Good morning ladies and gentlemen, welcome to the Anderson's 2023 Second Quarter Earnings Conference Call. My name is Anthony, and I'll be your coordinator for today. At this time all participants are in listen-only mode. Later we will facilitate a question and answer session. [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 Colter, Vice President, Corporate Controller and Investor Relations. Please proceed.

Thanks, Anthony. Good morning, everyone, and thank you for joining us for the Anderson second quarter earnings call. We have provided a slide presentation that will enhance today's discussion. If you are viewing this presentation via the webcast, the slides and commentary will be in sync. This webcast is being recorded in a recording and the supporting slides will be made available on the investors page at Andersons inc.com. Shortly. Please direct your attention to the disclosure statement on slide two, 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'll 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 second quarter results, and for your continued interest in the Andersons. I'm very pleased with our second quarter results. We are a second best ever Q2 exceeded only by the second quarter of 2022, which was an all time record for the company. Our nutrient and industrial segment results were our best in 15 years, and our renewables results were very strong as well. While our trade results were down year-over-year, due to the fact that last year's results were impacted by strong demand and market volatility in response to the Russian invasion of Ukraine. On a year to-date basis, trade remains ahead of last year. Trade Group results for the quarter includes strong merchandising earnings on good positions across several products and geographies. Performance of our North American assets was lower than last year due to normalized grain elevation margins. Recent investments in premium food and feed ingredients added to our results. Operating results from our renewables business was very good due to a combination of strong crush margins and efficient operations. We continue to benefit from good merchandising of ethanol and co-products and further growth of our low CI renewable diesel feedstock merchandising volumes. Our plants are running efficiently and generated improved yields above last year. Our nutrient and industrial results reflect improved volumes, as we were well prepared for the planting season, which was delayed somewhat compared to last year. As expected, lower overall fertilizer prices compressed margins from the high levels we saw in 2022. But our increased sales pushed results higher. Brian will now cover some key financial data. And after that, I'll be back to discuss our outlook for the remainder of 2023. Brian?

Thanks, Pat, and good morning, everyone. We're now turning to our second quarter results on slide number five. In the second quarter of 2023, the company reported net income from continuing operations attributable to the Andersons of $55 million, or $1.61 per diluted share and adjusted net income of $52 million or $1.52 per diluted share. This compares to adjusted net income of $82 million, or $2.39 per diluted share in the second quarter of 2022. Gross profit for the quarter was $222 million, compared with $231 million in 2022. For the year to-date period, gross profit of $370 million in 2023 was up from $350 million in 2022, driven by improvements in trade and renewables. Adjusted EBITDA for the second quarter of 2023 was $144 million, compared to $169 million in the second quarter of 2022. Trailing 12 months adjusted EBITDA exceeds $386 million. Our effective tax rate varies each quarter based primarily on the amount of income or loss attributable to non-controlling interests. We recorded taxes for the quarter at a 21% effective tax rate. We still expect a full-year adjusted effective tax rate between 22% and 25%. Next, we'll move to slide six to discuss cash, liquidity and debt. We generated cash flows from operations before changes in working capital of $118 million in the second quarter of 2023, compared to $135 million in 2022. Commodity prices have moderated since the highs of last spring, resulting in a sharp decline in our short-term borrowings from $1.2 billion in 2022, to $103 million at the end of June. And with the current interest rate environment, our teams are actively monitoring working capital levels to ensure appropriate customer service while balancing interest rate exposure. Next, we'll take a look at capital spending and long-term debt on slide seven. We…

