Otter Tail Corporation (OTTR) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to the Otter Tail Corporation's Q1 2021 Earnings Conference Call. Today's call is being recorded. I will now turn the call over to the company for their opening comments.
Loren Hanson: Good morning, everyone, and welcome to our call. My name is Loren Hanson, and I manage otter Tail's Investor Relations area. Last night we announced our first quarter 2021 earnings results. Our complete earnings release and slides accompanying this call are available on our website at ottertail.com. A recording of the call will be available on our website later today. With me on the call today are Chuck MacFarlane, Otter Tail Corporation's President and CEO; and Kevin Moug, Otter Tail Corporation's Senior Vice President and Chief Financial Officer. Before we begin, I want to remind you that we will be making forward-looking statements during this call. As noted on Slide 2, these statements represent our current judgment or opinion of what the future holds. They are subject to risks and uncertainties that may cause actual results to differ materially.
Chuck MacFarlane: Thank you, Loren. Good morning, everyone. Welcome to our first quarter 2021 earnings call. Otter Tail Corporation continues to support all the locations we serve with collective efforts to mitigate the spread of COVID-19. Our business continuity plans put the health and safety of our employees and our communities at the forefront and are designed to help ensure continued electric reliability and operational excellence across our companies. We remain diligent in our precautionary health and safety efforts based on the recommendations from the CDC, regional health organizations and state and local government orders. Currently, 10% of our employees continue to work remotely. We continue to monitor this dynamic event and how it is impacting the economy and our electric and manufacturing platforms. Please refer to Slide 4 as I begin my comments on Q1 results. We earned $0.73 per share for the quarter, a 22% increase over the $0.60 per share earned in Q1 of 2020. This increase was largely driven by outstanding results at our Plastics segment. Kevin will provide a more detailed discussion of our financial performance in his comments, but a brief overview of Q1 results are the electric segment earnings per share increased $0.02, which is primarily driven by recovery of now -- the now operational Merricourt wind farm and approved interim rates going into effect January 1 in conjunction with Otter Tail Power's Minnesota general rate case filing. This was offset in part by negative weather and a decrease in C&I sales due to COVID. Our Manufacturing segment earnings per share increased $0.01. BTD continues to see a rebound in sales of most of their end markets as major OEMs rebuild depleted inventories created by the pandemic. Our Plastics segment had a record-breaking quarter with earnings per share increasing $0.08. This was driven by slightly higher pipe sales volumes and higher PVC pipe prices and improved operating margins. As shown on Slide 5, we are now on track to meet or exceed our original annual EPS guidance every year since 2016, with a projected 9.8% EPS compound annual growth rate over the 2016 to 2021 time frame. We continue to grow Otter Tail Power through capital investments in generation, transmission and technology projects.
Kevin Moug: Well, thanks, Chuck, and good morning, everyone. We had an exceptionally strong first quarter with consolidated revenues up 11.5% and net earnings up 25%. This was driven primarily by the outstanding performance at our Plastics segment. We also experienced quarter-over-quarter earnings growth at our Electric and Manufacturing segments.
Operator: And your first question comes from Chris Ellinghaus with Siebert Williams.
Chris Ellinghaus: Can you talk a little bit about the FERC delays that you mentioned in the Electric segment discussion on the MISO projects?
Chuck MacFarlane: Sure. Chris, this is Chuck. We have been doing a number of the self-fund, and these are the projects where effectively a generator, generally a wind generator, could be a neighboring utility or an IPP request interconnection, we do upgrades on our transmission system to allow them to interconnect. And then we recover that over 20 years from that interconnection customer. We've done about $50 million of upgrades, and there's a series of projects, which are referred to as interim projects kind of -- there were a number of different FERC orders on these. And these interim projects tend to be about 5 years old. They're already built and in service. And they're reviewing those for movement into this sort of category where we're going to get recovery of those over 20 years versus when they were completed, we were paid by the interconnection customer the full amount. So those rulings on those have been delayed, and we don't anticipate that we'll get those here in 2021. But they refer to projects -- about $9 million worth of projects that are in service where interconnection customer has paid us the full amount, we would refund that, and then we would set up a 20-year schedule. Those are the 4 or 5 projects that are -- are not -- haven't been heard or we don't expect an order from FERC this year.
