The Andersons, Inc. (NASDAQ:ANDE) Q1 2024 Earnings Call Transcript

The Andersons, Inc. (NASDAQ:ANDE) Q1 2024 Earnings Call Transcript May 8, 2024

The Andersons, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen. Welcome to The Andersons 2024 First Quarter Earnings Conference Call. My name is Rocco, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now hand the presentation to your host for today, Mr. Mike Hoelter, Vice President, Corporate Controller and Investor Relations. Please proceed.

Michael Hoelter: Thanks, Rocco. Good morning, everyone, and thank you for joining us for The Andersons first quarter earnings call. We have provided a slide presentation that will enhance today’s discussion. If you are viewing this presentation from our webcast, the slides and commentary will be in sync. This webcast is being recorded, and the recording and the supporting slides will be made available on the Investors page of our website at andersonsinc.com shortly. Please direct your attention to the disclosure statement on Slide 2 as well as the disclaimers in the press release related to forward-looking statements. Certain information discussed today constitutes forward-looking statements that reflect the company’s current views with respect to future events, financial performance and industry conditions.

These forward-looking statements are subject to various risks and uncertainties. Actual results could differ materially as a result of many factors, which are described in the company’s reports on file with the SEC. We encourage you to review these factors. This presentation and today’s prepared remarks contain non-GAAP financial measures. Reconciliations of the GAAP to non-GAAP measures are included within the appendix of this presentation. On the call with me today are Pat Bowe, President and Chief Executive Officer; Brian Valentine, Executive Vice President and Chief Financial Officer; and Bill Krueger, Chief Operating Officer. After our prepared remarks, we will be happy to take your questions. I will now turn the call over to Pat.

Patrick Bowe: Thank you, Mike, and good morning, everyone. Thank you for joining our call this morning to discuss our first quarter results and outlook for the remainder of 2024. First quarter results were solid for the company and overall, very comparable to last year. The mix of our results is a bit different with trade down against last year’s record first quarter and renewables in Nutrient and Industrial both generating favorable results against 2023. I want to thank our teams for their hard work in producing these results in transitioning markets with a continuing focus on operating safety. As expected, Trade had a slower start to the year as farmers have been reluctant to engage in forward sales at these lower price levels.

Coupled with this is softer global demand for U.S. crops as worldwide supply and demand has become more balanced. These factors impacted both our physical grain assets and our merchandising teams. Our premium food and pet food ingredients business saw a significant year-over-year improvement. This is a smaller but growing portion of our Trade business, and improvement comes from both organic growth and 2 recent accretive acquisitions. Operating performance in the Renewables business was very strong and driven primarily from our ethanol plants. We had record first quarter production and efficient operations benefiting from lower natural gas prices and solid ethanol yields. The ethanol crush hedges the team executed during the fourth quarter also helped our ethanol margins.

We are successful in increasing volume in our renewable diesel feedstock merchandising business, but have been challenged by compressed margins on industry fundamentals. Our feed co-product values were also weaker with the overall lower commodity price environment. In our Nutrient and Industrial business, we experienced an increased margin and volume in our agricultural fertilizer product lines in the seasonally slow quarter. Results were significantly improved from the first quarter of 2023. Brian will now cover some of the key financial data. After that, we’ll be back to discuss our outlook for the remainder of 2024. Brian?

Brian Valentine: Thanks, Pat, and good morning, everyone. We’re now turning to our first quarter results on Slide #5. In the first quarter of 2024, the company reported net income attributable to The Andersons of $6 million or $0.16 per diluted share. This compares to a net loss of $15 million or $0.44 per diluted share and adjusted net income of $7 million or $0.20 per diluted share in the first quarter of 2023. Adjusted pretax earnings were $7 million for the quarter, which was comparable to the $8 million in 2023, with Renewables and Nutrient and Industrial both showing improvement, offset by a year-over-year decline in Trade. Adjusted EBITDA for the first quarter was $51 million compared to adjusted EBITDA of $55 million in the first quarter of 2023.

Trailing 12 months adjusted EBITDA totaled $401 million. Our effective tax rate varies each quarter based primarily on the amount of income or loss attributable to noncontrolling interests. We recorded taxes for the quarter at a 9% effective tax rate. We now expect a full year adjusted effective tax rate between 18% and 22%. Next, we’ll move to Slide 6 to discuss cash, liquidity and debt. We generated cash flows from operations before changes in working capital of $48 million in the first quarter of 2024, demonstrating our ability to consistently generate strong operating cash flows in changing markets. Our cash flow generation, combined with lower commodity prices and delayed farmer engagement, resulted in negligible short-term borrowings at the end of the quarter.

Next, we’ll take a look at capital spending and long-term debt on Slide 7. We continue to take a disciplined, responsible approach to capital spending and investments, which we expect will be approximately $150 million to $175 million for the year, roughly half of which is typically related to maintenance capital. Our long-term debt to EBITDA is currently less than 1.5x, which is well below our stated target of less than 2.5x. We have a balance sheet with significant capacity to support growth investments that meet our strategic and financial criteria. We continue to evaluate growth projects in our pipeline, including additional M&A opportunities. Our project pipeline has been increasingly active over the past few months, and we are excited about potential opportunities to execute on additional growth projects, including the recently announced acquisition of Reed and Perrine, a bolt-on acquisition expanding our geographic reach in our turf business.

