The Andersons, Inc. (ANDE) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the Andersons 2026 Third Quarter Earnings Conference Call. My name is Joe, and I will be your coordinator for today. [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 Hoelter, Vice President, Corporate Controller and Investor Relations. Please proceed.

Good morning, everyone, and thank you for joining us for The Andersons Third 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 recording and the supporting slides will be made available on the Investors page of our website shortly. Please direct your attention to the disclosure statement on Slide 2 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 the GAAP to non-GAAP measures are included within the appendix of this presentation. On the call with me today are Bill Krueger, President and Chief Executive Officer; Brian Valentine, Executive Vice President and Chief Financial Officer; and Mark Simmons, Executive Vice President, Renewables. After our prepared remarks, we will be happy to take your questions. I will now turn the call over to Bill.

Thanks, Mike. Good morning, everyone, and thanks for joining the call to discuss our third quarter results and outlook. I'd like to start by thanking all our team members as they work safely through the busy harvest season across our plants and elevators. We are making considerable progress in accomplishing our One ANDE mindset and culture. Our third quarter results are just one example as we delivered record third quarter EPS for our shareholders. Our year-over-year trailing 12-month adjusted EPS has grown from $2.56 in the third quarter of 2025 to $6.67 today, putting us well on our way to achieve our stated target of $7 EPS exiting 2028. Starting with renewables. While successfully performing all our shutdowns, we are able to generate year-over-year improvements on our base ethanol production due to improved co-product values, lower corn basis and focused plant operations. These results are even more impressive when you consider that board crush was down $0.10 per gallon year-over-year. With volatility back in the grain markets, our Agribusiness segment delivered improved results in our merchandising businesses. Our grain assets were impacted by less space income on wheat and reduced grain volume due to lower yields and weak demand in the Western corn belt. The Port of Houston project is now complete. We've initiated both our originations and marketing programs kicking off our combined domestic and export soybean meal strategy. We've made substantial progress on our Clymers, Indiana debottlenecking project with a targeted run rate increase in production of 30 million gallons by Q3 2027. We announced this morning the signing of a material acquisition, which we will speak to at the end of our prepared remarks. With that overview, I'll turn the call over to Brian to discuss our financial results. I'll be back after his update to discuss the outlook for the fourth quarter and early 2027.

Thanks, Bill, and good morning, everyone. We're now turning to our third quarter results on Slide #5. In the third quarter of 2026, the company reported net income attributable to the Andersons of $46 million or $1.36 per diluted share and adjusted net income of $47 million or $1.38 per diluted share. This compares to adjusted net income of $29 million or $0.84 per diluted share in the third quarter of 2025. Gross profit increased for both business groups as fundamentals were improved over the prior year. Adjusted pretax earnings were $54 million compared to $31 million in 2025 with both segments contributing to the increase. Adjusted EBITDA for the third quarter was $101 million compared to $78 million in 2025. Our effective tax rate varies each quarter based primarily on tax credits earned and the amount of income or loss attributable to noncontrolling interests. We recorded taxes at an effective rate of 13% for the third quarter and expect our full year adjusted effective tax rate to remain in the range of 14% to 18%. Next, we'll move to Slide 6 to discuss cash, liquidity and debt. We generated cash flow from operations before changes in working capital of $83 million in the third quarter of 2026 compared to $68 million in 2025 with the increase being driven from the stronger year-over-year earnings. In addition, we recently signed an agreement to sell the majority of the 45Z tax credits that we are generating in 2026 and expect that most of the cash should be received later this year. Our short-term borrowings are up as we have seen increased market volatility in 2026. However, our readily marketable grain inventories remain well in excess of our short-term debt, which is consistently the case throughout the ag cycle. Next, we'll take a look at capital spending and long-term debt on Slide #7. Third quarter capital spending was $60 million compared to $67 million in 2025. This includes the funding of previously announced long-term growth projects as well as normal maintenance capital. We continue to take a disciplined, responsible approach to capital spending, which we expect will be approximately $225 million for the year, excluding acquisitions. We also completed share repurchases of approximately $15 million this quarter. Our long-term debt-to-EBITDA is 1.3x, which remains well below our stated target of less than 2.5x. We continue to evaluate various acquisitions and organic growth projects and have a strong balance sheet that will support investments that meet our strategic and financial criteria. Now we'll move on to a review of each of our business segments, beginning with Agribusiness on Slide 8. The Agribusiness segment reported adjusted pretax income attributable of $9 million compared to $2 million in the third quarter of 2025. Agri business saw good improvement this quarter and on a year-to-date basis remains well ahead of the prior year. Strong execution and volatility during much of the quarter provided more opportunities for our merchandising businesses. However, with a late start to harvest, our asset footprint saw less space income in the quarter. Our fertilizer results were similar to 2025 in this seasonally quiet quarter. We also remain pleased with our continued focus on optimizing our business portfolio, which has resulted in ongoing benefits year-over-year. Agribusiness had adjusted EBITDA of $40 million in the third quarter compared to $29 million last year. Moving to Slide 9. Renewables had another strong quarter, generating pretax income of $63 million compared to adjusted pretax income attributable of $46 million in the third quarter of 2025. Our ethanol plants continued to perform well with efficient operations. Plant profitability was up year-over-year on lower Eastern corn bases and higher co-product values despite lower ethanol board crush margins. While we have benefited from improved corn oil prices and higher renewable feedstock volumes, our merchandising results were lower year-over-year on competition from foreign feedstocks and lower demand from bio-based diesel plants. Renewables had EBITDA of $78 million in the third quarter compared to adjusted EBITDA of $67 million last year. And with that, I'll turn things back over to Bill for some comments about our outlook and to introduce Harvestone Low Carbon Partners.

