The Andersons, Inc.

Good morning, and welcome to the Anderson's fourth quarter 2022 earnings conference call. All participants will be in a listen-only mode today. And should you need any assistance during the call, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw a question, please press star, then two. Please note that this event is being recorded today. I would now like to turn the conference over to Mike Holter, Vice President, Corporate Controller, and Investor Relations. Please go ahead, sir.

Thanks, Joe. Good morning, everyone, and thank you for joining us for the Anderson's Fourth Quarter Earnings Call. We have provided a slide presentation that will enhance today's discussion. If you are viewing this presentation on our 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 investor's page of our website at andersonsinc.com shortly. Please direct your attention to the disclosure statement on slide two of the presentation, as well as the disclaimers in the press release related to forward-looking statements. Certain information discussed today constitutes forward-looking statements that reflect the company's current views with respect to future events, financial performance, and industry conditions. These forward-looking statements are subject to various risks and uncertainties. Actual results could differ materially as a result of many factors which are described in the company's reports on file with the SEC. We encourage you to review these factors. This presentation and today's prepared remarks contain non-GAAP financial measures. Reconciliations of non-GAAP measures to the most directly comparable GAAP financial measure are included within the appendix of this presentation. On the call with me today are Pat Bowe, President and Chief Executive Officer, and Brian Valentine, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will be happy to take your questions. I will now turn the call over to Pat.

Thanks, Mike, and good morning, everyone. Thank you for your interest in the Andersons and for joining this call. We're excited to review our overall operating results for the fourth quarter. which capped a record year for us. As we noted in yesterday's earnings release, strong ag fundamentals existed in 2022, and our team's performance has once again been exceptional. We ended with full-year record earnings and adjusted EBITDA from continuing operations of $412 million. As you know, we previously set aggressive targets for EBITDA growth, and I'm pleased to say that we exceeded our 2025 goal of $375 to $400 million of EBITDA three years early. Later in this call, I'll discuss updated targets for 2025. The trade business posted a record fourth quarter, which also capped a record year for the segment. Our fourth quarter results were led by improved performance across our asset footprint with rising basis values and storage income. Merchandising results were also very strong and benefited from our attention to customer needs and ability to source grain for regions and countries with grain deficits. Our renewables business again generated solid profits but was not able to match last year's record quarter as industry crush margins weakened. Our low-carbon feedstock business continues to grow and make positive contributions to our renewables segment. Plant Nutrient experienced mixed results with buyers on the sidelines as market prices have declined for major ag fertilizers. We did have good engagement on our fall application and specialty liquids business. Manufactured product lines were also impacted by reduced consumer demand. I'm thrilled with a second consecutive year of very strong results. I'm very proud of our Andy team and their performance in optimizing results in an environment of strong ag fundamentals. I'm now going to turn things over to Brian to cover some key financial results. When he's finished, I'll be back to discuss our early outlook for 2023. Brian?