Now we’ll move on to a review of each of our businesses, beginning with Trade on Slide 8. Trade reported first quarter pretax income of $6 million and adjusted pretax income of $9 million, compared to $24 million in the same period of 2023. We had mixed operating results in our Trade business portfolio when compared to our record 2023 first quarter. As Pat mentioned, aggregate results of our merchandising businesses were solid, but down in a backdrop of a less dynamic U.S. grain market with lower commodity prices and less volatility. In addition, given recent geopolitical unrest, we have intentionally and prudently pulled back on activity in certain regions. The financial results for our grain assets were relatively consistent year-over-year as domestic producers are still hesitant to sell — to forward sell due to lower commodity prices, combined with limited basis appreciation to start the year.

Our assets are well positioned once the grains are brought to market. Investments in growth projects, including acquisitions and additional food corn capacity, led to improved results in our premium food and pet food ingredient businesses. Trade’s adjusted EBITDA for the quarter was $24 million compared to $44 million in the first quarter of 2023. Moving to Slide 9. Renewables had a very strong first quarter, generating pretax income attributable to the company of $16 million and $13 million on an adjusted basis compared to $6 million in the first quarter of 2023. Our current quarter earnings doubled year-over-year due to stronger ethanol margins and favorable ethanol crush margin hedges executed during the fourth quarter. Production facilities continued to operate efficiently with record first quarter production and lower natural gas prices.

Renewable diesel feedstock volumes continue to grow, but we are seeing margin compression on industry fundamentals. Feed ingredient demand is also strong, but at a lower value as it is tied to the price of corn. Renewables had EBITDA of $35 million and adjusted EBITDA of $32 million in the first quarter, compared to $22 million in the first quarter of last year. Turning to Slide 10. The Nutrient and Industrial business reported a first quarter pretax loss of $2 million compared to a loss of $10 million in 2023. Overall, fertilizer prices stabilized in the seasonally slow quarter. The improvement year-over-year was driven by increased volumes and margins in core agricultural product lines. Nutrient and Industrial had EBITDA of $7 million for the quarter compared to an EBITDA loss of $1 million in the first quarter of 2023.

And with that, I’ll turn things back over to Pat for some comments about our outlook for the remainder of 2024.

Patrick Bowe: Thanks, Brian. We remain positive about our 2024 outlook against a changing market environment. While the last few years brought us volatile demand-driven markets, a global balance of supply and demand will now allow us to demonstrate our ability to deliver good results in carry markets with more focus on the value of our grain assets. We continue to expect a sizable U.S. harvest, but acknowledge pockets of weather-related planting and fertilizer application delays due to wet weather, which is typical in this spring season. Our Trade business outlook remains solid, although strong levels of global supply and reduced prices have caused both farmers and end users to reduce their forward contracting. Markets have recently begun to move higher, which could bring more volatility into the mix.

At this time, we continue to expect a normal growing season. In February, we talked about our lowered expectations for wheat storage income with the large purchases from China during the fourth quarter. Subsequent cancellations of a significant portion of that wheat purchases from China has resulted in a return of carry to the wheat markets, leading to a more positive outlook. We’re also very pleased with the growth in our premium food and feed ingredient products and look for that to continue to both grow organically and through acquisitions. Our Renewables segment looks to build on their outstanding first quarter, our second best Q1 ever. The Renewables business is an important part of our growth strategy, and we continue to make progress toward lowering the carbon intensity of our ethanol.

This includes enhancements at our production facilities as well as supportive farmer programs that should position us to acquire lower carbon corn as a feedstock in the future. The outlook for this business remains strong. Improving and maintaining our 4 production facilities for optimal efficiency is crucial to us. After the quarter end, we completed all 4 maintenance shutdowns and successfully returned to full production. Our renewable diesel feedstock merchandising business is also an important growth engine for the company. And while we increased volume in the quarter, margin compression reduced the year-over-year result. We believe that with additional renewable diesel refinery demand expected in 2024, volumes and margins will stabilize.

The Nutrient and Industrial business outlook also remains positive as we anticipate solid demand for the ag fertilizers and specialty liquids that we supply. The spring planting season is critical to this business and it is typical we have pockets of our geography that have experienced wet weather. We’re also ready to support our customers with both input supply and application services when needed. We continue to work on operational improvements in our turf business and recently closed on the acquisition of Reed and Perrine, a turf fertilizer manufacturer located in New Jersey that expands our geographic reach to the East Coast. So with our strong balance sheet position and a desire for growth, we’re excited about significant opportunities in each of our 3 segments.

We have a number of organic growth initiatives as well as a pipeline that is very robust. With changes in the ag markets, we’re also focusing on organic and acquisition opportunities that should help us achieve our 2025 run rate EBITDA target of $475 million. We’ll continue to maintain and maximize our response and our decisions that benefit our customers and maximize shareholder value as we execute on growth opportunities within our stated strategy. With that, I’ll turn things back over to Rocco, and we’ll take your questions.

