Otter Tail Corporation (OTTR) on Q2 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to the Otter Tail Corporation's Q2 2021 Earnings Conference Call. Today's call is being recorded and 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.
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 second quarter 2021 earnings results. Our complete earnings release and the slides accompanying this call are available on our Web site at ottertail.com. A recording of the call will be available on our Web site 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.
Chuck MacFarlane: Thank you, Loren. Good morning, everyone. Welcome to our second quarter 2021 earnings call. Otter Tail Corporation continues to support all the locations we serve with collective efforts to mitigate the spread of COVID. As most of our employees return to the office from working remotely, we continue to monitor case activity with vaccination rates in the communities we operate. We also continue to monitor and follow guidance and recommendations from the CDC, our state's local public health officials and OSHA. As of today, 5% of our employees continue to work remotely. Throughout the course of the past year and a half, our companies and employees have done an excellent job managing the highs and lows from COVID related impacts, including adjustments to staffing levels, navigating supply chain constraints, managing commodity pricing and supporting increased customer demand. Please refer to Slide 4 that I began my comments on Q2 results. We're under $1 per share for the quarter, which is 141% increase over the $0.42 per share earned in Q2 of 2020. All of our businesses had improved results led by our plastic segment, which had another outstanding quarter. Kevin will provide more detailed discussion of our financial performance and his comments. But here a few brief overview of the Q2 results. The electric segment at a record second quarter with earnings per share increasing $0.04. This was primarily driven by recovery of investments in Astoria Atation and Merricourt Wind Energy Center. Approved interim rates going into effect January 1st in conjunction with Otter Tail Power’s Minnesota general rate case filing and increased revenues from C&I customers as sales volumes recover from the negative impacts of COVID.
Kevin Moug: Well, thanks and good morning, everyone. Second quarter sales were up 48%, and net earnings increased to 148%. These results are primarily driven by unique market conditions in our plastics segment, resulting from PVC resin supply constraints that caused an acceleration of sales pipe prices well in excess of the increase in resin costs. Let me provide a detailed review of the quarter results as shown on Slides 27 and 28. The electric segment set a new record for second quarter net earnings as we continue to see our largest business execute on its rate base growth strategy. Net earnings increased $2.1 million quarter-over-quarter, driven by $1.5 million increase in net retail revenues related to the interim rate increase effective January 1, 2021 associated with our current Minnesota rate case; a $1.5 million increase in retail revenues from commercial and industrial customers, primarily due to increase sales compared to the second quarter of 2020, which was negatively impacted by COVID; a $1.4 billion increase in revenues related to the recovery of Merricourt operating expenses and Astoria Station project cost; recovery of increased CIP program spending in Minnesota and South Dakota and transmission rider revenues. These items were offset by increased operating expenses due to the Merricourt wind farm and Astoria Station being commercially operational, increased transmission tariff expenses, increased CIP expenditures, which are being recovered through retail rates and higher vegetative and plant maintenance expense. These expense increases were offset in part by lower bad debt expense due to improving customer collections as the economic impact of COVID-19 has eased. Other items impacting earnings were higher depreciation and property tax expense due to recent capital additions, higher interest expense due to new long-term debt issuances in 2020, higher short-term borrowings in 2021 and a lower level of capitalized interest, resulting from the placement of the Astoria Station in service in the first quarter. And also, a reduction in other income due to lower amounts of equity funds used during construction due to the completion of the Astoria station. And income taxes were favorably impacted mainly due to production tax credits earned on Merricourt in 2021. Net earnings for the manufacturing segment increased $5.5 million due to higher parts revenues at BTD from increased demand across all their end markets. This resulted an increased sales volumes and improved operating margins. Steel prices continue to exceed historical levels as mill capacity has been slow to recover to pre-pandemic levels, creating supply chain challenges.
Operator: Your first question goes from the line of Chris Ellinghaus from Siebert Williams.
Chris Ellinghaus: The foundation donation potential, should we sort of expect that to be similar to the magnitude of 2020, or given the earnings level this year, should we expect that to be bigger?
Kevin Moug: We've got roughly $0.05 a share is what's included in this updated guidance for a potential contribution to the Foundation this year. So compared to last year that was -- when you look at the foundation between -- or the contribution between the power company that they contributed to their foundation and then plastics also made a contribution to the Otter Tail Corporation Foundation, it's less this year than last year.
Chris Ellinghaus: The way you describe the plastics market today, I'm a little confused, you're talking about probably selling more pounds. So that suggests that your ability or your allocation of the resin market is the same or better. So that doesn't, to me, sound like you have a resin constraints per se. Does that mean that some of your competitors have bigger constraints and that's allowing for this supply demand imbalance to allow higher prices, or -- I'm a little confused on where the resin supply problem is?
