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. As a reminder, this conference is being recorded for replay purposes. I will now hand the presentation to your host for today, Mr. Mike Hoelter, 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, 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 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 had our 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 include 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 were 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.

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 continue to take a disciplined approach to capital spending, which we expect will be approximately $125 million to $150 million for the year, roughly half of which is typically related to maintenance capital. Through June, we have spent $76 million on capital expenditures. Included in the spending are several growth projects expanding capabilities in our fertilizer, renewables, and premium food businesses. Shortly after the end of the quarter, we closed on the acquisition of ACJ International, a growth opportunity for us in the pet food ingredients supply chain. We are evaluating various growth projects in our pipeline, including additional M&A opportunities. Our long-term debt-to-EBITDA currently is about 1.6 times, which is well below our stated target of less than two and a half times. We have a balance sheet with capacities toward growth investments for those that meet our strategic and financial criteria. Now we'll move on to review each of our businesses, beginning with trade on slide number eight. Trade reported pre-tax income of $5 million and adjusted pre-tax income of $7 million in the second quarter of 2023, compared to $24 million in the same period of 2022. While trades quarterly results are down from the second quarter of last year, our year-to-date results are higher than last year. Merchandising performance was mixed, with some profit centers recording very strong results, while others did not have similar market opportunities compared with last year, which was impacted by a period of significant volatility following the start of the Russia/Ukraine war. Results in the North American assets were down following a good first quarter as elevation margins normalized. Investments in growth projects made in prior periods added to our premium food and pet food ingredient businesses. Trades adjusted EBITDA for the quarter was $27 million, compared to $47 million for the second quarter of 2022. Year-to-date, adjusted EBITDA is $71 million, compared to $67 million last year. Moving to slide nine, renewables have second quarter pre-tax income attributable to the company of $39 million and adjusted pre-tax income of $32 million, compared to $46 million in the second quarter of 2022. Included in the prior year results are $9 million of USDA COVID relief funds and $24 million of mark-to-market gains. Our current quarter earnings were solid due to strong ethanol crush margins combined with efficient operations at our production facilities, which drove improved yields. Merchandising results for renewable diesel feedstocks, feed ingredients, and third-party ethanol trading were also up compared with last year. The total volume of vegetable oils merchandised increased 64% over 2022, as we continue to grow our renewable diesel feedstock business. Renewables had adjusted EBITDA of $74 million for the quarter, compared to $86 million in the second quarter of last year. Turning to slide 10, the Nutrient and Industrial business reported its highest second quarter in 15 years, with pre-tax income of $43 million compared to $38 million in 2022. An overall volume increase of 21%, driven by demand in our agricultural product lines, led to an outstanding quarter after a slow start to the year. With fertilizer prices stabilizing at more historical levels, we were well-positioned to serve our customers throughout the spring planting season. Year-to-date sales volume has increased by 10%. Although as expected, margins declined in our ag products, given the significant year-over-year reduction in market prices. Nutrient and Industrial had EBITDA for the second quarter of $52 million compared to $47 million last year. And with that, I'll turn things back over to Pat for some comments about our outlook for the remainder of 2023.

Thanks, Brian. We remain positive about our 2023 outlook. 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 are good news for 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 shifts 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 favorably located with expected lower corn costs through harvest. We remain focused on improving our 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 now turn it back over to our operator, Anthony, who will take your questions.

We will now begin the question-and-answer session. 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 continued momentum into the back half of this year with sustained strength in 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 to three quarters? 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 has greatly surpassed what we originally thought they were going to be. So, we've been really pleased with driving demand. I think official numbers are up almost 2% on June through August. The vacation driving that everyone seems to be doing, not to mention jet fuel demand, 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. We are getting good small increases in blending all the time. Stocks have been tight all year. We continue a steady export pace of that 13 to 14 billion gallons. 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 when it 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 are still pretty inverted to the spot, and the spot has been the increased value. So there haven'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 characterizing the trade business setup ahead. But I wanted to ask you, you made a comment about lower basis values in the east versus the west for corn benefiting renewables. When you look at the 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 exist that you see through the new crop as well? Any comments there on the benefits of your asset base would be helpful?