Chris Ellinghaus: Chuck, you were talking about the Biden infrastructure plan. What elements do you see there? I think the one about PTCs is kind of interesting. But elements in that plan sort of intrigue you for your own opportunities?
Chuck MacFarlane: I think you touched on the extension of PTCs or ITCs. As we are doing our current integrated resource plan runs for a September '21 filing, if PTCs are extended on wind or solar, new solar or new wind for 10 years, that will impact I believe the amount of renewables that become cost-effective in that plant. I think that's the biggest rollout. We do have plans on EV infrastructure that's been reviewed and approved by the Minnesota Commission. It's effectively like 11 large or tier 3 chargers and approximately the same tier 2 spread out in our service territory in Minnesota. But I think the biggest ones would be the tax credit and any requirement on carbon reduction.
Chris Ellinghaus: Would the alternative schemes in the Biden plan be helpful to you in terms of your tax appetite?
Chuck MacFarlane: The -- I mean the direct pay-in in lieu of the tax credit? Yes.
Chris Ellinghaus: Okay. As far as PVC goes, this is really kind of a confusing time. We've got enormous demand for construction materials, and yet you still have resin supply constraints. How do we think about that back-end of the year? And how do we think about the supply-demand dynamics, particularly with -- presumably, the rest of the world is seeing some similar construction demand. So as those plants come back to full capacity, will some of that be utilized for the export market? So there could still remain some supply-demand imbalances in the U.S. How do we think about this in the grand scheme? And if there were supply constraints for a good piece of 2021, does that leave a backlog of demand for 2022 that suggests a strong 2022 pipe market as well?
Kevin Moug: A long question, Chris.
Chris Ellinghaus: Lot of pieces there.
Kevin Moug: Well, we'll take -- we'll answer it and what we missed just -- we'll come back to. But as it relates to, will there still be -- as the plants come back online, will there still be a fair amount of this that would go export? And the answer to that is yes. The export market still is expected to remain strong and continue to create that imbalance or challenge for domestic PVC capacity. Right now, we're seeing -- hearing that the plants should be back fully operational by the end of the quarter. We are currently expecting that our shipments of resin to the plants will be back to what we would consider more normal levels. And so to the extent -- and where we're concerned is this supply constraint has gone longer than we would have originally expected. And so to the extent that the plants don't come back to normal capacity, the resin plants, that puts pressure on the last half of the year. To your question of if supplies remain -- resin supplies remain short through this year, does that put pressure on 2022 for projects? I think it does. I think that to the extent that we can't get back to normal, that will start to push projects back into 2022, if there isn't enough supply for -- enough resin supply to make the PVC pipe for the projects. Right now, announced resin price increases are -- I think it's $0.04 for May and $0.03 for June, so that we are expecting $0.74 a pound for resin at the -- by the end of the second quarter. We've not seen any announced resin price changes in Q3. I think that could still yet happen, but potentially later in the quarter. And I don't know if that covers all your questions or not, Chris, but fire back if it didn't.
Chris Ellinghaus: Well, there's still 1 million questions that would go into this sort of equation of what the PVC pipe price market might look like. So even though there might be price increases for PVC resin, the demand for construction materials seems such that they're being able to absorb cost increases with prices. So what would your thought process be for pipe prices and margins sort of in this very strong demand market for the second half of the year and for 2022? It seems like the environment that you're in might suggest that resin prices might support sustainable high margins.
Kevin Moug: I think that's right, Chris. I mean we're seeing today, obviously in the first quarter we saw higher PVC sales pipe prices driven by this supply constraint concern. Resin prices, like I said, are expected to be around $0.74 by the end of the second quarter. And we continue to see strong sales prices here in the second quarter. Despite some of the constraints that are there, the projects still need to be done and completed. And the -- typically the cost of the PVC pipe for these projects are not a significant portion of the overall construction cost of these projects. And so sales prices have been rising much more than what resin prices have been. I think that as we continue to go through the rest of the year, to the extent that there's still that shortage that is out there because the plants aren't full capacity, we would certainly expect that sales prices would still continue to be strong through the rest of the year. Of course, we're going to be heading into the third quarter that always introduces the elements of hurricanes and the impacts that hurricanes could have on this dynamic as well. And that -- of course, we're not going to know the result of that until we get to the third quarter and see what type of weather conditions we have. The thing we're watching and guarding against as we've been in this business long enough to know that things can turn quickly. And to the extent that resin supply does get back to normal levels, and there is plenty of it available, that could cause margin erosion for us in the last half of the year as -- if that availability of the raw material is there, there could be downward pressure than on the sales prices, and we look to see some margin erosion as we head into the last half of the year.
