
Chuck MacFarlane: Work continues on the second phase of our expansion and our Phoenix facility. We are on track to bring the second extrusion line and related infrastructure and online early next year.
Chuck MacFarlane: This will add an additional 26 million pounds of capacity, which along with the phase one line will increase our total capacity by approximately 15%.
Chuck MacFarlane: We are pleased to have completed our BTD Georgia Facility expansion project in the first quarter of the year. The project was completed on time and on budget.
Chuck MacFarlane: We expect all manufacturing equipment to be installed and ramping up to full production capacity over the remainder of the year.
Chuck MacFarlane: This project positions us well to grow with our customers that are expanding in the Southeast market.
Chuck MacFarlane: We anticipate the project will increase production capacity up to 35 million in incremental annual sales.
Chuck MacFarlane: I'll now turn it over to Todd to provide his financial update.
Thank you, Chuck, and good morning, everyone.
Chuck MacFarlane: As illustrated on slide 19, we produce diluted earnings per share of $1.62 in the first quarter of the year.
and 8% decline from the same period last year.
Chuck MacFarlane: Please follow along on slides 20 and 21 as I provide an overview of our first quarter results by segment.
Chuck MacFarlane: Electric segment earnings increased 10% in the first quarter, driven by favorable weather conditions compared to the same period last year.
Chuck MacFarlane: An increase in sales volumes and increase rider revenues from the recovery of our ongoing capital investments.
Chuck MacFarlane: Heading Degree Days in the first quarter of 2025 approximated normal levels, but were elevated compared to the first quarter of last year, which was unseasonably warm in our service territory.
Chuck MacFarlane: These increases in revenues were partially offset by increased depreciation and interest expense from our capital investments and associated financing costs.
Chuck MacFarlane: Manufacturing Segment Earnings Decreased 9 cents per share, primarily due to lower sales volumes along with increased production costs and unfavorable product mix and the impact of product pricing pressures.
Chuck MacFarlane: As Chuck mentioned, we continue to see soft and market demand, especially for recreational vehicles and agricultural equipment.
Our team is focused on managing costs in the business.
Aligning her cost structure with the current demand environment
Chuck MacFarlane: Despite the downcycle, the fundamentals of this segment remain strong, and we continue to benefit from the incremental earnings and cash flow generated by these businesses.
Chuck MacFarlane: Turning to slide 21, our plastic segment produced diluted earnings per share of a dollar and three cents in the first quarter of 2025, a decrease of 7% compared to the first quarter last year.
Chuck MacFarlane: This expected decline was driven by the continued reduction in product prices.
Chuck MacFarlane: The average sales price of PVC pipe declined 11% compared to the first quarter of 2024.
Chuck MacFarlane: This continues the downer trend we have experienced since the middle of 2022 after PVC pipe
Chuck MacFarlane: Partially offsetting the decline in pricing was a 13% increase in sales volumes.
Chuck MacFarlane: The large damper pipe capacity we added late last year contributed to this increased sales volume and we continue to see strong distributor and end market demand across our territory.
Chuck MacFarlane: First quarter earnings also benefited from lower material cost as resin prices have declined due to increased domestic supply levels stemming from new resin production capacity and a soft export market for P.M.C. resin.
Chuck MacFarlane: Finally, our corporate costs were higher in the first quarter of 2025, primarily due to an increase in employee medical claim levels under our self-insured plan.
Turning to slide 22, our balance sheet remains very strong.
Our consolidated equity layer as of March 31st was 62%.
Chuck MacFarlane: We have available barren capacity on both the parent and otter tail power credit facilities, which along with our $280 million of cash and equivalence provides for a total available liquidity of over $600 million.
Chuck MacFarlane: Our position of financial strength ensures we are well positioned to weather a period of economic uncertainty to deliver on our growth strategy and consistently deliver long-term shareholder value.
Chuck MacFarlane: On slide 23, we are affirming our 2025 diluted earnings per share guidance range of $5.68 to $6.8 cents.
