Okay, and we're back. Again, Ben Mayhew. I'm with the Ag/ Protein Equity Research Team at BMO. For our next discussion, we are pleased to have The Andersons with us. The Andersons is a diversified agribusiness company and significant player in the North American ag supply chain, operating in grain trading, ethanol production, and plant nutrients, with a historically strong asset presence in the Eastern Corn Belt, though has recently expanded to the Western Corn Belt with its Skyland Grain investment and asset-light capabilities that span the U.S. and other countries. We are pleased to have with us CEO Bill Krueger and CFO Brian Valentine. Welcome, and thank you for spending time with us today. Okay. Bill.
Fireside chat.
Fireside chat. Here we go. You've only been in the CEO seat since October, replacing a legend in Pat Bowe, but have been at the company in management roles since you joined as part of the Lansing acquisition, where you were CEO. How has your first six months gone, and what excites you about the future as CEO of The Andersons?
Thank you, and good morning. You do make a good point, is that being CEO of a private company the size of Lansing and then merging with The Andersons has been really an exciting process over the last six years. Pat had done a great job, in my opinion, of transforming the company. He had made a lot of changes before I arrived, and together, pretty much any measure that you want to use, we've tripled the size of the company since January 1st, 2019. It has been exciting. We've obviously seen the markets have a lot of fluctuation. The first quarter had a lot of interesting dynamics with policy and administrative changes. I know we'll talk about those later. What really excites me about the company today, I have to lead with our people.
I believe that over the last four or five years, we've built a management team that is able to run a substantially larger company. That is my goal, to give them that opportunity. I also am excited about the opportunity where we've put our three business segments into two, combining our nutrient business with our trade group. Over the past five years, we've done a really good job of taking our ethanol plants and our trade opportunities and blending them, and now we feel like it's time to do the exact same with the nutrient business. The other opportunity, and maybe kind of the final thing that really excites me today, is the opportunities that we're seeing in both segments.
Our renewables business has had very strong results, our trade business has, and with the addition of the Skyland investment, we have really kind of finalized the one or two holes that we had in our asset footprint by buying the elevators in Southwest Kansas and the Panhandle of Texas.
Great. The Andersons has operated as more of an asset-light model in recent years, which has worked out very well for the company. What are the advantages of The Andersons' asset-light ag model, and do you expect The Andersons to remain asset-light over the longer term, excuse me, or venture into more investments in an asset-heavy model?
If you go pre-2019, The Andersons were completely asset-heavy in the Eastern Corn Belt and their ethanol plants. With the addition of Lansing, it created a more asset-light feel. The capabilities around being able to trade around your grain assets or your ethanol plants is one that has helped us quite substantially, actually. The tangential opportunities that you can have allow you to be more nimble. The previous three years, I would suggest that the assets were trading at multiples that we were not comfortable with the returns. Today, we have seen those assets come down in terms of multiples, and I think that we are trying to be disciplined with our shareholders' capital. The way that we are deploying it today, we are a little bit agnostic on an asset-light opportunity or a fixed asset.
We're going to look at the opportunities and how it fits with us strategically.
Okay. What is your view on the global ag supply-demand balance through 2025? Will we return to a more oversupplied environment, barring any major weather events? How does that impact your view of The Andersons' earnings opportunities and potential?
Let's start with the wheat market. The wheat market is one that has really drugged down the entire commodity complex. Historically, and I don't see this changing, The Andersons have benefited with our capacity on the wheat market when there's carries in it, like there is now. For the first time ever, we now have variable storage rate triggers in both hard wheat and soft wheat. Traditionally, that would not have benefited The Andersons on the hard wheat side. With the addition of our assets at Skyland, we should be able to benefit on both. The global supply wheat is in balance today. It does feel heavy in the U.S., a little weak globally. The corn balance sheet really globally is pretty well structured for the demand that we have. The problem in the U.S.
For oversupplied, which at one-sixth carryout, we're not really oversupplied, is we have competing factors in the Western Corn Belt, which benefits our merchandising, where milo and wheat are taking corn demand away from us, and our cattle numbers are low.
Right. I mean, given the WASDE on Monday, I mean, what were your thoughts around the 2025, 2026 numbers? Does anything stand out to you that's kind of bogus feeling, or did it mostly make sense?
The increase in global demand for corn was the one surprise. I am a little surprised how the market has reacted to it. 95, 96 million acres of corn feels like we should have an inverse from old crop to new crop, and the market's basically taking the majority away. The reaction of the market was more surprising than the numbers.