Chris Ellinghaus: So in other words, you're saying it's a complicated scenario?
Kevin Moug: Yes. And I think that we're going to -- I mean, as we're looking at this, we're going to have -- expect to have a whole lot better visibility at the end of the second quarter once we see what happens with the -- if these -- the petrochemical plants are fully back online as they're expecting.
Chris Ellinghaus: Okay. Last thing, you mentioned the foundation in corporate and other segments. Can we assume that that $0.04 change to the guidance is for -- dedicated for that piece alone?
Kevin Moug: It's in part dedicated to that, Chris. But given the uplift in the guidance because of the strong performance, we're also seeing that part of it is being driven by incentive costs in our incentive plans as well.
Operator: And your next question comes from Brian Russo with Sidoti.
Brian Russo: Just to quickly follow up on the Plastics segment and the significant performance to say the least in the first quarter and your increased guidance. In the first quarter, is it safe to say that PVC prices were rising at a faster rate than your resin prices to supply constraints, which cause operating margins to expand significantly more than what, say, the historical kind of run rate is in the low teens?
Chuck MacFarlane: Yes. That's a fair statement.
Brian Russo: And when we look at -- I think this is the second year in a row, right, where you've had tailwinds I guess in the Plastics segment. And I guess things can go the other way. But are we in, say, a new PVC environment where not only can you retain margins, but you can expand your margins on a sustainable basis over the next, say, 2 years despite supply constraints or running out of resin inventory? So your cost of goods sold will increase as you maybe suggested in the second half of the year?
Kevin Moug: Yes. Are we in a new realm? I mean we -- I think we've been saying here, Brian, for the last couple -- 3 years that we think normal earnings in this business are somewhere in that $20 million to $25 million range in that. Now here we go. We're taking guidance up pretty healthily from where we started. And it's, again, being driven by a constraint or market factor that I think we're able to predict. I mean, these winter weather and how cold it was and having to shut down the plants, I mean, we certainly didn't expect to see that. And I mean, your earlier comment about sales prices starting to rise faster than the announced resin price increases is exactly right. It's -- we -- people need the pipe, and they have been willing to pay the price as prices have been moving up to get the product for the -- their projects. Now is -- the margins we see today, are those the margins we expect over the next couple of years? I think today we'd say, no, we wouldn't expect to see these kinds of margins over the next 2 years because we would expect market forces to come back to be more in line where once the resin plants have the supply or they're operating and they have their full supply, we'd start to expect to come back to some more normal spreads of sales prices over the resin prices.
Brian Russo: Got it. That makes sense. Then just to switch gears to Manufacturing and specifically BTD, you maintained the February guidance. And I'm just curious, since February, we've seen a couple of your larger end market customers increasing their sales outlook and earnings outlook while also acknowledging supply constraints on that side of the business and rising steel prices, which you pass through. So I'm just wondering, are there any more assumptions? What's your -- any assumption on sales growth at BTD embedded in the new guidance, which is unchanged?
Kevin Moug: There's some sales growth embedded in there, Brian. But what we're seeing is this -- the steel availability issues that are there. And then, of course, we're having labor issues because we laid off a number of people in the second quarter last year, and now we're having difficulty getting people back. So we need -- we're -- our productivity is being impacted by not having the right level of staffing. And then with this product availability issue on the steel side, we've seen our expedited freight costs go up. So that's been eroding into our margin as well. And so despite -- we were able to -- obviously we passed through the steel price, but we've seen some price increases. We've seen that offset by the labor productivity and then this expedited freight. And that as we look at the guidance and keeping it where it is, despite the good first quarter performance, we're being cautious because of the impact that the labor and the expedited freight costs are having on the business right now.
Brian Russo: Okay. Got it. Then just switching gears to the electric utility, I think it's roughly a 9% or 10% downward revision to the EPS guidance range. And I think you attributed $0.04 to weather. Can you break down the other $0.06, which is C&I versus those delayed MISO projects?