Thanks, Brian. In Agribusiness, we've discussed the Western drought conditions and reduction of volumes in that region. While these conditions may have a negative impact on our Western assets, it provides an opportunity for our merchandising teams to creatively meet the customers' needs. This is a strength of our complementary asset and merchandising portfolio. The unusually high rainfall across much of the U.S. in August appears to have improved soybean yields to above average nationally. The rainfall will replenish subsoil moisture and combined with market prices should drive increased planted acres of both hard and soft wheat, which should benefit agribusiness. Our Eastern assets are finishing up what has turned into a great harvest. We're seeing record soybean yields with strong receipts. The corn crop has shown higher than normal variability in yields, but in total, we expect to see our harvest volumes for corn and soybeans exceed initial expectations. This should provide opportunities for improved elevation margins and space income. This further supports the value of our vertical integration of originating lower cost and higher quality corn into our ethanol plants. While we are optimistic about the fundamentals in agribusiness, post-harvest market dynamics could impact timing of income over the next 2 quarters. The tailwinds in biofuels should continue to drive solid domestic corn and soybean demand, which is critical for the U.S. farmer. With the favorable October weather, our fall applications and fertilizer sales are off to a good start. Farmers are maintaining application rates and volumes in the East are solid. As mentioned earlier, the Port of Houston project is operational, expanding our domestic and export soybean meal capabilities. We believe this location will be an outlet for Midwestern origins and a competitive alternative for global buyers. We feel that our history of working with CPG companies on sustainability goals will provide us with a competitive advantage as we roll out our regenerative ag programs for corn originations into our ethanol plants. These programs are built on leveraging traceability back to the farm gate, agronomic practices and compatibility with lower carbon objectives. Our goal is to reward the farmers who participate in these programs to reduce the carbon intensity of the corn they produce. This will benefit both our agribusiness and renewable segments, again demonstrating our One ANDE approach. In the Renewables segment, we expect to see increased production of ethanol as we move into 2027. US ethanol exports are expected to remain strong. Elevated global fossil fuel prices and the RVO continue to support ethanol demand and favorable blending economics. The passing of year-round E15 would drive even more blending, reducing the cost of gasoline to the American consumer. We are evaluating additional projects to reduce the carbon intensity of the ethanol we produce as we believe this will be accretive to long-term shareholder value. Our renewable diesel feedstock merchandising business expects to see increased production in bio-based diesel in Q4 and 2027 to meet the RVO requirements and this should provide additional growth opportunities for our feedstock merchandising business. Next, I'd like to share some information about the acquisition we announced this morning. As you know, increasing our ethanol production through capital projects and acquisitions has been part of our stated strategy. We've evaluated several plants with a focus on location, efficiency, proximity to feedstock and access to North American LCFS markets. We are now pleased to announce the signing of an agreement to acquire Harvestone Low Carbon Partners, HLCP, the owner and operator of 3 ethanol plants that produce approximately 215 million gallons of ethanol annually. These 3 plants include Blue Flint Ethanol and Dakota Spirit