Okay. Can you talk about the overall financial health of the U.S. farmer and implications for both farmer selling and fertilizer demand?
Yeah. I'll take the second part of that first. We have seen a very high demand for our fertilizer products, both in the East and the West this year, which there was some hesitancy going in because the producer is not as strong as they have been the last 36 months. I also talked to some producers who say, "Hey, we're doing as well as we ever have because of the precision agriculture, because of their crop rotations and their capabilities." Overall, across the country, I'd say the producer's in a little weaker position than they have been due to the prices and equipment costs. We have not seen a reduction in fertilizer applications due to it.
Okay. Can you discuss the impact that tariffs and Section 301 port fees are having on ag merchandising? Are you bullish, neutral, or bearish about the net potential outcome, given what we have seen so far, which is, to be fair, pretty fluid? What types of scenarios are you running, and do you think The Andersons is well positioned in its current state to operate with tariffs and higher port fees?
Yeah. Let's start with the USTR 301 first. As it was originally worded, it would have been pretty damaging, in my opinion, to the entire ag export markets. The new wording that came out and is intended today to go into effect October 14th really took the risk off The Andersons. If you think about, first of all, we're primarily a North American trading company and asset company, but we do export the largest amount of grain out of the lakes. The exemption for the Great Lakes took our risk away there. Then how they have changed the deadweight size and the fact that Chinese-built vessels just are exempt as long as they're not managed, owned, or operated by Chinese companies really has taken the rest of the risk away from us, allowing our Houston export business to continue as is.
For us, 301 really was a very large event from February 21st until March 17th, or I'm sorry, later than that, late March. On tariffs for us, China has been the one that we've been really monitoring for the ag industry. Tariffs affect The Andersons. The strategies that we've been running are more around the fertilizer business and any wheat that we import from Canada. USMCA has allowed that to move tariff-free.
If we look back on it in the first quarter, obviously it had an impact because it brought everything to a halt, and people were just staying short nearby. As Bill said, this Section 301 has landed in a good spot for our business. I think from here on out, hopefully, unless there's a continued daily whipsaw, things should hopefully settle down and be more positive the rest of the year.
How does the Skyland Grain investment enhance your agribusiness footprint, and what is the EBITDA contribution timing?
I'll let Brian handle the EBITDA piece of it. It is literally right down the middle of the fairway for us. We have been trading that southwestern Kansas, High Plains area of Texas for over 20 years. We have good relationships with a lot of the producers and commercials out there. When this opportunity came up for us, it allows us to have capacity in the exact same areas that we're trading. Animal numbers are growing in that region, more in the northern part of the region. With one transaction, we're able to double the size of our farm centers. The Andersons have been trying to grow the farm center business for a decade, and with this transaction, we're able to double it.
You take that, you couple it with our ability to get into the cotton ginning business, which was new for us with one of the best cotton gins. They have three in total. It just really added a lot of lift for our agribusiness unit.
Yeah. I mean, in many ways, it was analogous, albeit on a smaller scale, to the Lansing acquisition in combination with Andersons. It was an area that we traded in, as Bill just said, and now you have that asset footprint to round it out. It is very complementary from that perspective. From an EBITDA perspective, we have talked about it contributing $30 million-$40 million on a run rate basis. First quarter was a bit light this year given some of the lack of activity and things going on with milo. This year, we would probably say we would expect it to be on the lower end of that range, but still $30 million-$40 million is what we would expect kind of on an ongoing basis.
Moving on to ethanol, what is driving your ethanol earnings success relative to industry margins, and how are your ethanol assets differentiated from peers?
As far as our assets being differentiated, I would just tell you that we've had ongoing reinvestment in all of our plants. For those of you who I spoke to, our ethanol model is different than some of our competitors in the fact that I'll just use corn as an example. We grind about 140 million bushels of corn a year. A lot of ethanol companies would only buy 140 million bushels of corn. We will trade somewhere around 900 million b ushels of corn annually. We are able to maximize what we call outside the four walls of the ethanol plant. While we are maintaining and operating our plants, we are able to trade around those plants, and we do the same thing with ethanol, DDGs, and corn oil.
Corn oil, as an example, we'll trade 500 million-600 million gallons of corn oil in a year, and we produce 130 million. It is that ability to leverage our production and our capacity with our trade business.