Thanks, Pat, and good morning, everyone. We're now turning to our fourth quarter and full year results on slide number five. In the fourth quarter of 2022, The company reported net income from continuing operations attributable to the Andersons of $15 million or 44 cents per diluted share and adjusted net income of $34 million or 98 cents per diluted share. This compares to adjusted net income from continuing operations attributable to the company of $39 million or $1.14 per diluted share in the fourth quarter of 2021. Adjusted pre-tax income attributable to the company of $50 million nearly matched a prior year fourth quarter record due to the sizable increase in the performance of trade. For the full year, gross profit increased to $684 million, up more than $90 million or 15% compared to 2021, on revenues of $17.3 billion. Adjusted EBITDA for the quarter was $104 million compared to $130 million in the fourth quarter of 2021. Full year adjusted EBITDA was $412 million, almost $60 million better than 2021 adjusted EBITDA and a second consecutive record. Now let's move to slide six to review our cash flows and liquidity. We generated fourth quarter cash from operations before working capital changes of $90 million in 2022 compared to $84 million in 2021. Full year cash from operations of $315 million is comparable to the prior year, which included $30 million of cash tax refunds. Our readily marketable inventory continues to exceed our outstanding short-term debt. While commodity prices are higher compared to 2021, inventories on hand are down. Short-term debt at year end is seasonally low due to timing of producer payments after harvest. Typically, our highest borrowings occur in the spring as a result of our seasonal businesses. We continue to have adequate liquidity amidst ongoing volatility and have strong support from our banks as they understand the key role that we play in the ag supply chain. Moving to slide seven, we continue to take a disciplined approach to capital spending and investments, which were $110 million for the year, about half of which related to maintenance capital. Our long-term debt to EBITDA remains well below our stated target of less than two and a half times. In addition to the previously mentioned capital spending, we closed on two separate bolt-on acquisitions during the quarter, Bridge Agri in trade and Moat Farm Services in plant nutrient. Both are performing well and integration is underway. We continue to evaluate growth projects in our pipeline, including additional M&A opportunities. We have a balance sheet that will support growth investments for those that meet our strategic and financial criteria. We continue to utilize our share repurchase program, executing over $5 million of share repurchases in the quarter. The total cash used for this program to date is over $14 million through January. Now we'll move on to review of each of our businesses, beginning with trade on slide eight. Trade reported pre-tax income of $27 million and adjusted pre-tax income of $52 million in the fourth quarter of 2022, compared to adjusted pre-tax income of $27 million in the same period of 2021. Fourth quarter 2022 adjusted pre-tax income excluded approximately $25 million of charges resulting from insured inventory damaged in a fire and an asset impairment. Our merchandising teams continue to execute well in these dynamic markets with gross profit increasing 30 percent and adjusted pre-tax income nearly doubling from the prior year. Increased elevation margins in our grain assets also improved significantly from the fourth quarter of 2021. Trade had adjusted EBITDA for the quarter of $72 million compared to adjusted EBITDA of $42 million in the fourth quarter of 2021. For the full year 2022, trade had record adjusted EBITDA of $199 million, which was up more than 30% compared to $151 million in 2021. Moving to slide nine, the renewable segment reported fourth quarter pre-tax income attributable to the company of $13 million compared to $27 million in 2021. Ethanol crush margins were substantially lower during the quarter, especially compared to the extreme highs in the fourth quarter of 2021. Continued strength in corn oil values and execution by our renewable diesel feedstock merchandising team helped offset the lower ethanol crush margins. Renewables had EBITDA of $36 million in the fourth quarter of 2022, compared to $78 million in the fourth quarter of 2021. For the full year, renewables generated record EBITDA of $180 million compared to $166 million in 2021. Turning to slide 10, the plant nutrient business reported fourth quarter pre-tax income of $2 million, a decrease from the record of $16 million generated in tight fertilizer markets during the fourth quarter of 2021. The business experienced lower margins in our agriculture products as fertilizer prices continued to drop dramatically during the quarter. Farmer income remains high, which supported higher margins in our specialty liquids products. However, volumes were lower in anticipation of further declines in fertilizer prices. Our manufactured lawn products business also experienced lower demand and some additional inventory write-downs, which we believe are now behind us. Plant Nutrients EBITDA for the quarter was $11 million, a decrease from $24 million in the fourth quarter of 2021. For the full year, Plant Nutrients had EBITDA of $73 million, which was comparable to 2021. And with that, I'll turn things back over to Pat for some comments about our outlook.

