Good morning, and welcome to Otter Tail Corporation's First Quarter 2023 Earnings Conference Call. Today's call is being recorded. 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.

Good morning, and welcome to our first quarter 2023 earnings conference call. My name is Tyler Nelson. 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 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 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 about 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.

Thank you, Tyler. Good morning, and welcome to our first quarter 2023 earnings call. Please refer to slide 4 as I begin my comments on our first quarter results. We are pleased with our first quarter financial results. We generated earnings per share of $1.49. As expected, our earnings declined compared to first quarter of last year as earnings from our Plastics segment receded from historic hits. In contrast, our electric and manufacturing segments each produced double-digit earnings growth in the first quarter of 2023. Based on our first quarter results and expectations for the remainder of the year, we are increasing our 2023 earnings guidance range from $4.55 and to $4.85 per share, an increase of approximately 20% from our previous guidance, driven by increased earnings from our Plastics and Manufacturing segments. In a moment, Kevin will provide a more detailed discussion of our first quarter financial results and our expectations for the remainder of the year. Slide 5 illustrates our expected five-year compounded annual growth rate in earnings per share through the end of 2023, with and without the impact of our Plastics segment. Through dependable earnings and steady growth at Otter Tail Power, BTD, T.O. Plastics and changes in corporate costs, we expect to produce a compounded annual growth in earnings per share from 2018 through the five years ending 2023 of 9.5%. This excludes the results of our Plastics segment. The additional earnings and cash flow generated by our Plastics segment over this time period provide additional strength to our already strong credit metrics, liquidity and capital structure and allow for capital investment in our operating companies. Turning to slide 7. We illustrate Otter Tail Power efforts in working toward a cleaner energy future. We are targeting to reduce carbon emissions from own generation resources, approximately…

Thank you, Chuck, and good morning, everyone. We are pleased with our first quarter financial results. We generated diluted earnings per share of $1.49. This is the second best first quarter results we have ever reported, second only to the first quarter last year. As expected, our operating revenues and earnings declined from the record first quarter of 2022, driven by lower sales volumes in our Plastics segment. Both our Electric and Manufacturing segments delivered double-digit quarter-over-quarter earnings growth. Please refer to slide 29, as I provide an overview of our first quarter segment earnings. Electric segment net earnings increased $4 million or approximately 21% over the first quarter of 2022. The increase in earnings was primarily driven by higher commercial and industrial sales volumes, including a full quarter impact in 2023 of our new commercial customer in North Dakota that was brought online in the first quarter of 2022. We increased driver revenues from the recovery of construction costs at Hoot Lake Solar and the commencement of recovery of our investment in Ashtabula III, and lower pension and other postretirement plan costs based on an increased discount rate and expected returns on plan assets for 2023. These items were partially offset by higher O&M costs driven by maintenance expenses from an outage at Big Stone Plant, increased interest costs related to short-term borrowings on the Otter Tail Power credit facility and the impact of weather conditions compared to the first quarter of 2022. Manufacturing segment earnings increased $2.8 million or 68% over the first quarter of 2022, driven by a 19% increase in sales volumes at BTD, driven by end market demand in agriculture, construction, energy and power generation. Favorable product mix and pricing initiatives have offset inflationary cost pressures at BTD and increased product pricing and the availability…

[Operator Instructions] One moment please. Our first question comes from the line of Tate Sullivan of Maxim Group. Your line is now open.

Hi. Hi. Good day. First focusing on your decline, the comment, Kevin, you said decline in profits in the second half of 2023, if plastics pricing decreases what conditions could cause the plastic pricing to be more resilient than you expect? I mean starting there, please?

Yeah, Tate, thanks. We continue through the first quarter of 2023 and certainly into the second quarter, we have seen our sales prices continue to be stronger than we expected in spite of -- there's certainly inventory management going on at distributors and contractors given the higher levels of inventories that they had in 2022 and kind of the softness of the construction markets that have been going on. I think that to the extent that those conditions -- we're expecting those conditions to continue through the rest of the year. And as the distributors, contractors work through their higher levels of inventories we're currently expecting. And the demand will -- the volumes will start to come back some. We're expecting our volumes in the last half of 2023 to be consistent with the volumes we had in the last half of 2022, but we just are seeing indications in the market that there could -- with certain product lines that sales prices are starting to pull back, and we're watching that carefully and certainly being cautious as we look forward to the rest of the year. To the extent that this pullback that we've seen in some of the pricing of products doesn't continue and sales prices continue to remain strong given that the PVC pipe is a -- it's not a significant cost to these overall construction jobs. To the extent that those prices stay strong, that's where we're seeing that there could be potential upside to the year, but we certainly haven't reflected that in any of our guidance.