Chuck MacFarlane: which is expected to produce a return on equity near 14%.
Our guidance reflects electric segment earnings growth of approximately 7%.
Chuck MacFarlane: and a continued decline in plastic segment earnings as PVC pipe prices continue to decline.
Chuck MacFarlane: In addition, manufacturing segment earnings are anticipated to decline as end-market conditions remain challenging.
I will now advance to slide 24.
Chuck MacFarlane: with a combination of a high growth electric utility and a manufacturing platform that provides enhanced returns and incremental cash flows.
Chuck MacFarlane: We have a proven track record of delivering outstanding growth levels for our investors.
Chuck MacFarlane: Based on the midpoint of our 2025 guidance range, we are forecasting our consolidated 5-year compound annual growth rate and earnings per share to be over 20%.
Chuck MacFarlane: Even without the impact of plastic segment earnings, we expect this growth rate to exceed 8%.
Chuck MacFarlane: Flight 25 presents our customer focus capital investment plan for years 2025 through 2029.
Chuck MacFarlane: The $1.4 billion of capital investments in our electric segment will benefit our customers and investors and will be a key driver of earnings growth for this business over the five-year period.
Chuck MacFarlane: Beyond our base five-year capital spending plan, we project up to $650 million of incremental capital investment opportunity at Otter Tail Power.
Chuck MacFarlane: Our base capital plan for 2025 through 2029 does not currently include any capital investment for wind generation approved in our Minnesota Integrated Resource Plan.
Chuck MacFarlane: as we continue to evaluate whether building and owning a new facility or contracting the energy through a purchase power agreement is most beneficial to our customers.
Chuck MacFarlane: This plan also does not include any delivery investment relating to potential new large loads.
Chuck MacFarlane: For every $100 million of incremental capital investment, we estimate our rate-based compound annual growth rate would increase by approximately 75 basis points.
Flight 26 summarizes our five-year financing plan.
Chuck MacFarlane: Even with our robust capital spending plan, we expect to finance the entire five-year growth plan without any equity issuances.
Chuck MacFarlane: given our current cash balance and cash flow projections over the next five years.
Chuck MacFarlane: Annual debt issuances at Otter Tail Power are planned to help fund our rate-based growth plan and maintain our authorized capital structure.
Chuck MacFarlane: In the first quarter, we completed a $100 million private placement debt issuance.
Chuck MacFarlane: with the first $50 million funded in March and the second $50 million to be funded in June of this year.
We do not anticipate any further debt issues in 2025.
Chuck MacFarlane: We have $80 million of total parent-level debt that all matures in late 2026 and we plan to retire this with existing cash and not replace it with new issuances.
Chuck MacFarlane: The value of our portfolio of companies is evident in our financing plan.
Chuck MacFarlane: We project being able to eliminate the need for external equity for at least the next five years by investing the incremental cash flow generated by our manufacturing platform into our utility's rate-based growth plan.
Chuck MacFarlane: and Flight 27 we reaffirm our long-term earnings expectations of our plastic segment to be in a range of 45 to 50 million dollars beginning in 2028.
Chuck MacFarlane: We continue to expect earnings to decline through 2027 based on the assumption that our sales prices continue to trend downward at a pace similar to what we have experienced since the latter part of 2022.
Chuck MacFarlane: Our long-term view of segment earnings also incorporates the impact of incremental sales volume growth and the expectation that raw material costs will generally increase with the rate of inflation.
Chuck MacFarlane: Considering these factors, we expect our gross profit margin percentage in 2028 to approximate the margin percentages we realize from this segment prior to 2021.
Flight 28 summarizes our investment targets.
Chuck MacFarlane: While we are currently navigating a period of heightened economic disruption and uncertainty, we remain confident in our ability to deliver on our investment targets over the long term.
Chuck MacFarlane: We continue to target a long-term earnings mix of 65% electric and 35% manufacturing.