Kevin Moug: The plants are pretty much back to full levels, but they continue to keep customers, us and our competitors, on resin allocations. So we're getting the resin we need but we aren't getting all the resin we could certainly use. And so our inventory levels are significantly lower today than they have been in previous years. And so what we're getting in terms of allocation, we’re pretty much producing and selling through.
Chris Ellinghaus: So really if I think about, this is really extraordinary demand that can't be met with supply is more in my mind where the margins coming from. In prior years where you didn't have the February disruption, would the resin market have been able to adjust its volume to supply you that incremental capacity?
Kevin Moug: Yes, it would have.
Chris Ellinghaus: So the sort of a combination of factors that are causing these margins. What are you expecting in 2022? You're talking about a return to normal. But is there a reason to think that the construction market will ease, or are you simply thinking that the resin supply will increase to meet that demand?
Kevin Moug: Chris, as we look at it today, we're expecting that the resin supply will return to more normal type levels in 2022 as such then to meet the demand -- more easily to meet the demand that’s out there. And that we would start to see then these conditions that drove the high sales prices and margins would return back to kind of more normal levels that we've seen historically.
Chris Ellinghaus: Can you give us a little color on what your July weather looks like?
Kevin Moug: July weather has been, I would say, it's probably a little bit warmer than normal.
Chuck MacFarlane: I think, we're 5 degrees above average for July.
Operator: Your next question comes from the line of Brian Russo from Sidoti.
Brian Russo: So just to follow-up on the plastic segment. I mean, do you have a competitive advantage in this market, or is it just a spread business? Meaning when demand is outstripping supply, your margins expand. Or are you able to secure more resin inventory than competitors maybe to the location, et cetera, that -- or aer all your competitors seeing the same unprecedented outsized margins right now?
Chuck MacFarlane: We certainly believe we have a competitive advantages as it relates to our ability to quickly react to customer demands and needs when some of our competitors are not able to do that. We certainly saw that in 2020 as we kept our plants open, lines running while other competitors did temporary shutdowns during the first couple quarters of COVID impacting us. Having said that, though, I would also tell you that we are seeing competitors who are making announcements to raise sales prices of pipe pretty significantly as well. Even since the end of the quarter here, we've seen competitors come out with price announcements as they continue to raise prices given the revenue. There's just -- even though the plants are backup running in terms of everybody still having to be on resin allocation, there is a demand out there for product. And we're seeing competitors raise prices as well as we go through this. And we're seeing that occur also with our customers where they are now starting to not be able to maybe honor some of the prices that had been out there given that the supply side is raising prices, they're having to not be able to honor their prices to the end users as well and having to raise prices. So that's affecting a lot of the market.
Brian Russo: So competitors raising PVC pipe prices. Is that a leading indicator to your plastic segment performance? Meaning it's an indication of increasing demand and therefore widening spreads relative to an increase in the actual raw material or resin.
Kevin Moug: Well, it could be, Brian. I think what we're seeing too though is we're seeing our competitors raise prices. We're also seeing announced resin price increases coming from the suppliers here.
Brian Russo: So on Slide 25, the spread relationship and any willingness to share what that spread is?
Kevin Moug: No. We have confidential, confidentiality provisions in our supply agreements with our present suppliers, so such that we just aren't able to kind of go down that pathway.
Brian Russo: In this bipartisan infrastructure bill, I think there's nearly 55 billion allocated to water infrastructure. Is your plastic segment leverage to that spend?
Chuck MacFarlane: I think we have not put that in our forecast yet. We are aware of the lead replacement in the bill, a lot of that has to do with areas in the Eastern US, which is not a big amount of our pipe going there. But it'll put a positive, I think, on the entire sector or pipe manufacturing business.
Brian Russo: And then at the BTD segment, obviously, a lot of OEM or end market demand, inventory levels, dealership inventory levels are historically low. So just some of your customers, they can't meet the demand, because of supply constraints. But it seems that you're -- I'm trying to get a sense of what your volume growth was like in the second quarter versus just revenue. Because revenue reflects the higher price of steel, which is a pass through. So I'm just trying to get a sense for what's kind of the actual growth rate in terms of units sold versus the top line revenue?
Kevin Moug: Let me try and break it down for you this way, Brian, and see if it helps. But as we compare to 2020 revenues at BTD to our current view, we're seeing about $96 million increase in revenues. So that's 47% but of that 56 million is material pricing between our 2020 results in revenues and what we are forecasting this year. So then there's 40 million of, if you will, growth as it relates to the value add that we're doing to our customers.
Brian Russo: So when some of your end market customers, on recent conference calls, have noted supply chain issues, et cetera. It's not you that they're facing supply shortages from, it's elsewhere for other products that go into these off road vehicles, I guess?
