Otter Tail Corporation
Q1 2024 Earnings Call Transcript

Published: 7 May 2024

[Operator:]

Good morning, and welcome to Otter Tail Corporation's First Quarter 2024 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.

[Beth Eiken:]

Good morning, everyone, and welcome to our first quarter 2024 earnings conference call. My name is Beth Eiken, and I'm Otter Tail Corporation's Manager of Investor Relations. Last night we announced our first quarter financial results. 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. With me on the call today are Chuck MacFarlane, Otter Tail Corporation's President and CEO; and Todd Wahlund, Otter Tail Corporation's Vice President and CFO. 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 2, 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 against 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 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 Corporation's President and CEO, Mr. Chuck MacFarlane.

[Chuck MacFarlane:]

Thank you, Beth. Good morning, and welcome to our first quarter 2024 earnings call. Please refer to Slide 4 as I begin my comments on our quarterly performance. We are pleased with our overall first quarter financial results. Diluted earnings per share increased nearly 20% to $1.77 per share compared to the same time last year, driven by strong financial performance within our Plastics segment. Plastics segment earnings increased 39% from the first quarter of 2023 due to higher sales volumes driven by customer sales volume growth and strong distributor and end market domain. Electric segment earnings decreased modestly, primarily driven by weather-related headwinds. Manufacturing segment earnings decreased 23% due to lower sales volumes. Our corporate costs decreased due to returns earned on our short-term investments, driven by a larger cash balance and higher interest rates. We are increasing our 2024 earnings guidance by $1.10 per share to a range of $6.23 to $6.53 due to the stronger than expected Plastics segment performance in Q1 and our revised expectations for the remainder of the year. In a moment, Todd will provide a more detailed discussion of our first quarter financial results and our updated earnings expectations for 2024. Slide 5 shows our expected 5-year compounded annual growth rate and earnings per share with and without the impact of our Plastics segment through the end of 2024 based on the midpoint of our updated earnings guidance. Even without the impact of the extraordinary results generated by our Plastics segment over the last few years, we expect to produce a compounded annual growth rate in earnings per share from 2019 through 2024 of 8.5%. Turning to our Electric segment. Slide 7 provides an overview of our electric operations. Our regulated electric utility announced a sizable 5-year capital spending plan earlier this year with significant amounts being allocated to renewable resources, transmission investment and technology. In addition to Otter Tail Power's rate base growth, we also have the opportunity for new large loads. This potential load growth is primarily driven by crypto mining, high-performance computing and clean fuel-related opportunities. At this time, we have not made any adjustments to our load growth forecast for these opportunities, but continue to engage with companies showing an interest in entering our service territory. Slide 8 summarizes Otter Tail Power's 5-year capital spending plan. The plan includes $1.3 billion of capital investment over the next 5-year period and is expected to produce a rate base growth of 7.7%. Otter Tail Power has a strong track record of translating rate base growth into earnings growth. In the previous 5-year period, we converted an average rate base growth and the earnings growth at a 1

[Todd Wahlund:]