Thanks, Brian. We remain positive about our 2023 outlook. And at the midpoint of the year, we're very pleased with our results year to-date. We knew that our record second quarter of 2022 results would not repeat, given several of the geopolitical and global market events that occurred last year. That said, our year to-date results are very strong. Improving U.S. crop conditions should influence the global grain supply outlook as well. And as always weather for the key crop growing season will influence final production. But the recent rains in the Midwest is good news to U.S. farmers. Our trade business outlook remains solid. Most of our dry areas have seen improvement in crop conditions in July, and we're monitoring this closely. Also in July, we sourced more of the winter wheat harvest than we originally anticipated, and had better qualities in our eastern assets. Like last year, our Louisiana assets are well-positioned for their early harvest. With our balanced portfolio of merchandising and grain assets, we're able to optimize both volatility and crop dislocation as well as potential shift with larger production and carry markets. In our renewable segment, ethanol crush margins remain historically strong and are above our early 2023 expectations. We believe that our eastern ethanol plants are favourably located with expected lower corn costs through harvest. We remain focused on improving our four production facilities for optimal efficiency, and are making investments to increase our fermentation capacity. We also continue to grow our supply arrangements from other producers, distillers corn oil and other third party renewable diesel feedstocks. We are evaluating a number of opportunities that will lower the carbon intensity of our ethanol production with potential benefits from the inflation Reduction Act. The outlook for this business remains strong. The Nutrient and Industrial business outlook has improved with strong second quarter results. We expect to see solid farm incomes once again, which should continue to support purchasing of crop inputs, including our value added low salt starters and micronutrients. We also anticipate growth in our industrial product lines. As always, the timing of harvest and fall application season will influence fourth quarter demand. In conclusion, I continue to be extremely proud of our team and their dedication to serving customers, and we remain committed to our 2025 EBITDA goal of $475 million. In reaching that goal, we must successfully complete the internal growth projects and acquisitions that we have in our pipeline. We will continue to remain disciplined in this approach. We are pleased with the progress we're making on executing our long-term growth strategy. And we'll continue to make decisions that benefit customers and maximize shareholder value. Thank you. And with that, we'll will now turn it back over to our operator, Anthony, who will take your questions.

We will now begin the question-and-answer session. [Operator Instructions] First question will come from Ben Bienvenu with Stephens. You may now go ahead.

Hi, thanks. Good morning, guys. Congratulations.

Thank you, Ben.

I've got a handful of questions. I wanted to start on the renewables business. Really strong results here. You talked about kind of continued momentum into the back half of this year with sustained strength and margins in the industry. Can you talk a little bit, Pat about your ability to already lock in some of those strong margins as we look out two, 3Q. And then, when you look at the pieces that build up to a more robust backdrop, your view on the sustainability of those dynamics?

Sure. Yes, very good comments Ben. I think when we go back earlier in the year, our outlook for ethanol margins have greatly surpassed what we originally thought they're going to be. So, we've been really pleased with driving demand. I think official numbers are up almost 2% on June through August. So this vacation driving that everyone seems to be doing let alone jet fuel demand, et cetera, is really driving the demand side. We're not back to the pre-COVID commuter miles that we had, but we are seeing more of a return to work, maybe pushing that a little bit. But also the implied blending continues. So we're getting good small increases in blending all the time. So stocks have been tight all year. We continue a steady export pace of that 13 to 14 billion gallons. And so, the outlook continues strong, and now we'll be going into a harvest period where we'll hopefully have a really good corn crop. The rains have been outstanding here this last month. So, we're set up very well. Your question about hedging in Florida, we always trade our positions, we'll put on forward hedges, I want to makes sense. We've done some of that this past year to capture margin opportunities. We've done some of that. But generally, the markets still pretty inverted to the spot and the spot spend the increased value. So there hasn't been any big opportunities. If anything, we look further out into the first quarter, which is historically a lower price period as you go into winter. So we always look for opportunities in the winter months, if we could lock down a good margin then. So we'll be keeping our eyes open for that.

Okay, great, very helpful. And then you gave some comments that were helpful in kind of characterizing the trade business setup ahead. But I wanted to ask you, you made a comment about lower bases values in the east versus the west for corn benefiting renewables. When you look at kind of east versus west crop conditions, as they stand today, some of the benefits of assets in Louisiana and the Gulf, are there arbitrage opportunities around bases that exists that you see through new crop as well? Any comments there on the benefits of your asset base would be helpful?

Sure, absolutely. And if I indicated about an East/West split, I didn't mean it that way that historically, like the last quarter, we had seen, last couple quarters, Eastern values cheaper than the West as the West was really struggling with bad weather and tight supplies last year. That's kind of equalized a little bit, so that east to west differential has become more neutralized here in the last month or two as we get closer to this next coming harvest. I think we're very excited about a couple of things in our merchandising business. One, as you know, Ben, we're big players in the software and wheat market with our eastern located assets. tributary to the CME delivery point here in Toledo. We had surprisingly really good wheat quality as well as good yields. It surprised us, because it was pretty dried and we thought that yields might be sacrificed and they didn't. And the software and wheat crop came in very strong both here and in the Canada, in Ontario, so we feel very good about our ability to earn, and this goes back for you, Ben and the analysts the variable storage rate. So the Sulphur and wheat market is close to 75% carry and thus, we're probably pretty highly likely chance of earning a variable storage rate tick. If you remember the days we do that. That's a good thing for Andersons. So, while we talk about volatility of global markets, we do see a stable really good Sulphur and wheat Eastern crop. That's a good values that will generate earnings for us. On the corn and bean front, it's good that you mentioned dislocation regionally. Right? So, you have to remember, we're not solely like an exporter, we're really focused on a lot of domestic…

That's great. That's super helpful. One more question from me, and it's for Brian, and the balance sheet. You know, it's amazing what a difference a year makes. The balance sheet leverage has come down considerably. And I think typically, seasonally, your short-term borrowing comes down into the back half of the year, which would imply that things maybe the leverage more? How should we be thinking about your appetite for balance sheet leverage? You talk about your targets, and maybe help us think about what you'd like to do there?