Chuck MacFarlane: Brian, I would say it's a combination of all. I mean, we certainly are experiencing supply constraints as well that then impact our ability to get product to our customers. But I think you see whether it's Polaris, you look at Toro, others this supply constraint is a issue for a lot of industrial companies. And we're experiencing higher expedited freight costs. We've been having to have employees work overtime to try and meet the demand that our customers are putting on us. And we're working through that. We're trying to hire more labor to help improve some of that productivity. But we're certainly seeing an impact in the P&L as it relates to just higher labor costs and expedited freight costs as we work to get product to them.
Brian Russo: What is the utilization rate at the plant at BTD? I think you got to one in Minnesota and one in Georgia?
Kevin Moug: While we have the Washington, Illinois, we have the Georgia facility and then the Minnesota facility, I think, in general, we're somewhere around 70% capacity level.
Brian Russo: And then just switching gears to the utility. Any insight into the IRP in terms of transmission or renewables, or scenarios surrounding environmental compliance at Coyote or maybe repowering, et cetera?
Kevin Moug: Brian, I think we don't usually include any of the transmission investments in that IRP. Those are -- generally will come out of the MISO plan. And right now we're just going to wait until we file it in September, such that our regulators get the first review of the plan and what's in it, and we are still finalizing that. So it's a little early to bring those out.
Operator: Your next question comes from the line of Sophie Karp from KeyBanc.
Sophie Karp: So obviously guys you have a really strong performance in the plastics and manufacturing segments, driven by all of this market conditions. My question is, it's almost a windfall, if you look at the numbers. My question is, what are the uses -- how you're going to use this sort of unexpected, if you will, revenue and the cash flows that it's ultimately translated into? Would that sort of offset maybe your equity needs and we should start thinking about that or is there a share buyback, or is just getting get reinvested? So is there any kind of special use that we should be thinking about?
Kevin Moug: We don't have in our, I think we talked about this on the first quarter call, but we don't have any equity needs in the five year plan. And so right now, as we look and as I mentioned, I think in my opening comments, as it relates to the stronger cash flows, we certainly have the opportunity to look at some additional contributions to our pension plans. They help the funded status there. We also have additional capital investments that create additional organic growth for us, specifically in the plastic segment that we've been looking at that that extra cash would help us fund those things and allow us to have additional organic growth opportunities going forward.
Sophie Karp: So I will take it that you not considering maybe selling those segments at this point given the revelations must be very attractive?
Kevin Moug: As we continue to communicate, the two platform strategy between the utility and the manufacturing consisting of manufacturing and plastic segment, we like the business model and we think it’s performing well and continue to expect to execute on that.
Operator: And there are no other questions over the phone line at this time.
Chuck MacFarlane: All right. I'll turn it over here to Kevin for a second.
Kevin Moug: Yes, I just -- we've got a momentous occasion here today on the press release that I'd like to cover here. And I'd like to recognize Loren Hanson, our Manager of Investor Relations today is Loren's last Otter Tail earnings call as he has announced his retirement. He has been with us for 40 years and leading our Investor Relations group since 1986. He has shown an unwavering commitment to our company and has been a strong advocate for our shareholders. Loren, it's been an absolute pleasure to work with you. And I appreciate all you have done to provide outstanding service to our shareholders and Otter Tail. Congratulations on an outstanding career and thanks for the lasting contributions that you have made. You have touched many lives over the years. I'd like to also introduce Tyler Akerman, who is replacing Loren on his retirement. Tyler joined Otter Tail Corporation in June. It comes to us from Otter Tail Power Company where he spent over eight years in business planning. Tyler's experience of utility positions him well to lead the investor relations function going forward and to continue Otter Tail's tradition of service to our shareholders. Welcome, Tyler.
Chuck MacFarlane: I'd also like to offer my thanks, and congratulations to Loren. He's been a positive fixture, as Kevin mentioned, in Otter Tail Investor Relations for 35 years. All the best in your retirement, and welcome Tyler. As I wrap up here, thank you for all your questions and interest in Otter Tail Corporation. Our outstanding year-to-date results reflect the collective efforts of the people of Otter Tail Corporation and unique market conditions. We remain focused on our strategic initiatives to grow the business, achieve operational and commercial excellence and develop our people, and provide value to our shareholders and position us for the long-term success. We're also pleased to announce that carbon emissions from own generation are now targeted to be 50% less by 2025 and 97% less by 2050 compared to 2005 levels. We remain committed to making system investments that provide clean, reliable and affordable energy solutions for our customers, while improving the communities where we live and work. Based on our strong year-to-date results and our updated view of the remainder of the year, we are raising our 2021 diluted earnings per share to $3.50 to $3.65 from our previous guidance of $2.47 to $2.62. 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: Ladies and gentlemen, this concludes today's conference call. We thank you all for participating. You may now disconnect.