Kevin Moug: Sure. So I think the C&I is about $0.02. The delays in FERC approval is $0.01 to $0.02. And then the lower MISO revenues would kind of be the rest.
Brian Russo: Okay. And then just one last question. Thanks for the sensitivity on the FERC NOPR. Can you give us a sense of what percent of your overall rate base is under FERC jurisdiction?
Chuck MacFarlane: This is Chuck, Brian. The total amount under FERC -- the vast majority of our transmission is under state regulation. I would guess it is in.
Kevin Moug: About 10%.
Chuck MacFarlane: 10%.
Brian Russo: Which is why the sensitivity I guess is -- seems manageable on a 50 basis point change? Yes. Okay. Great.
Chuck MacFarlane: Brian, the revenue from FERC is 10%.
Operator: And your next question comes from Chris Ellinghaus with Siebert Williams.
Chris Ellinghaus: Sorry, did it again, I left the mute on. But I want to beat this horse a little bit more because it's really important. The first quarter, can you differentiate, if possible, how much of sort of the good margin dynamic is the supply constraint for the resin versus we've seen quite an extraordinary spike in construction demand. So my thought is some of these other markets, the prices have skyrocketed for construction materials and prices and margins have been good there as well. So would you have seen a really strong PVC pipe market and prices even in the absence of the resin issues?
Kevin Moug: I think we would have seen a strong quarter. It wouldn't have been as strong had it not been for the constraint issues, Chris, because our volumes quarter-over-quarter are basically flat.
Chris Ellinghaus: Well, you also had constraints too. So how much -- can you differentiate how much of the flat volumes was a function of the resin constraint? How much more could you have produced if there were no constraints?
Chuck MacFarlane: Not much in the first quarter.
Kevin Moug: Not much in the first quarter.
Chris Ellinghaus: Okay. I guess there's a question here about whether there's maybe been somewhat of a demand shift. Over the last few years, has the first quarter dynamics given you any thoughts about that $20 million to $25 million that you've kind of been expecting a normal trend to develop at some point? Has that number, that range been adjusted in your mind at all with the totality of what you've seen over the last, say, 5 years?
Kevin Moug: I would say, answer that, Chris, that we're looking at it again.
Chris Ellinghaus: Okay. I want to ask Chuck if he's -- if he has questions about the ability of the company to forecast what that range will be. But I guess I'll ask him at the end of the year whether the chief forecaster of PVC dynamics needs to make some adjustments.
Chuck MacFarlane: We'll look into that, Chris. I mean I think we're in a unusual market. You can't look at any construction material now that's following a normal pattern. So -- and I think there's a number of people that would have loved to been long, lumber or something in that area. We'll look at it. I do think we've got to look at this total global resin supply. There's more export pressure, and Kevin mentioned that, and there has been historically too just the ability for the U.S. to produce resin using natural gas versus other feedstocks in other parts of the world has continued to put pressure on the export market for this resin, U.S.-produced resin.
Chris Ellinghaus: Right. So will you now, like Kevin said, you'll know more at the end of the second quarter when supply returns to normal somewhat, but it seems like the same dynamics in many other countries are similar to what we're seeing on the construction materials side. So will you have a sense of how much more of the resin supply is being siphoned off for international markets at that point?
Kevin Moug: We'll have updates to it. Yes, Chris.
Chris Ellinghaus: Okay. It’s a very interesting set of equations for the PVC market.
Operator: And there are no further questions. I will now turn the call back over to Chuck for closing remarks.
Chuck MacFarlane: Thank you for your questions and interest in Otter Tail Corporation. With continued execution on our rate base growth and efficiency improvement opportunities at the utility and emphasis on operational and commercial performance and our manufacturing platform, we remain confident in our ability to deliver long-term shareholder value. Based on our strong first quarter performance and our updated view of the remainder of the year, we are raising our 2021 diluted earnings per share to $2.47 to $2.62 from our previous guidance of $2.39 to $2.54. Thank you for joining our call. We appreciate your interest in Otter Tail Corporation, and we look forward to speaking with you next quarter.
Operator: This concludes today's conference call. You may now disconnect.