Sure, absolutely. If I indicated an East/West split, I didn't mean to imply that. Historically, over the last quarter, we had seen, the last couple of quarters, eastern values were cheaper than the West as the West struggled with bad weather and tight supplies last year. That's kind of equalized a little bit, so the east to west differential has become more neutralized here in the last month or two as we get closer to this next 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 soft red wheat market with our eastern located assets tributary to the CME delivery point here in Toledo. We had surprisingly good wheat quality as well as good yields. It surprised us because it was pretty dry, and we thought that yields might be sacrificed, and they didn't. The soft red wheat crop came in very strong both here and in Ontario, Canada, so we feel very good about our ability to earn, and this goes back for you, Ben and the analysts on the variable storage rate. The sulfur and wheat market is close to 75% carry, and there’s a pretty high likelihood of earning a variable storage rate tick. While we talk about volatility in global markets, we do see a stable, good sulfur and wheat eastern crop. That's a good value that will generate earnings for us. On the corn and bean front, it's good that you mentioned dislocation regionally. Remember, we're not solely an exporter; we're really focused on a lot of domestic markets, both cattle and dairy and hog, as well as supplying ethanol players and others. It’s still quite volatile in local truck markets, and our team has done a great job navigating those markets over the last few months. We see that continuing to provide good opportunities for the rest of the year. So we're pretty confident about how grain merchandising results will look at the balance of the year. One last point, if you don't mind me going there, Ben, is on the global front. I know you're all watching things closely. We had a big Brazilian crop, and it looks like the U.S. crop will be a good one this year. After some early concerns, it's been very hot. But as you know, rain makes grain, as we always say. So these hot, wet conditions are perfect for growing corn. However, globally, recent activities in Ukraine and Russia continue to add gasoline to the fire here. There's a bridge called the Kerch bridge connecting Russia to Crimea and is critical for grain movements out of Russia. Russian grain wheat movements have been huge, which is good to supply the needy countries, especially in Africa and the Middle East. The challenge is, this bridge has been bombed a couple of times before by Ukraine, and if it were to be destroyed or damaged, that would impact especially wheat exports. And on the other side, the Russians had a drone strike this morning, with 15 hitting in its meal. This is in Ukraine, a port location for barge loading, destroying some grain and food grain facilities. This situation on the Romanian border, as you know, is concerning, as Romania is a NATO and an EU country. The bottom line on wheat and European situations related to the Russian exports is quite volatile, and I think probably the most important thing that the market is watching right now, and of course, we're watching that closely. What it does mean is that volatility in a macro sense coming back to the Andersons plays right into our hands for merchandising opportunities. Again, that was a very long-winded answer, Ben, to tell you about what's going on in market weather and geopolitics, but that's exciting news of what's happening today.

That's great. That's super helpful. One more question from me, and it's for Brian, on the balance sheet. It's amazing what a difference a year makes. The balance sheet leverage has come down considerably. I think typically, seasonally, your short-term borrowing comes down into the back half of the year, which would imply that things maybe 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, that’s a good question. You’re correct that the third quarter usually sees the largest decline, but some aspects have shifted a bit, particularly with our Swiss office and international operations along with merchandising and larger loads. Generally speaking, we are pleased with our current position. We are confident in our capacity to pursue growth projects through capital expenditures and mergers and acquisitions. We feel optimistic about our position and plan to utilize it effectively for the right types of projects.

We will talk about this later. We've executed on two acquisitions here in the last six months that are accretive, and we're feeling good about those. I call them in a previous call, base hits and doubles, because they are smaller to midsize acquisitions. So we're excited about that. One point I think is interesting to note about the balance sheet is, corn and bean prices are off the peak from a year ago, as is fertilizer quite a bit. But farmers are selling at quite a bit less. Last year when the market rallied, we had a pretty good look on farmer business. This year, the farmer has been reticent to sell until he sees what his crop is. So our absolute ownership levels are lower, which I believe 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 now go ahead.

Thanks. Good morning, and congratulations on the results. I wanted to take a step back and discuss your focus on growth, the merchandising of renewable diesel feedstocks, and the investments in lower carbon intensity. Could you share your thoughts on prioritizing capital allocation and how you view the opportunities for growth in terms of organic versus inorganic options?