Yeah. I think our three Eastern plants are all large-scale facilities producing about 140 million gallons each annually. I think this point Bill brought up about corn, though, is a really important one. In many ways, we're vertically integrated in that business. That allows those facilities to run essentially sometimes just-in-time inventory during certain parts of the year because they know that somewhere in the system that we're trading, they'll be able to get that corn if they, for some reason, are going to be short. There's a lot of efficiencies there. I think also, though, the investment that we've made to continue to keep the efficiency and improve the yields in those plants has been really important.
In this year, we have an interesting dynamic where the Eastern corn basis is higher than the Western corn basis. The last three or four years, we've benefited by having lower corn basis in the East on a relative value to the West.
Yeah. That is an important point, I think, with how this year is going to play out, which segues into my next question. Do you foresee the ethanol fundamentals getting better from here through 2025, through the end of 2025? What would that look like from a margin component perspective?
Getting better from today, yeah, I think we should expect ethanol margins for the balance of Q2 and the balance of Q3 to be higher. I mean, traditionally they are, and then it'll tail off a little bit in Q4. I think there's a lot of dynamics working today, whether you want to talk about coverage of the House's proposed bill. More importantly, looking at gasoline demand, it is expected to be up about 1% year- on- year. That's going to pull ethanol. Obviously, discussions around E15. We have the waiver. Will we mandate E15 year-round? I'd like to think that has a high likelihood. There are a lot of small tailwinds behind ethanol that I think when you step back and look at it in totality, there's potentially a lot of opportunities.
Okay. In terms of the industry production and inventory levels, what is a benchmark that we can look at at the end of July or at the mid-August that's going to say, "Okay, inventory levels are at this, and this is why margins are better or worse"? I think one of your competitors called out 22 million barrels. It's like getting to that level is key in terms of creating a better margin environment. Just curious your thoughts around that.
Yeah. No, that's spot on. We tend to look at days of supply, but that's an accurate number. What we want to do is coming out of spring maintenance is have a drawdown. Okay? The driving season should run. What you're really looking at is where do we expect ending ethanol stocks at the end of the year? We think it's going to be very similar to last year. We also are more positive than some in the industry on exports. We could drop to 1.85 this year, but that's still a good year. We just think, obviously, we had a great first quarter of exports, but we do not see the drop-off on exports. The industry's running pretty well. We've had three or four plants shut down this year, but the balance of the industry is running pretty well.
Okay. What is your updated outlook for corn oil prices given the recent recovery in the veg oil complex? Do you foresee a return of strong demand from renewable diesel producers? Can you frame what type of EBITDA contribution this could be? Now, clearly, the house tax bill draft just came out, and on the surface, it seems very favorable for or incrementally more favorable for veg oils as a feedstock. This is a three-part question, so I hope you remember each aspect, but just frame up the corn oil opportunity and kind of what it's going to look like from an EBITDA perspective too.
You are correct. Soybean oil in the East traded around $0.52 yesterday. Corn oil should trade and has been trading at 105%-108% of the value of soybean oil, and that's where it should trade when you want to relate it to the CI scores. We believe that you have a lot of questions there, but let's talk about the RVO. The RVO is what's going to drive the renewable diesel run rates. That's our belief or margins in it. With the recent proposal, if we exclude all foreign feedstocks except for Mexico and Canada, I would suggest that the RVO will likely be set somewhere in the high fours. Let's call it 4.6-4.8. I think the EPA is going to look at the eligible feedstocks.
If you take foreign-supplied feedstocks outside of Canada and Mexico, I think that number's going to come down. At, let's just call it 4.7, that's going to create strong demand. I'm getting asked a lot, "What does this mean for The Andersons?" It's actually positive in three different areas for us. An RVO somewhere north of 4.6 increases demand for our feedstock business, our renewable diesel feedstock business, which we've continued to perform well with. It raises the value of the DCO coming out of our ethanol plants. We've announced the expansion at the Port of Houston to add 22,000 tons of capacity for exports out of Houston of soybean meal. That's going to drive more meal production, which is going to drive meal quicker to export parity. We should benefit from that investment also.
The RVO, even though we don't produce renewable diesel, really has a big influence on The Andersons. We're excited about that.