located in North Dakota and Iroquois Bio-Energy Company, IBEC, located in Indiana. HLCP has a key position in the production of low-carbon ethanol. Blue Flint has been sequestering carbon on site for approximately 3 years and uses waste steam generated by a nearby power plant to attain one of the lowest carbon intensity scores in the industry. Dakota Spirit is expected to begin sequestering carbon in early 2027 and uses waste steam generation in its process. Both North Dakota plants are well located to reach U.S. and Canadian low-carbon ethanol markets. The IBEC plant in Indiana has filed their Class VI well permit with the EPA and is in technical review, much like our Clymers, Indiana plant. IBEC is expected to begin sequestering carbon in late 2028. All 3 of the HLCP plants have potential debottlenecking opportunities and have been well maintained. HLCP provides us with several competitive advantages. Location of the North Dakota plant gives us exposure to Western corn belt markets in a region that has exportable surplus of corn with acres forecasted to increase. These plants also have access to both U.S. and Canadian low-carbon fuel markets due to location and their rail service. Blue Flint and Dakota Spirit will be 2 of the limited number of plants able to sequester carbon on-site in 2027. This is a competitive advantage compared to pipeline options. Finally, we bring our vertically integrated approach to sourcing corn and merchandising ethanol and co-products. With the larger production footprint, we'll have more merchandising opportunities. We have agreed to a purchase price of $915 million inclusive of working capital. Approximately half of the purchase price is attributed to expected 45Z and 45Q tax credit cash flows, with the remainder of the underlying base ethanol operations and additional low-carbon opportunities. The acquisition will be financed entirely through debt with approximately $300 million from existing revolver credit facility and $615 million in additional committed long-term debt. At transaction closing, we expect long-term debt to EBITDA to be approximately 2x, well below our target of less than 2.5x. As a result of the significant cash flow that we are projecting from the combined enterprise, we expect to have most of the debt repaid within 5 years. We expect this transaction to be immediately accretive to EPS and generate EBITDA in a range of $225 million to $250 million each of the next 3 years. We are excited to welcome the HLCP employees to the ANDE family and believe they will add strength to our ethanol team. We anticipate closing later in the fourth quarter or soon after the first of the year. In our 2025 Investor Day, we identified several strategic and financial criteria for growth through M&A. This acquisition checks all the boxes, and we are looking forward to the combination of these plants with the ANDE ethanol footprint. We bring deep expertise in grain origination, commodity merchandising, logistics, ethanol and co-product marketing that complement HLCP's existing capabilities and positions the combined team to unlock additional value. We anticipate on closing of the transaction that our production volume will reach approximately 730 million gallons annually, moving to 760 million gallons in Q3 2027. Our team first started talking with HLCP in late 2024 about a potential transaction. We have been able to spend time with their leadership team and understand their plans very well. We believe that the leadership and operational integration will be seamless. When we look at the commercial integration, we already have established teams that merchandise and market all the products. And this will provide us with the opportunity to handle 40% more volume. The strength of the combined teams should provide a solid foundation to ensure a successful integration. We are happy to answer your questions at this time.