See also 25 Richest Billionaires in Metals and Mining Industry and 25 Richest Billionaires in Manufacturing Industry.

Q&A Session

Operator: [Operator Instructions] Today’s first question comes from Ben Bienvenu with Stephens.

Ben Bienvenu: If I think about, Pat, kind of all the puts and takes that you laid out in the Trade business, the risks from geopolitical uncertainty and maybe the pullback associated with that, a more balanced, less volatile backdrop. But now a weak carry in the market, large crop here in the U.S. Help us think through net of all of those factors, how you’re thinking about for the remainder of the year, maybe a year-over-year comparison of kind of Trade contribution of pretax earnings to the business?

Patrick Bowe: Sure. A very good question, Ben. I’ll get it started and then turn it over to Bill who knows it better than I do. I think the interesting thing to think about us is we talk about the balance of our portfolio. So the good news for us is the carries coming back to the wheat market. As you know, historically, we’re very well positioned for storage of soft wheat inventories in our eastern assets, and that’s going to be a nice income source for us, a traditional way of earning carry income at our elevators. But some of the volatility that we had a year ago with really tight inverse markets, we took advantage of that with some of our point-to-point trading that’s not there this year, which asks us to do something quite different.

So we just haven’t had a lot of farmer engagement selling at lower prices or even customers wanting to — on the buy side, wanting to book ahead forward. But that will change as we go through the crop year. I think the farmers see what’s coming. With their planting, they have a little more confident position. And if we have a little pop like we’ve seen recently, we’ll have better farmer engagement. And we’ll just be able to work through these merchandising through the course of the year in a different fashion. I’ll turn it over to Bill, who can elaborate further.

William Krueger: Ben, the only thing I’d add to what Pat had commented there is, in Q1, you had kind of a combination of items, right? You had lower prices than the producers had been used for. The end users were being rewarded by waiting. So we just saw a lot fewer transactions occurring. Now that we’re getting into our corn planting and we’ve had this recent rally, we’re seeing a lot more activity pick up. And as we’ve talked about before, your end users currently, at least in the U.S., are doing very, very well. So we don’t anticipate any changes there. And assuming we end up with the expected fall crops, we actually feel like we’re positioned really well. We’re going to see less volatility likely in 2024 as we look forward today, which will not benefit our merchandising businesses. But at the same time, we have a lot of capacity that we’re able to accumulate on a cheap harvest basis and be able to trade that into the marketplace as the market dictates.

Patrick Bowe: And maybe just add one more thing to that. I know you know this well, Ben. But as primarily domestic suppliers, so we’re not so much tilted just towards exports, our big export pool, which we don’t have right now. We really focused on those beef, swine, poultry customers as well as ethanol, flour millers, other food and pet food business. So the diversification we’ve done over the last several years, especially in the food and pet food area kind of diversifies our portfolio domestically, and we work closely with those customers, and we expect that to be a nice support for us.

Ben Bienvenu: Okay. Very good. Thinking strategically about capital allocation and kind of positioning of the business, you guys have sort of been swimming upstream, I suppose, in accumulating U.S. domestic grain assets. Some of the larger competitors of yours have been selling or leaning out of asset exposure. Why does it make sense for you guys to allocate capital to those businesses? How are you doing it differently? And why is it attractive to you in a backdrop where some of your competitors are moving away from that business?

William Krueger: I’ll take that, Ben. If you look back over the last 5 years, in fact, we’ve actually trimmed our asset portfolio and have been able to utilize our remaining assets very positively. The other difference that we have versus some of our competitors, as you mentioned, is we believe that we have the connection from the producer, all the way through to the end user with our ability to manage logistics, manage risk and be able to be a good supplier to those customers. So we see value in having the assets that we do have, in being able to work with the producers, we’ll talk later on some of the regenerative ag products that we’ve been working on the last couple of years. And so we see our fit in that ag supply chain across North America.

Patrick Bowe: Maybe to add on to that, too, Ben, just to echo what Bill said, we did modify our portfolio. We sold Champaign, Illinois, which is one of our biggest assets. And previous to that, we sold assets we had in Tennessee and Iowa. So we had kind of shrunk our footprint a little bit in grain assets. A lot of the bolt-on acquisitions that we’ve done have been in pet food and investments we made into food grade corn. So we’re kind of working on those parts of the portfolio or niches where we could differentiate. And Bill mentioned, now we’re trying to position ourselves well with regenerative ag and working around our ethanol plants, how we can be a low carbon provider and working with growers on that. So it’s kind of a just grain assets for grain assets sakes isn’t our focus. It’s really about how do we broaden our portfolio that give us higher margins.

Ben Bienvenu: Okay. Very good. Very helpful. My last question, if I could ask one more just on the ethanol business. You had kind of inkling of a positive outlook a little bit there. Can you talk about kind of what your expectations are as we enter the summer driving season with respect to where we see days of inventory, export demand and kind of production across the industry?