Brian, thanks for that question. An important clarification. We really have two strategies in our overall renewables business. One is focused on the renewable diesel feedstock trading desk that we created a couple of years ago. 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 area, we'd like to pursue that. We're not going to build a $3 billion renewable diesel plant; we're focusing on the feedstock side. We've optimized our corn oil production with investments in our ethanol plants to feed that. Looking for other opportunities to continue to grow the RD feedstock, not just vegetables, but also fats and used cooking oil. So, that's one part of our strategy. The other part is on our ethanol assets. We believe our four plants are 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. We have some opportunities; we mentioned doing work right now on different energy projects in the plants, as well as fermentation capacity increases. We’re working on projects for capturing carbon and sequestering carbon. Nothing we can announce in today's call, but these are the things we're looking at. So, the two different focus areas are renewable diesel feedstocks and improving the efficiency and carbon intensity of our ethanol plants. We want to continue to do that, because we think long-term the most efficient plants, with the best yields and the lowest CI scores, are going to be the winners. So we're just plugging away and making those plants better through investment. 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. You’ve made two acquisitions in a short amount of time in that space. How should we think about that? Do you feel like you've got a footprint there that you're comfortable with? Or is there still room for growth?

Yes, that's a good question. I’d say we feel really good about the Bridge and ACJ acquisitions; they are very complementary with our existing pet food ingredient business. The incremental EBITDA you can think of from the combination of those two is probably around $10 million, plus or minus on an annual basis, and we'd love to do more. We feel really good about bringing those two teams into our fold. It’s an area with a lot of growth, with better margin opportunities, and we'd like to grow it further.

Maybe, Brian, just to kind of hit on that a little more, our stated strategy around two segments, in addition to our historical grain merchandising business, which has been operating for 75 years, we’ve been pushing growth in two areas; pet food and food ingredients. On the food ingredient side, we've been a long-term supplier of food-grade corn to chip manufacturers. We have added capacity and capabilities to those assets in both Illinois and Nebraska to have more capability in the food space. We’d like to expand that footprint. It's a very stable, consistent supply business that we like. On the pet food ingredients side, we've been in that business for quite a while. We want to add additional products and capabilities. But one cautious thing we have is that you've seen in the past, pet food companies have fetched very high prices and very high multiples for ingredient companies. We want to be very disciplined to keep things inside our wheelhouse, and things we know how to do and can buy at fair value. So with the Bridge and ACJ cases, we're excited about those two bolt-on acquisitions. 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 now 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. I appreciate the magnitude of this. I'm wondering if you can talk about your strategy within renewable diesel, particularly how your strategies are informed by various tax incentives? I mean, the Renewable Fuel Standard changes seem to get people in the space in a tizzy recently. I'm wondering if you have a stance on that and how changes in these incentives really formulate your strategy regarding renewable diesel going forward?

Okay. Thanks. That's a very good point. The interesting thing for us is that we're not a soybean crusher, nor are we an RD manufacturer. Many of the big players who have crushing plants is smart for them to expand. They have partnered with key renewable diesel players, and that makes a ton of sense. But there are many opportunities besides that. There's much bigger space, not just confined to the enormous cooking oil space, but also fats and greases, corn oil, and other vegetable oils. So, we feel that fits really well for Andersons. We are continuing to add to our footprint we already have in corn oil and build out supplies for it. So, none of that really has a direct correlation to tax incentives because it pertains more to the RD manufacturer. We are focused on being an ingredient supplier and a diverse ingredient supplier, both in terms of product type and geography.

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

Yes, I believe it's the latter. From my experience of over 30 years in these facilities, it's not solely about fermentation. It's also about addressing any bottlenecks that hinder us from achieving peak crush capacity. In some instances, it may relate to our firm's ability to increase throughput. We are emphasizing yield, particularly corn oil yield, as this is currently our most profitable product. We are maximizing every possible ounce of corn oil. We've implemented new technology at our facilities, with the latest installation underway. Other opportunities involve debottlenecking the facilities to enhance their consistency. Our current focus is on improving facility efficiency, boosting high corn oil yield, and reducing carbon intensity. The journey towards reducing carbon intensity is a long-term endeavor; we are just at the beginning of this process in the renewable sector. It’s crucial to approach this strategically and make informed decisions during these early stages.

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. Thanks for taking 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.