Thank you, Chuck, and good morning, everyone. We delivered diluted earnings per share of $1.77 in the first quarter of 2024, nearly a 20% increase over the same time last year despite headwinds experienced within our Electric and Manufacturing segments. Our Plastics segment produced stronger than anticipated financial results in the first quarter of 2024. And due to this performance and our revised expectations for the remainder of the year, we have increased the midpoint of our 2024 earnings guidance by 21%. Please follow along on Slide 26 as I begin with an overview of our first quarter financial results by segment. Electric segment earnings decreased $751,000 or 3% from the first quarter of 2023, driven by the impact of unfavorable weather, higher operating and maintenance expenses primarily relating to higher labor costs and increased depreciation expense. These items were partially offset by increased rider revenue, the interim rate increase in North Dakota stemming from our general rate case filing and higher commercial and industrial sales. Quarter-over-quarter, the impact of unfavorable weather was $0.09 per share as our service territory experienced a much warmer start to the year. For example, temperatures in March were about 12 degrees warmer than in 2023. Manufacturing segment earnings decreased $1.6 million or 23% compared to the first quarter of 2023, primarily due to the lower sales volumes at both of our manufacturing businesses. The decrease in sales volumes and earnings quarter-over-quarter was largely driven by T.O. Plastics customers continuing to work through inventory previously purchased in response to supply chain related challenges. We are forecasting a rebound in sales volumes later this year as we anticipate customers being proved their destocking efforts in advance of the next seasonal purchasing period. BTD experienced a slight decrease in sales volumes quarter-over-quarter due to softening and market demand across multiple sectors, but we continue to benefit from diversity in end markets and customers. In response to the headwinds experienced at both manufacturing businesses, we are taking actions to tightly manage costs in an effort to mitigate the impact of overall 2024 earnings. Plastics segment earnings increased $13 million or approximately 39% from the first quarter of 2023. Higher sales volumes led to the increase in earnings and this was partially offset by margin compression with PVC pipe prices continuing to gradually decline. Sales volumes increased 56% compared to the same period last year due to customer sales volume growth and strong distributor and end market demand. Milder weather seems to have contributed to higher sales volumes as it allowed for construction work to begin earlier than normal. Additionally, sales volumes in the first quarter of 2023 were much lower than usual as distributors, our primary customers, were focused on destocking efforts after purchasing higher levels of inventory in 2022 in response to supply chain related disruptions and challenges. Gross profit margin declined in the first quarter of 2024 as PVC pipe sales prices declined more than the change in the cost of resin and other input material costs. Sales prices of PVC pipe declined 15% from the same time last year. Corporate costs declined nearly $1.2 million from the first quarter of 2023, primarily driven by returns earned on our short-term investments as our cash balance is higher and interest rates have increased. We continue to have a very solid balance sheet with a higher level of earnings and cash generated from the operations of our diversified portfolio of businesses. Turning to Slide 27. Our consolidated equity layer as of March 31, 2024 was 61.3% and our return on equity over the last 12 months was 22.1%. We continue to be in an enviable position with a strong balance sheet and ample liquidity to fund growth opportunities without having to issue additional equity. Turning to Slide 28. We are increasing our 2024 diluted earnings per share guidance to a range of $6.23 to $6.53 from our initial range of $5.13 to $5.43 due to stronger than expected Plastics segment performance in Q1 and our revised expectations for the segment throughout the remainder of the year. This increases the midpoint of our guidance to $6.38 or $1.10 increase per share. We are maintaining our Electric segment and corporate cost center earnings guidance for 2024. Despite the impact of unfavorable weather in the first quarter, our Electric segment is positioned well to overcome these headwinds based on updated estimates for sales volumes and the impact of our sale decoupling mechanism in Minnesota. We are increasing our Plastics segment earnings guidance as the sales price of PVC pipe has been more stable than we originally anticipated for 2024. Sales prices continue to exceed, but at a much more gradual rate than was assumed in our initial 2024 guidance and relatively small changes in pipe prices significantly impact Plastics segment earnings. Additionally, with strong end market demand, we expect sales volumes to be higher than assumed in our initial 2024 guidance. We are decreasing our 2024 earnings guidance for our Manufacturing segment due to lower expected sales volumes, compressed operating margins and reduced research and development tax credits for BTD. Compared to 2023, we anticipate lower sales volumes in the horticulture, lawn and garden, recreational vehicles and agriculture end markets. This reduction in sales volumes on [ fixed ] manufacturing costs negatively impacts operating margins. With the changes made to our earnings guidance for the year, we anticipate our earnings mix for 2024 to be 34% Electric and 66% non-Electric, net of corporate costs. While this anticipated mix deviates from our long-term expected earnings mix of approximately 65% Electric and 35% non-Electric, the incremental cash flow will further position us to execute well on our growth strategies without the need for additional equity. Our 5-year capital spending plan, which is a key driver of earnings growth for our Electric segment is included in more detail on Slide 29. No changes have been made to this plan since it was first announced earlier this year during our year-end earnings call. As we continue to work towards a decision on our Integrated Resource Plan in Minnesota and additional transmission grid enhancements are advanced, we will determine what updates, if any, are needed to our electric utilities 5-year capital spending plan. In order to finance our rate base growth at Otter Tail Power, we project issuing debt on an annual basis for the next 4 years. Slide 30 provides a summary of our financing plan for 2025 through 2028 following our $120 million private placement debt issuance completed in the first quarter of 2024. We continue to expect retiring and not replacing our only outstanding parent level debt when the $80 million note matures in 2026. Additionally, due to the significant amount of cash and earnings generated over the past few years, we have no external equity needs over the 5-year period, avoiding any resulting dilution in earnings per share. We believe this differentiates us from many of our peers within the utility space who will need to access the equity market to fund their rate base growth. We are positioned well to deliver upon our revised 2024 earnings guidance as well as meet our long-term investment targets, as summarized on Slide 33. Our diversified business model continues to produce above-average returns, serving us and our stakeholders well. We have many organic growth opportunities across our segments and are positioned to grow with our customers. We are in excellent position to support this growth with our strong balance sheet, ample access to liquidity and investment-grade credit ratings. We are now ready to take your questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Tim Winter of Gabelli Funds.

[Timothy Winter:]

Congratulations on another really, really good quarter. It looks like PVC continues to be strong. I'm just acquiring some of your neighboring utilities have recently spun off or partial IPO. They're non-regulated businesses that have done very well. Any consideration of such a dynamic for the Plastics division given the strength?

[Chuck MacFarlane:]

Yes. Tim, we're in the middle of our strategic planning -- annual strategic planning process. And so as part of that, we do evaluate our portfolio on strategic options. And currently, we view our portfolio of businesses is very solid and our growth strategy is very solid, but we do consider alternatives every year.

[Operator:]

I'm showing no further questions at this time. I would now like to turn it over to Chuck for closing comments.

[Chuck MacFarlane:]

Well, thank you for joining our call and your interest in Otter Tail Corporation. If you have any questions, please reach out to our Investor Relations team, and we look forward to speaking with you next quarter.

[Operator:]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.