Yes. It’s good question. You're right. And third quarter is typically where we would see the largest decline. Some of that has changed a little bit. Now that we have more of the -- with our Swiss office and the International and some of the merchandising and the larger loads there. But I would say generally speaking, we feel good about where we're positioned today. We feel good about our ability to do growth projects via capital expenditures and M&A. And we kind of -- we feel really good about where we're positioned and expect to use it as appropriate for the right types of projects.

We will talk about this later. We executed on two acquisitions here in the last six months that are creative, and we're feeling good about those. I call them in a previous call, base hits and doubles, because it'd be a smaller to midsize acquisition. So we were excited about that. One point I think it's interesting to note about balance sheet is, obviously corn and bean prices are off the peak of year ago as is fertilizer quite a bit. But farmers selling is quite a bit less. So last year when the market rallied we had a pretty good look on a farmer business. And this year the farmer has been reticent to sell till he sees what his crop is. So, our absolute ownership levels are lower. To me that provides an opportunity for us as we go into harvest. So I think that's a good position to be in.

Very good. That's great. Thank you all so much.

Our next question will come from Brian Wright with ROTH Capital Partners. You may not now go ahead.

Thanks. Good morning, and congrats on the results. And I wanted to just take a step back, and you've talked about the exploring growth, and merchandising of renewable diesel food stocks, and also the investments in lower carbon intensity. so, I wanted to talk -- think about it in terms of prioritization of capital allocation? And how you see that number one, and number two, just kind of how you see those opportunities between organic versus inorganic?

Brian, thanks for that question. An important clarification. So there's really two strategies. In our overall renewables business, we have two paths we're taking strategically. One is on the, you know, we created a renewable diesel feedstock trading desk a couple of years ago and build that business up, we continue to grow that and our volumes get bigger each quarter. We'd like to do more in that space. And if there were bolt on acquisitions, or potentially to do things in that space, we would like to do that. That will -- and we're not going to get -- we're not going to build a $3 billion renewable diesel plant. We're talking to focus on the feedstock side. We've optimized our corn oil production with investments in our ethanol plants to feed that. And we're looking for other opportunities to continue to grow the RD feedstock, not just vegetables, but also fats and UCO [ph]. So it's an area of growth for that. So that's one plank [ph] of the strategy. And the other plank is about our ethanol assets themselves. So, we've talked before about -- we feel our four plants are a very large, competitive low cost facilities, we've invested in them consistently over the years to make them that way. Now, we want to do additional investments to make them lower in their carbon footprint or lower their CI scores. So we have some opportunities. We mentioned we're doing some work right now on different energy projects in the plants, as well as fermentation, increases capacity. And we're working on projects for capturing carbon, capturing and sequestering carbon. Nothing, we can announce in today's call the things we're working on. So, the two different planks. One is on renewable diesel feedstocks. The other one is, how do we make our battleships, and the ethanol business stronger and lower CI and we want to continue to focus on, because we think long-term, the most efficient plants are the best yields, and the lowest CI scores are going to be winners. So we're just plugging away and making those plants better through investing in them. And that's where a good chunk of our capital will be going.

Great. Thank you. And then just a follow-up on the pet food assets. Its two acquisitions, and a short amount of time in that space. How to think about that? Or do you feel like you've got a footprint there that you're comfortable with? Or is that an opportunity as well?

Yes, that's a good question. I guess what I'd say on that one, Brian, is we feel really good about the bridge and ACJ acquisitions, they are very complementary with our existing pet food ingredient business. We feel really good about what that brings. And just to kind of put that in context, I would say the, the incremental EBITDA you can think of from the combination of those two is probably call it $10 million, plus or minus on an annual basis, and we'd love to do more. But we feel really good about bringing those two teams into our fold. But yes, it's a space where there's a lot of growth. A lot of you know, there's better margin opportunities, and we'd like to grow it further.

