Good day, ladies and gentlemen, and welcome to The Andersons, 2021 Third Quarter Earnings Conference Call. At this time, all participant lines are in a listen-only mode. Later, we will conduct a question-and-answer and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your host today, Mike Hoelter, Vice President, Corporate Controller and Investor Relations. Please go ahead.

Thanks, Sarah. Good morning, everyone, and thank you for joining us for The Andersons third quarter 2021 earnings call. We have provided a slide presentation that will enhance today's discussion. If you are viewing this presentation via 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 of the presentation 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 non-GAAP measures to the most directly comparable GAAP financial measure are included within the appendix of this presentation. On the call with me today are Pat Bowe, President and Chief Executive Officer; and Brian Valentine, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will be happy to take your questions. I will now turn the call over to Pat.

Thank you, Mike, and good morning, everyone. Thank you for joining our call this morning to review our third quarter results. We are extremely pleased with our overall third quarter results, which included an all-time record performance in the Trade Group and continued our strong momentum. Along with solid ag fundamentals, we have executed well, trading through an inverse market and addressing supply chain and labor challenges in a period of significant volatility. The company recorded its best third quarter since 2014, with the sale of our Rail leasing business in August, I'm also excited to note that our trailing 12-month adjusted EBITDA from continuing operations exceeded $294 million, not including the Rail segment. Across the company, our teams are working hard to provide extraordinary service to our customers in these favorable markets. Trade had a great quarter, executing well in dynamic grain markets, where low grain stocks have provided excellent merchandising and elevation opportunities. We had especially strong elevation margins in a number of regions. Our Louisiana locations were not impacted by the recent hurricanes, and we were able to continuously serve customers. Idaho also benefited from strong basis appreciation in its wheat inventory. Our propane distribution business continued to perform very well. Winter wheat harvest receipts were better than expected, and we are seeing storage income return to the corn and wheat markets. We also saw incremental gross profit from new profit centers in the quarter, including our Swiss trading office. Although our ethanol segment had a loss in the quarter, Board crush margins were improved and U.S. ethanol stocks ended the quarter very low. As we predicted in our last earnings call, we were negatively impacted in the third quarter by high corn basis at our ethanol plants, but have seen relief as we started the corn…

Thanks, Pat, and good morning, everyone. We're now turning to our third quarter results on Slide #5. In the third quarter of 2021, the company reported net income attributable to The Andersons from continuing operations of $13.9 million or $0.41 per diluted share and adjusted net income from continuing operations of $5.2 million or $0.15 per diluted share on revenues of $3 billion. This compares to a net loss attributable to the company of $1.5 million or $0.04 per diluted share and an adjusted net loss of $2.9 million or $0.08 per diluted share on revenues of $1.9 billion in the third quarter of 2020. Adjusted EBITDA from continuing operations for the third quarter of 2021 was $56.3 million, an increase of 20% when compared to third quarter 2020 EBITDA of $47 million. Adjusted EBITDA from continuing operations for the trailing 12 months was $294.3 million, an increase of nearly $130 million. Each of our 3 business units has significantly improved year-to-date EBITDA compared with 2020. Our effective tax rate varies each quarter based on the amount of income or loss attributable to the non-controlling interest. We recorded taxes for the quarter at an effective rate of 24.7% and are currently forecasting a full year effective tax rate of between 22% and 25%. Next, we'll move to Slide 6 to discuss cash, liquidity and debt. We generated third quarter cash flow from continuing operations before changes in working capital of $55.6 million compared to $52.8 million in 2020. Year-to-date cash flow has already exceeded our full year of 2020. We have seen an expected seasonal reduction in short-term debt as the balance of readily marketable inventories has declined somewhat, and we have paid down our revolver. Futures prices in the grain markets remain high, but are down from the levels…