[Operator Instructions] And our first question here will come from Ben Klieve with StoneX.

Congratulations on both the nice quarter and especially on the acquisition announcement. I'd like to start, Bill, where you left off regarding the -- kind of a relationship and the history here with the acquisition. You noted that, that conversation began at the end of 2024. I'm curious if you can elaborate a bit on your relationship with them over the years. Is this a -- have these been facilities that have been customers of yours from a trading perspective? I'm just wondering kind of how deep your relationship is in the context of you now are feeling comfortable enough to pull off the news of the acquisition.

Yes. How their markets work, we would have very little transactional business with them. Their ethanol would tend to flow to different destinations than our 4 plants do, which is one of the reasons why we were very interested in them. They have ample corn demand right in their backyard. They have a solid feed business. And the DCO markets, we do interact with them in that area. But that's kind of the beauty of this acquisition -- or potential acquisition, excuse me, is that there is a lot of synergy value and just straight growth into geographic regions that, quite honestly, if you look at North Dakota corn, it's one of the few areas that are left that the Andersons doesn't have a strong presence in, and this will provide that.

Very good. That's helpful. And then my follow-up on this is that it seems like you are uniquely compelled by the opportunity provided by the carbon sequestration throughout the 3-facility footprint here. And I'm wondering if you can talk about how your perspective on acquiring this business has evolved over the last couple of years as their investments into CCS have progressed and especially as the kind of regulatory dynamic around carbon sequestration has evolved? Is this something that really became a catalyst for an acquisition here recently? Or am I overthinking it?

No, I don't think you're overthinking it at all. The Andersons is focused on having the capabilities to sequester carbon for a number of years, going back to one of our plant in Ohio, maybe 7, 8 years ago. So this has been on the forefront of our strategy and one that we've talked about publicly, we started talking publicly about Clymers 3 years ago, and we're still -- we're very close to having our well permit -- or Class VI well permit, but what we really like about this opportunity is, we are in the carbon sequestration game on site the day after closing. And we have spent a lot of time analyzing and researching the long-term value of low CI ethanol and the benefits that it will provide not only in North America, but globally. So I wouldn't say this has been a shift. It's been a strong focus. And one of the reasons why we've been committed to getting the CCS program going at Clymers.

Got it. Very good. Well, I appreciate that color. Congratulations again to you and the whole team on this.

And our next question will come from Derrick Whitfield with Texas Capital.

Also congrats on the quarter and acquisition. Wanted to start with Harveston first. The EBITDA generation from those facilities appears very strong. My quick search indicates their nameplate is in the 215 million to 220 million gallon range on an aggregate basis? And kind of when I think about the efficiencies that you guys operate your plants up to date, could you offer some perspective on the degree of the bottlenecking you could achieve against that capacity? And then also just where does the CI sit on average today across those plants?

Yes, I can certainly take that. I'll probably have Mark Simmons, our EVP of Renewables answer part of the question for you. The total capacity today, as we've stated, is 215 million gallons. We believe that all 3 plants have debottlenecking opportunities that will be relatively low cost of capital. And as we've been able to do that at our plants over the past couple of years, we believe there's an opportunity to certainly surpass 250 million gallons across the 3 plants combined, and it will take probably 24 to 36 months to achieve, maybe a little less than that. So yes, that is one of the thoughts that we had and was -- gave us a lot of interest early in it. Now in terms of efficiencies in the 3 plants, this management team is excellent at running plants. It was a lot of fun with our team and their team when we were on site looking at them. They literally talk and think about successful operation of ethanol plants, the exact same. The Dakota Spirit plant has a different technology, thermal kinetics. The other two are ICM, which we obviously know ICM very well. But we were impressed with that technology and the potential. So in terms of us bringing immediate improvement to their plant operations, I would tell you it's only going to come through the economies of scale because the team they have in place today is really good. I will turn over the CI questions to Mark.

Yes. Thanks, Bill. And starting with the CI scores, BFE has one of the lowest CI scores in the industry today due to the efficiency of the plant. We talked earlier in the earnings call about the waste steam that provides energy to the plant. That's one component of it and then also the carbon capture and storage capabilities. And DSA on sequestering will have very similar. So lowest in the industry from a CI perspective.

And then just as my follow-up. You guys are really excited -- extremely excited about the downstream market exposure you're gaining through this acquisition. I guess could you maybe offer some perspective on where the product is being sold today? And if you think about your existing business today in your ethanol markets you're selling into, is it fast track your ability to find higher value markets as you kind of think about piecing this together?