Chuck MacFarlane: We anticipate achieving this in 2028 as electric segment earnings per share grows in line with rate-based growth of 9%.
Chuck MacFarlane: The manufacturing segment recovers from the current down cycle and plastic segment earnings normalize.
Chuck MacFarlane: Following this, we project a long-term EPS growth rate of 6-8 percent that will be driven by our capital investment plan for our electric segment and the recent and planned capacity additions within our manufacturing platform.
Chuck MacFarlane: and generates sufficient cash to enable us to finance our growth issues without any external needs for at least the next five years.
Chuck MacFarlane: Finally, we are committed to a balanced capital allocation strategy, reinvesting in our businesses to support future growth while returning capital to our shareholders through our dividend.
which we have paid for 86 consecutive years.
Chuck MacFarlane: The indicated annual dividend increase of 12% announced earlier this year reflects our position of financial strength and our commitment to delivering shareholder value.
We are now ready to take your questions.
Speaker Change: As a reminder, please press star 1-1 on your telephone and wait for your name to be announced.
To withdraw your question, please press star 1-1 again.
Uh-oh.
on our first end of Sophie Carp
Let's turn it over to Chelsea.
Hi. Good morning. Can you hear me?
Good morning, Sophie. Good morning, Sophie.
Speaker Change: Great, so thanks for taking my question. Just wanted to maybe start with the, you know, plastics. I'm just kind of curious.
Speaker Change: I guess looking at slides on your seven here, right? So if you have, if you expect to have an inflationary increase in the input costs
Speaker Change: Why would you simultaneously expect the continued products price declines, right? So it wouldn't be like a set in each other, inflation or a pressure plane to stay with, could they be supportive of pricing? Thank you.
Speaker Change: Thank you, Sophie, for the question. I'll take first one, and if I miss any of the questions you asked, just ask again here. So in terms of the volume for
Speaker Change: this year. It's lower single digits increase in our volume. We had very strong volumes in Q1 increase over 2024.
Speaker Change: We expect to have a strong increase in the second quarter as well, but our guidance reflects a potential downturn in the second half of the year, just as we're looking at housing
Speaker Change: and Builder Sentiment. We see that there is some risk in the second half of the year so we factor that into our guidance but we still expect to be within the guidance range based on that potential downturn in the second half of the year.
in terms of the inflationary.
Speaker Change: Increases. So basically our core assumption here on our normal plastics earnings is that we revert back to
Speaker Change: the same gross margin percentages that we had pre-2021. So at some point those...
Speaker Change: Converge, and we expect to see that in that end of 2027 time frame. So as costs are increasing, prices are decreasing. Once we get to that gross margin percentage level, we expect that's when we'll see the new normal play out. So...
Speaker Change: We are factoring in basically the continued about 12% decrease in prices per year that we've been seeing since September of 2022.
Speaker Change: Did I catch all your questions, Sophia? Did I miss you? Yeah, yeah. I think this is great. And then if I can squeeze one more in, I don't know if you said, are you seeing yet any impact from some of your competitors? First, pipe competitors, expanding capacity in your core region. So is it too early to kind of see that?
Speaker Change: You know, we don't have complete visibility into that but we anticipate that
Speaker Change: The competitors are doing similar to us in adding incremental lying capacity at various sites or debodel-mecking sites that they have to our knowledge, we're not seeing new plants or that type of thing, but...
Speaker Change: We anticipate that there are others replacing equipment, upgrading equipment, adding capacity.
very similar to what we would be doing.
Thank you so much. It's all for me.
. . .
Speaker Change: As there are no remaining questions in the queue, I will turn the call back over to Chuck for his closing remarks.
Speaker Change: Thank you for joining our call and your interest in Otter Tail Corporation.
Speaker Change: If you have any questions, please reach out to our investor relations team and we look forward to speaking with you next quarter.
Speaker Change: This concludes today's conference call. Thank you for participating. You may now disconnect.