Thanks, Brian. We remain positive in our outlook for 2021. While grain export demand has seasonally slowed, we expect high global demand for U.S. produced crops into 2022. This demand continues to support world grain trade and commodity prices higher than historical averages. Harvest in our draw area is progressing well. Farmer income is high, and we expect an abundant harvest that will provide us additional merchandising and elevation opportunities into 2022. Given these conditions, we remain optimistic in the potential for our trade segment. Worldwide supplies are projected to be tight beyond this 2021 harvest. Some storage income opportunity has returned to corn and wheat, and we're able to acquire more of the summer wheat harvest than projected. A large 2021 harvest will reduce but not eliminate the impact of strong worldwide demand. With a broad trade portfolio, the benefits from merchandising grains for consumptive demand as well as by providing storage space, we see continuing complementary opportunities. We continue to navigate well in these volatile markets, and we remain focused on managing risk. While we believe our fourth quarter in Trade could be comparable to 2020, keep in mind that the prior year included some especially high-margin soybean sales. We expect good results from the harvest despite some delays from recent wet weather across the corn belt. In Ethanol, gasoline demand has returned to pre-pandemic levels and Board crush margins are strong and positive into the first quarter of 2022. U.S. ethanol stocks are currently low, but industry production is increasing to meet this demand. Co-product values support our overall margin as the new renewable diesel demand continues to drive high corn oil values. We've received approval on our California Air Resources Board application for ethanol sales from our Colwich, Kansas plant. Once verified, we expect to begin…

[Operator Instructions]. Our first question comes from the line of Ken Zaslow with BMO Capital Markets.

Just a couple of questions I have. One is, when you think about the current quarter, what do you think was either transient on the positive side or on the negative side during the quarter? And can you discuss magnitude of that? That will be my first question.

Okay. Good question, Ken. It's funny, I think a week ago or 10 days ago, Ken, we probably said rain, because, as you know, we had that -- those big storms come across the corn belt, and we were worried about maybe some delays in harvest. Now this week, we've got really bright sunshine in the eastern grain belt, some frost, which is actually good for harvest conditions. So it feels like maybe weather isn't as big of a concern maybe it would have been 10 days ago. So that seems to have alleviated on the harvest side. I think probably the biggest swing factor is really about ethanol pricing in Nov and Dec, crush margins right now and production has picked up. So if the margins can stay strong through November and December, will be a big factor in our quarterly results.

I see. And was there anything from the storm -- I think you mentioned that your Louisiana plant was not impacted, but the elevation margins were higher. Was that -- is there something that may not -- is that something that was created because of the storm and is kind of not onetime in nature, and we don't want to minimize your business model, but may not be going forward, is that a way to think about it? Is there -- but on the flip side, it sounds like there are other things that might have negatively impacted you in terms of supply, logistics, things like that? Just trying to get a base of anything that is extraordinary in the quarter.

That's a fair clarification. I think it's important to note, so our assets are domestic assets in Northeast Louisiana, so we're not at the Gulf. I'm not talking about export elevators. Unfortunately, some of our colleagues in the industry suffered some severe damage from the hurricanes, which we feel horrible about. These are domestic shippers of rail and storage assets in the northern part of the state. We're able to dodge any damage from any storms and similar weather. So we were able to capture those early premiums, probably higher than normally be, because the inverse was so steep this year. So we had really good results in Louisiana. That's the first harvested corn to come off in the country, and we're able to take advantage of that, so right place, right time. And will that happen again next year? I guess, time will tell. So we'll just knock up -- a very good year in Louisiana for us.

When you talk about your capital allocation, you listed bolt-on, you list a lot of things. One thing that you didn't say as much is the focus on the high-protein feed and where you're going to go on that strategy. Can you talk about where you think -- not in the next quarter, but like when you think about it next year and the year after, how big do you think that could be? How important is that to your growth algorithm? And is there any sort of risk of that if all these crushers come on -- bring in capacity?

Yes. It's a good clarification, Ken. And if I didn't mention that, that was a mistake. So we still continue to pursue high-protein feed strategy at our ethanol plants. We have it installed and doing very well at our western plants in Kansas and Iowa, and we're working on projects to do additional higher value feed products in our eastern plants. So we see that being a part of the overall crush margin optimization in years going forward and also reducing energy and lowering our CI score as well. So that is a big part of our optimization of ethanol assets in the years ahead. Like I said, we're not doing it all in 1 quarter. We're pecking away at those projects in a logical fashion. We're still very friendly to value-add to DDGs. I think one of the challenge is short term, Ken, as you mentioned. So the protein complex as crushing will increase for oil products across the country may keep some pressure on meal and feed values relative to corn. So that could be a little bit of a cap to overall returns on the protein complex in general. But overall, improving net corn cost for ethanol plants, we feel makes lots of sense long term.

And my final question is, okay, so you've added the Swiss trading. I think you probably added a couple of other low trading businesses as well as some other new businesses. Can you frame how -- and just take it for like a year, and it is a hard question. For last year, the things that you've done, how much incremental either profits were associated with that, but more importantly, how much do you think it will add in 2022 and 2023? And again, I think about the trading operations that you've added in different locations, the different products you've added? And is there a way to kind of put some of that together to see, all right, we spend this much capital, and this has been so much return and this is what we expect. And then we can kind of parlay that into stuff that you're going to do in the future? Just trying to think it like that. I know it's a hard question, but any sort of framework would be helpful.