Maybe, Brian, just to kind of hit on that a little bit more is our stated strategy around two segments, besides the overall grain merchandising business, which we've historically been in for 75 years, we've been pushing growth in two areas; pet food and food ingredients. So in the food ingredient side, we've been a long-term supplier of food grade corn to chip manufacturers. And we have added capacity and added capabilities to those assets, both in Illinois and Nebraska, to have more capability in that food space. So we'd like to expand that footprint. That's a very stable, consistent supply business that we like. And then on the pet food ingredients side, we've been in that business for quite a bit of time. We want to add additional products and capabilities. But one cautious thing we have, I think you've seen in the past pet food companies got very high priced and very high multiples were paid for ingredient companies. And we don't want to do that. We're being very disciplined to keep things that are inside our wheelhouse, and things we know how to do and can buy at fair value. So with the case of bridge and ACJ, we're excited about those two bolt on acquisitions. And they fit that criteria exactly in the pet food ingredients space.

Great. Thank you so much.

Next question will come from Ben Klieve with Lake Street Capital. You may not go ahead.

All right. Thanks for taking my questions. First question on the renewable diesel initiative that you've discussed on the call. First of all, Brian, thanks for providing a little bit of color on the volume increases year-over-year, that was super helpful. Appreciate the magnitude of this. And I'm wondering if you can talk about your strategy within renewable diesel and in particular, how your strategies informed by various tax incentives? I mean, the Renewable Fuel Standard changes seem to get people in the space up in a tizzy recently. And I'm wondering if you -- first of all have a hot take on that. And then also how changes in these incentives really formulate your strategy and renewable diesel going forward?

Okay. Thanks. Very good point. I think the interesting thing for us, we're not being a soybean Crusher, or are an RD manufacturing. And a lot of the big players who have crushed plants makes a lot of sense, they've expanded, they partnered with key renewable diesel players that makes a ton of sense. The point is, there's a lot of opportunities besides that, right? There's much bigger space, and people really think about when you talk about the whole huge cooking oil space, and fats and greases and then corn oil and other vegetable oils. So, we feel that's the place that it fits really well for the Andersons. So we're continue to add on our footprint we already have in Corn oil and a built out supplies of that. So, none of that really has a direct correlation to tax incentives. Because it's, you know, that's related more to the RD manufacturer. We're really focused on being an ingredient supplier and a diverse ingredient supplier, both from the product type as well as a geography. So that's really our focus. And we think we can get a lot bigger than that. And it isn't one big huge investment. I think it'd be probably more mid sized ones that we could bolt on if we can make that work well. Very different on the ethanol side, as we talked about earlier. So, the two tax incentives under the tax code were both the 45-C [ph] and 45-Q, there's a time element there. So people are working quickly to get new technologies in the ethanol plant. So I think that's different because then the RD side, so we're working on that. And those tax incentives make a difference to the payback of those projects.

Got you. And then both Pat, both you and Brian talked about fermentation expansion in the renewable segment. Can you help kind of characterize the magnitude of this that you're looking at? And then also, the degree to which you want to kind of expand fermentation capacity kind of around the edges that exists in plants versus looking at entirely -- entire new facilities?

Yes, I think it's the latter. So, in running and the good news, I've been around these facilities for over 30 years. It's not just fermentation. It's any bottlenecks that prevent you from reaching peak crush capacity at our facilities, in some cases, one facility that might be firm capacity to get your more put through. It's a focus on yield, and specifically on Corn oil yield, of course, the most valuable product we have right now. So any ounce of Corn oil we can squeeze out, we're doing. We've put in place the truths of technology and our facilities. Our last one is going in as we speak. And so, the other opportunities is, it's not like an incremental, X percent of capacity been that way. It's more about debottlenecking. facilities to make them run more consistently. So that's what we're in the middle of working on right now. How do you make them again? The most efficient high CI yielding and then low CI. So the CI story is a longer term game, right? This isn't -- we're in early innings of a long baseball game here on the renewable side and lowering CI. So we just need to play the game smart and make good bets in these early inning periods.

Got it. Very good. That makes a lot of sense. All right. Well, I think I'm in good shape. Congratulations to you all. And a really great quarter. And thanks to take my questions and I'll get back in line.

Appreciate the comments. Thanks Ben.

This concludes our question-and-answer session. I would like to turn the conference back over to Mike Hoelter for any closing remarks.

Thanks, Anthony. We want to thank you all for joining us this morning. Our next earnings conference call is scheduled for Wednesday, November 8 at 11 a.m. Eastern time, when we will review our third quarter results. As always, thank you for your interest in the Andersons and we look forward to speaking with you again soon.

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.