Just to kind of frame up the veg oil trading desk that we have, I think it's a good example even of an asset-light profit center that we established three, four years ago now. Our ethanol plants produce about 140 million lbs of corn oil a year. The renewable diesel feedstock profit center that we have traded 1.5 billion lbs of RD feedstocks last year, and they have a target to get to 2 billion lbs. I think it was 1.5 billion-1.6 billion last year. On kind of an EBITDA basis, just to frame it, it's probably order of magnitude between 5%-10% of our renewables segment now and growing from that perspective. I think it's a nice opportunity and a good example of a sort of a fixed asset-light way to be nimble.
Absolutely. Just staying on that trading desk opportunity for a second, have you already started to see an acceleration in purchasing of feedstocks ahead of what is expected to be a May RVO announcement? Also, is there any other investment you need to make into that business? It's clearly very talent-heavy, but how are you thinking about it from a CapEx standpoint? Is it minimal, or do you think something bigger needs to happen?
Yeah. We have looked at a number of what I would call medium-sized investments in the renewable diesel feedstock. It's pretty easy, right? Storage, blending is what we would like to invest in. We've not been able to find one that really fits our criteria in geography. It's pretty easy to draw a conclusion that if you look at the footprint of where Skyland's at, they have a fuels business, they have tank farms, there could be an opportunity organically inside of that business. Orders of magnitude, I wouldn't expect us to spend more than $50 million in one of those transactions just because they don't cost that much.
Yeah. Getting back to your comment on East versus West basis, because I think this is very interesting and important to your trading opportunities for this year and next year, can you frame the impact that basis has across your business, East versus West, and the implications there if the crops come in favorably as expected?
Specific to the ethanol business?
Specific to, trade in ethanol, if you could kind of dissect it.
Basis levels on the trade side do not materially affect our results. What we like is volatility. We like seeing basis move $0.15-$0.20 in a 30-45 day period. That, excuse me, is generally advantageous for us. It is pretty easy math at the ethanol plants. For every penny that you have, you are $0.03 cents on the basis, right? I mean, we are trying to manage, as Brian mentioned, our inventory in terms of the results. There is also the potential for us to find merchandising opportunities in the East also around the assets like we are talking about. Yeah, the higher our basis is in relationship to the West is a direct correlation in what your earnings are going to be.
Okay. Your comment on the Port of Houston, very interesting investment opportunity, soybean meal export capabilities. What is the difference in market opportunity from selling domestically versus overseas for soybean meal? With all these crush plants coming online with the 45Z working out likely more favorably for soybean oil, how do you view the end demand versus future supply of soybean meal and just the opportunities there, both domestically and export?
If you want to use soybean meal exports of 18 million metric tons on a trailing 12-month, if the current plants that come online are running at capacity, you'll add an additional 2 million metric tons to an already very heavy soybean meal market in the U.S. Soybean meal demand, it will compete with DDGs, but the demand growth in the U.S. is 1%-2%. We've kind of hit all those markets. The opportunity for us, we don't have a big U.S. soybean meal business because we're not a crusher. It gives us the opportunity to supply exports to our current customers that buy wheat from us out of Houston. It'll give us the opportunity to build some grocery boats to go to Latin America. It really will differentiate the Port of Houston in actually doubling our total capacity once we're online in 2026.
Along those lines with your internal investments, how robust is the current internal growth project pipeline? What is the right level of CapEx for the business in 2025 and 2026? What types of returns would you anticipate over what timeframe for those?
Yeah. I would say the pipeline is robust. Bill just talked about Houston. That's a project that's about a $70 million investment that we expect to be completed by, call it second quarter of 2026. There's a number of other projects that we have going directly with CPG companies and other large global companies where we're doing some sort of, it could be corn cleaning, it could be some sort of light processing. Order of magnitude, we expect this year's CapEx to be in the range of $200 million. That is up from, call it $150 million-$175 million the past few years.
I would say if we think about 2026, it'd probably be somewhere in that same zip code because there are some things we think about even in our ethanol plants for whether it be enhancing efficiency and additional yield or even potentially looking at sequestration projects and the like. On returns, I would say they can be, there's a wide range, but I would say generally speaking, I'd call it low to mid-teens.
Okay. How big of a role does M&A play in your growth strategy given your under-levered balance sheet, which is well below your stated target of 2.5x ? Is this a good environment for acquisitions? Are you looking to do more triples than singles or doubles now?