And Ken, maybe harder to define in the short term. But I'd say that this past, let's even go back a little bit, that the acquisition of Lansing back to 2019 was the biggest in our country's history, and that's really paid huge dividends for us and really broadened our portfolio. And so we're really happy about the results of that integration and where we're going with the talent and being able to broaden those product lines. So that's what's leading us to some of these opportunities like in feed ingredients that we're adding with Capstone to take us to the Texas and Southwest markets. The opening of our Geneva office is about extending our supply chain, mostly to Africa. So those businesses are up and going well. Not a big contribution to this year, this current quarter. But next year, I'd say maybe I'd say probably 10%, 15%.

Ken, I would say probably $10 million to $15 million of EBITDA is kind of a reasonable range for '22 for those on an incremental basis.

And I think the bigger question you're asking, Ken, is we have some ideas in the pipeline to be able to do more of that. And those are numbers that it's harder to project out because those are not completed deals. But that's what we'd like to do '22, '23, '24, continue to broaden our supply chains and add new products. And that's where we had kind of growth capital when we talked in previous discussions with you about projects down the road.

Let me just phrase it one more time because I think it's actually interesting. So in a capital constrained environment, where you're able to only put in capital wherever you could, you got probably about $10 million to $15 million. While going forward, you will actually have more capital to deploy, assuming that you don't do anything poorly and you keep the same strategy, the opportunity should be greater than that $10 million to $15 million because you have more capital to release and your capital discipline should not go down the way side. Is that a fair way of looking at it?

Absolutely. It's a very fair point. And part of the strategy I mentioned that we reviewed with our Board and the decision behind the sale of our Rail assets was to improve our balance sheet and to create dry capital for those growth plans that we think can provide higher returns, Ken, we were making with the Rail business. So our plan is to continue to grow in those segments. It's likely not one super large acquisition early, so something like we did with Lansing. They're probably more midsized type of acquisitions to be in the $50 million to $250 million kind of range. So we're excited to look at those opportunities. We don't want to be -- pay too high in the super-hot market, but those opportunities that are quite attractive for many of our segments that we think we can grow with.

Our next question comes from the line of Ben Bienvenu with Stephens.

I want to follow-up or maybe ask a similar question to Ken as it relates to the third quarter. And also maybe this year a little bit, where do you think you are in terms of delivering earnings relative to your potential? Do you think you're continuing to -- that there's continued opportunity? Do you think the net of everything is over earning? Obviously, you've laid out a long-term goal of meaningfully higher EBITDA, and you'll invest capital to get there. But you've had a number of kind of puts and takes this year. And so I'm just trying to get a sense of kind of where the equilibrium is.

It's a very fair comment, Ben, and I think it's hard to look back. I'd love to say, I think our team did a very good job, especially in the grain markets to navigate the inverse and all the activities that's here with shortage of truck drivers and the container challenges. There's a lot of interesting obstacles, I think, in the overall economy right now that everyone is dealing with, from labor shortages and manufacturing to transportation challenges. We've been able to navigate through that. I think there's opportunities for us to do even better. We haven't had any big negative hits to any of our businesses or any important losses. We've done well across the board in all of our product lines. I think there's potential to do even better. Margins aren't at historical highs, like they were back in the 2012 through 2014 period. So you can't say we're trading at some all-time highs, but we done well this year, especially in our trade group. I think our fertilizer business has more potential upside. As we continue to have incentives for farmers to really put nutrients into their crops. And as we work forward on carbon, I think there's going to be a lot of interesting opportunities in grain and in fertilizer related to sustainability. We continue to work on transparent food supply chain. That has higher margin opportunities, both in human consumptive food as well as pet food ingredients. So there's a lot of areas that I think we can do even better, and we have more growth potential on volume and margin in those businesses. So the answer is, I think the best is still in front of us.

Yes. I think, Ben, a lot of those puts and takes, I think, kind of offset, to your point. I mean, in trade, when you see some opportunities in Louisiana and also in Idaho with some conditions up in the Pacific Northwest. I think at the same time, higher corn basis and ethanol offsets that. Pat talked about some of the higher input costs and labor costs in plant nutrients. So I think on the whole, none of us earlier in the year, I think folks wouldn't have predicted tariffs coming back into the wheat market. So I think on the whole, some of these puts and takes offset. And I do think there's opportunity for continued growth from here.