I guess how far in terms of the visibility ahead in the business? I mean, is this the distributors, your customers, I mean, do they not place orders rather than a month ahead of time, or how are they managing inventory? And what kind of visibility do you have into their orders? How far ahead do they place orders for your PVC pipe?

We have real good visibility through the second quarter.

Okay.

And then we're -- there's certainly orders that are starting to be placed a little bit beyond that, but not significant. And so visibility is good through Q2 and as we progress through Q2, then we'll start to get better visibility into Q3 and Q4. But as we sit here today, we're starting to see some of those signs that sales prices could start to slide off in the last half of the year. And we certainly there's been we're expecting that we'll see some decline in resin prices starting in the kind of the latter part of Q2 and into Q3. And so that's another sign Tate that we're looking at given that as resin prices start to decline, typically, we would expect sales prices to decline as well.

And then last for me before I turn you over. Do you -- have you seen any signs with these historical margins any signs of new entrants into the market or competition? I mean -- or does it just take a long time to open a new PVC facility?

We haven't seen any new competition. The cost of entry is pretty significant to build a PVC pipe plant. And there hasn't been any new announcements from competitors that there may be -- like we've announced an expansion of the biotech facility to add another line. There's some of that, but nothing significant with new competitors coming in.

Thank you very much.

Thank you. One moment for our next question. [Operator Instructions] Our next question comes from the line of Tate Sullivan of Maxim Group. Your line is now open.

Hey, thanks. Thank you for taking my follow-up. On BTD, similar to the question I asked on plastics. How -- what is that? I know it probably varies by end market. But in terms of the pricing and the contracts, is it going to be a sort of a month contract to manufacture some parts or can it be as long as a year? Can you give some commentary to the contract structures in BTD, please?

Yes, Tate. It's going to vary depending on the request that will come from the customer in terms of what their specific product or parts that they need, what's the life cycle of the particular piece of equipment or product they're building in terms of we could be asked for a request to build a part for a particular, for example, a [indiscernible] that has a life cycle of three years to five years and that we would be looking to build parts for that over that period of time. We do get requests for replacement parts from customers as well. So it certainly varies from customer, depending on what their specific particular needs are going to be as it relates to the backlog for manufacturing. We have that in the press release, but we -- our current backlog today is about $289 million at March 31 of 2023, that's through the end of this year. And that compares with at the same time a year ago of $339 million, and there is a fair amount of difference just in steel prices between those two, there's about a $56 million difference in steel prices. Steel prices were higher at the end of the first quarter last year compared to the end of the first quarter of this year.

And then I saw this is slide 23, you point to power generation outlook being positive in terms of data centers. Are you doing some parts for generators in that market, if you can comment there?

Yes, Tate, this is Chuck. We do parts for on-site generation -- backup generation for the entire facility. But..

We saw out there, Tate -- on Amazon and Google and Facebook are key to driving that.

Okay. Thank you. And then, Chuck, when you mentioned earlier, when you comment on repowering the wind farms from the utility, is that replacing turbines, adding more towers? Can you comment on what happen there?

Generally, in the industry, these facilities were put in the 2007 to 2009 timeframe. We would replace blades, rotors, hubs, but the tower foundation, internal wiring those types of things stays. We have to generally increase the value -- the book value of the asset by 80% of it's got to be new to qualify for renewed tax credits on that. So we're doing that. So the foundation, stay the same. Generally, it's larger blades and new generator and associated internals.

Well, thank you very much for answering my questions.

Thank you. One moment for our next question please. Please standby as we compile the question-and-answer roster. One moment please. At this time, I would like to turn it back to Chuck, for any further comments.

Thank you for joining our call and for your interest in Otter Tail Corporation. Based on our first quarter results and expected higher sales volume and scrap income at BTD, along with anticipated stronger margins in our Plastics segment, we are raising our 2023 earnings per share guidance to a range of $4.55 to $4.85, an increase of approximately 20% from our initial range of $3.76 to $4.06. Over the long-term, we are well positioned with our utility growth strategy and predictable earnings stream, complemented by our strategic Manufacturing and Plastics businesses to achieve our financial targets. We expect to produce compounded growth in earnings per share of 5% to 7% off a base of 2024 earnings and increase our dividend in the range of 5% to 7% annually. Thank you again for joining our call. We look forward to speaking with you next quarter.

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