Yeah. I would say we've seen the environment really improve. Our pipeline's robust. It's just a typical stage gate process where projects will run through there. I would say valuations the past few years have been a challenge where people were still expecting too high of a multiple, and we are seeing that come down a little bit. I think given the strength of our balance sheet and given sort of the ag environment, there could be things that come to market that could be more opportunistic for us. With regard to size, yeah, I would say more doubles and triples relative to singles. If we think about the Skyland investment, we'd probably put that in the double-type category. We'd love to do doubles and triples and some of those investments, call it in the $100 million-$200 million range where they make sense.
We have to stay disciplined and be responsible. You can really do a lot of damage by overpaying for acquisitions. It is really about staying disciplined.
I want to ask about home runs too, but I don't want to get too greedy. Does using equity make sense in a deal for you guys, especially if there is a home run opportunity? I mean, you have over $200 million in cash on the balance sheet. We spoke about your leverage. I mean, how are you thinking about the financing side of some of these opportunities moving forward?
I mean, to your point, I mean, look, we'd love to do a home run type deal. If we could do another Lansing type deal, that'd be great. That'd be another home run. But they're few and far between, and then you get into the valuation question. If we found the right deal that was close to our core that really fit with our strategy, would we consider using equity? I think for the right deal, yes, but it all depends on the timing of that deal and the overall market dynamics. With regard to leverage, yeah, I mean, we've set our target is to be below 2.5x long-term debt to EBITDA. We're about 1.8x currently. Arguably we're a little bit under-levered, but given the market backdrop and dynamic, I think it's a good place for us to be.
The equity piece, as Brian was saying, would have to be tied to the right deal.
Right. You guys used equity with Lansing, right?
Yep.
Yep.
We did.
That was the right deal.
Yep.
Okay. So then what about share repo? Is that a consideration given your float and kind of?
Yeah.
How do you think about that?
Yeah. It's a good question. It's a fair question. We have a $100 million share repurchase authorization that was approved by our board last August. I would say the short answer is yes, we plan to use that share repurchase authorization, but it's going to be done in a balanced approach. When we think about it, you're right. Float is a challenge for us. We're fairly thinly traded. When you look at the concentration, even with some of the funds that are more passive in nature, it's sort of a balancing act. The other thing that we run into from time to time is depending on what deal flow is like in our pipeline, there are times where the window is closed and we are not able to be as active from a share repurchase perspective.
Yeah, it's one of the things in our toolkit we plan to use.
Okay. All right. Just to tie a bow on this discussion, what are some of the key milestones that The Andersons investors should be focused on through the balance of the year? What should we be keyed in on as key events? Sometimes it is very fluid, like you mentioned with the basis and trading opportunities. Just how are you thinking about the balance of the year? You put out that $475 million target. You were right around $400 million in EBITDA for four years straight. Clearly, if the right environment presents itself, you can really flex your muscles. What should we be looking for?
Specific items, maybe just using the calendar, is obviously we have to finish up getting the corn in. We're going to be well north of 70%, probably 75% by the end of this week, 72%. That has went well. Fertilizer has went well. Monitor the growing season. If we end up at 96 million acres, that should be good for The Andersons. We have a lot of space now, just under 300 million bushels of total capacity. That, coupled with what appears to be a good wheat harvest that's coming at us, would be things I'd look at. I'd also pay attention to the current proposed legislation because, as you commented, there are a lot of positives for our business model in that current legislation. How or when it gets passed, we will be able to take advantage of it very quickly.
Whether it's the indirect land use charge, whether it's extension of the 45Z, we do have our test well as has been completed. We're very close to filing our permit in Climbers, Indiana, for carbon sequestration. We've continued to move down the road in finding opportunities. That would be the things I would monitor from the outside if I were looking at The Andersons.
Great. That's it from my end. Is there any other points you want to add?
I mean, I would say, look, it continues to be an exciting time. We talked at the beginning about how the company has transformed. It went from a pretty diversified company with four or five distinct segments. Now we're really a pure-play North American ag company. I think something else that we haven't talked a lot about is how we continue to try to optimize our portfolio. As Bill talked about having two segments with agribusiness and renewables, bringing fertilizer and trade together, there's a lot of efficiencies and synergies, both from a commercial perspective, but also from a back-office enterprise function perspective. There's a lot of opportunities there. We're also looking at continuing to help address where there's some profit centers that might be underperforming and continuing to prune where it makes sense, but also gain efficiencies across our back-office functions as well.
I think there's a lot of exciting things going on. We talked about the strength of the balance sheet. Being in a position with this strong of a balance sheet at this point in the cycle could create a lot of great opportunities for our company.
Thank you so much for being here.
Thanks.