That's great. Sticking on the topic of future growth. Brian, I think you said you're expecting $85 million of capex this year. Should we expect a little bit more than that next year as you think about investing in the pipeline ahead of you, both organic and inorganic growth? What's a reasonable level of CapEx to be thinking about?

I would say, so I would probably put it in the range of $100 million to $125 million is probably where I would frame it. I would probably say that half of that is sort of maintenance capital and the rest being allocated to growth would be where I'd go from a high-level estimate perspective at this point.

And I think it's a good clarification that our CapEx during tighter times, during COVID and everything, we tightened our belts. Now we have some upkeep to do in our assets and plan to spend more on our assets to make sure they're shipshape as we have good fertilizer and grain opportunities in front of us. But that also includes some significant capital projects where we can really improve our assets. And then that's going to become very important for us as we think they'll be stressed in the coming years with very busy volumes.

That's great. That makes sense. If I think about the pipeline of opportunities ahead of you, what is the organizational bandwidth of The Andersons to pursue these future growth opportunities? Do you feel like the company is primed and prepared to go pursue these growth opportunities? You've now fully digested Lansing, you bolted-on a few acquisitions here and there. You've obviously gotten the divestiture of the Rail business behind you. What is the bandwidth of the company to go out and pursue growth? Are you -- do you have excess bandwidth to pursue that?

I think we have a really strong bench with, like you said, the acquisition of Lansing. We really broadened our capabilities on merchandising and business development. An example would be a year ago how we moved people into a veg oil trading desk to participate in renewable diesel supply. We've become a pretty important player in that business. I think we have the ability to apply talent to emerging opportunities. The exciting part is there's lots of opportunities in the sustainability part from the farmgate, all the way up into end customers. A lot of that's news space that everyone in the industry is learning about and applying resources to. So I think we have the capabilities to do what we need now and these new growth opportunities, we have talent to execute against it. So simple answer is, I think we're in a very good position to execute against our growth strategies. When we get into some of the assets and growth opportunities within those assets, we probably have to bring on some additional resources at that time. But excited about the team we have and the opportunities in front of them.

Congrats and best luck with the rest of the year.

Our next question comes from the line of Eric Larson with Seaport Global.

My first question is really current operations in specific. So I knew that you had some decent inventory in wheat. And I'm curious what contribution basis appreciation played in your third quarter numbers. And even more important, you've got to have some attractive basis, appreciation going forward. I mean, spring wheat prices have pushed through $10 on the Minneapolis exchange. And can you give us an idea of what your inventories are and maybe what the timing of some of those basis appreciation gains could be realized?

Yes, that's fair point. You were talking about spring. We remember that our inventories are most -- are soft red wheat from the eastern crop, and they all tie to the wheat market overall. Carries were probably about 70% of full storage in soft red wheat. So that's a good thing. We hadn't been able to enjoy soft red wheat carry the last couple of years. So seeing some carrying charges return to what was good. That's why we were excited to buy a little bit more wheat than we originally had in our program. So we like putting wheat into our Toledo complex for storage. Basis appreciation, I think that's a very specific question about the market right now. I think it's a good position for us. That we will have -- I think those soft weak values are going to be valuable over time. A lot was like we talked about in Idaho, a lot of our situation Idaho was about quality, right? So having the right quality wheat or blending wheat, both white wheat and hard wheat in the west really had a lot of value this year. So I think your point, Eric, is about the wheat market, which sometimes gets overlooked and seems kind of quiet. Right now, it's very interesting from a quality blending capability in storage, which is kind of old-fashioned grain business to come back. And I think we have some upside in our earnings on wheat overall.

Yes. And you had real shortages in the west of wheat and even small grains this last year. I mean, we're talking really tight numbers on carryover. So I suspect that that will be a positive going forward for you.

You mentioned small grain. So for us, we participate in the oat market as well as pulses. So those crops were hurt in Canada and up in the high plains. So it's been an interesting trading opportunity, and we've done well in merchandising small grains.

Are we going to have enough oats for all the demand next year, Pat, just out of curiosity, what your thoughts are on that?

So it'll be tight. It's going to be a tight market. So it's going to provide some interesting merchandising trading opportunities, but it's one of our tighter commodity markets this year.

Got it. Okay. So moving on, you provided some very specific guidance over the next couple of years, Pat, on your forward EBITDA. And what I'm curious about is, can you express your confidence in that guidance? And then #2, related to that, and I don't know if we can even characterize a normalized ethanol market, but you're still pretty far well below kind of what I would think is your average EBITDA contribution from ethanol. So what could be an annual -- if you normalize the ethanol market, that's a really tough question. But what can you -- what could we expect as an EBITDA contribution from ethanol going forward over the next couple of years?

Well, you laid a couple of handful of questions on us. So I'll start at the beginning. We talked about our outlook of -- against our EBITDA targets that we put forward a year ago and a few months ago, I feel very confident in our opportunity to grow. The ag markets now are providing opportunities for companies to be able to look at things like sustainability, and the change of renewable diesel impacting the entire OC complex has made a big difference. So I think we have a new period for the grain business and fertilizer business than we did 5 and 6 years ago. And so we have opportunities for growth. And I think the unique thing that we're positioned well is in things that fit into our strength, managing supply chains, working with farmers, working with end customers, understanding the environmental landscape as it relates to ethanol coming from that business and how the market works for RINs and working in a space that's complicated with government regulations, I think that helps us as we navigate these new market opportunities. So we're kind of excited about those new areas, but probably more importantly, just the fundamentals, back to exports of food and seed grains around the world. Domestic specialty crops and specialty products for human consumptive food as well as pet food have areas for growth. So a lot of our core businesses have some upside and we can do that through bolt-ons, project expansions, new product lines, things like that to grow. A good example is organics. So organic fertilizer business is an attractive opportunity for us. So these are crazy way out, they're ideas, they're things we know how to do. And that gives me more confidence that we'll be able to execute against it. The second question, Brian did you want to add anything?

Eric, just to add to that, we went through -- Pat mentioned that we went through a pretty detailed corporate strategy review this year. And so I think our teams really have a lot of focus and a lot of energy on key areas where we really believe that we can add value and are able to be successful and have competitive advantages. I think when we think about our modeling and some of the numbers that are out there going forward, they do include some M&A. We're going to continue to be disciplined in our approach and make sure that we're not overpaying. The markets have been pretty robust, as you know. And so some of that then might -- it certainly won't be linear, but we're going to continue to look to those opportunities.

The second question, I think I understood it, Eric, is just -- it's very hard to pinpoint exact numbers on average, as you said, for ethanol. And again, I've been around ethanol and involved in plants for almost 30 years now. It's very difficult to forecast because it's so many factors. But if you looked at the underlying factors today in ethanol, we have an abundant corn crop. We have very high corn oil values driven by renewable diesel, we have good, supporting values for value added feed products and DDGs in general. We have a global market of higher commodity prices in the energy sectors, which supports gasoline prices, which is good for ethanol. We have a new administration that is very focused on clean energy and it just recently at the Summit, talking about CO2 and carbon reductions. So there's a lot of things that can be very favorable to ethanol in the near term. So I think those opportunities for ethanol to be quite profitable this year as we get gasoline demand to come back after being a little bit depressed through the whole COVID period. So there's a lot of things that are lining up on the favor of ethanol short term. You also heard about recent developments about sustainable aviation fuel and that potentially coming down the pike. So there's a lot of exciting things that could support ethanol near term. Long-term, the question is more about e-vehicle penetration, right? And that's probably the macro longer-term challenge. But near term, ethanol could be quite good. And it's shaping up more checks on the positive side than on the negative side.

Okay. Yes. No, I would agree. So your balance sheet is -- it's an incredible improvement. Obviously, the Rail sale helped that a lot, et cetera. But you also announced a $100 million share repurchase program. With your balance sheet right now, could you not execute both that and your strategic growth alternatives available to you right now simultaneously? Or do you think you'd maybe have some bigger growth opportunities from an opportunistic point of view that would require a little bit more capital, so you're conservative on your share buyback?

Good question. I think when it comes to share repurchase, it's just as simple as we currently see more opportunities that we're really excited about to deploy capital for growth, to grow the company, and that's our keen focus right now.

[Operator Instructions]. There are no further questions. I will now turn the call back to Mike Hoelter for closing remarks.

Thanks, Sarah. We want to thank you all for joining us this morning. Our next earnings conference call is scheduled for Wednesday, February 16, 2022, at 11:00 AM Eastern Time, when we will review our fourth quarter results. As always, thank you for your interest in The Andersons, and we look forward to speaking with you again soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.