Thanks, Brian. Coming off a second consecutive record year We remain excited about our prospects for 2023. Ag fundamentals remain favorable, and we're well positioned to execute in this environment. We expect ongoing volatility in dynamic grain markets will continue to provide good merchandising opportunities. At this time, we expect higher US corn plantings, which is positive for all of our business segments. Yield challenges in the Western Corn Belt from the 2022 harvest will continue to influence markets well into the fall. We expect trade to continue to perform well and execute on these opportunities. Return of storage income to wheat and higher spring corn plantings should be positive for our eastern assets. Ethanol crush margins have been low to start the year. However, we believe that spring industry maintenance shutdowns and increases in driving miles may positively influence the second quarter. We're also making a number of investments in our plants to improve both the quality and yield of distiller's corn oil, a low carbon intensive input to the renewable diesel industry, and we continue to benefit from strong oil values. As renewable diesel production ramps up, we're well positioned to support plants through our numerous supply agreements on various feedstocks. Strong farmer income and increased corn plantings are expected to continue to drive demand for our fertilizer and specially liquid products. We believe that declining prices in this period prior to field work has kept buyers on the sidelines. We expect to see higher volumes in plant nutrient as we approach the spring planting season, but we'll likely see more normalized margins, lower than last year's peak. With these delays in purchasing, have an available product near key crop production areas in the eastern grain belt is an advantage. We continue to closely monitor risk in our core fertilizer positions as market prices have declined, but must also be ready to serve our customers when they need our products. We anticipate further growth in our specialty liquid fertilizer and industrial product lines. Next, we'll revisit our growth strategy as described on slide number 12. Our strategy remains to grow within and adjacent to our core grain and fertilizer verticals, as global demand for food, feed, and fuel is expected to grow. These areas include sustainable and carbon reduction opportunities. As mentioned in our earnings release, we have many projects under evaluation in our pipeline. We have proven our ability to execute new projects, but also exercise discipline while growing our company. We expect to continue to focus on these markets as we bring our unique ability to remain nimble and innovative across these verticals. Our balance sheet remains strong with capacity to fund growth, and our leadership is focused on delivering against our strategy. We're particularly excited about the renewable diesel feedstock market opportunities as we're well suited to provide inputs and services to refiners, merchandising third-party renewable feedstocks, and enhancing our own corn oil production processes. In addition to expanding organic fertilizer offerings, we're developing innovative new specialty products for consumers and growers of crops beyond traditional row crops, including biologicals and micronutrients. We will also consider M&A within our core areas of strength, including farm centers within our fertilizer footprint and product line extensions for our manufactured products. Returning now to slide 13, I want to provide an update regarding our progress against EBITDA goals. In late 2017, we established an EBITDA goal of $300 million by 2020. which was approximately double our 2017 result. Since that time, we increased our EBITDA target to 350 to $375 million by 23, and 375 to $400 million by 2025. Given our strong performance over the past two years, we've now exceeded these goals well ahead of schedule. As such, We are revising our 2025 EBITDA target up $100 million to $475 million, which will represent a compound annual growth rate of almost 20% from 2018 to 2025. I'll now provide you a little bit more detail on slide 14. So with this new target, we expect to maintain discipline in our approach to capital investment. keep our long-term debt to EBITDA ratio less than two and a half times, and continue to improve ROIC while continuing to optimize our portfolio. On this chart, you can see our historical EBITDA by business segment and where we expect to grow in each segment as we move forward, I'm sorry, as we move toward our $475 million goal in 2025. Because of the volatility in ag markets, this growth may not be linear. but overall fundamentals remain positive, and we're excited about our growth prospects. Our team is committed to providing exceptional service to our customers and will continue to make decisions that support steady growth and strong shareholder returns. I'll now turn the call back over to our moderator, Joe, and we'll be happy to take your questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw a question, please press star then two. At this time, we will pause just momentarily to assemble our roster. And our first question here will come from Ben Bienvenu with Stevens. Please go ahead.

Hey, thanks. Good morning, guys, and congrats on the quarter.

Thank you, Ben.

I want to ask Pat if you could, you talked a little bit in spots about how you expect things to evolve through the balance of this year with respect to, I think you talked a little bit about renewables, you talked about plant nutrient. Can you talk a little bit about the cadence of earnings as we move through this year and where you feel most versus least confident and maybe where your blind spots might be as you think about the full year EBITDA opportunity?

Sure, Ben. Yeah, good question. I think overall, as I mentioned, I think we, you know, our earnings are going to moderate some coming off the peak earnings of this past year with the, you know, commodity prices really soared in 22. As you well know, fertilizer prices are down almost 40, 50 percent from the peak of the time of the Ukraine war. So, you know, we don't have the environment we had with the high inflationary pressure on commodities that we had last year. Having said that, We still feel pretty confident about the original targets we put forward for 2023, which was the 350 to 375 million in EBITDA. We feel good about that. I think the weakness is in the early part of the ethanol cycle. So this first quarter, as you well know, board crush margins have been soft. Corn basis has come off a little bit, and we have pretty good feed values and oil values today. So we could see that reverse later in the year, and we're optimistic to see a turnaround in ethanol, but we're starting out a little softer maybe than we would have liked. The other point would be in the fertilizer markets. With the weakness in fertilizer prices, the farmer, as we mentioned, has sat on the sidelines as markets have come down quite a bit. We're right at that time of year right now. We're at 60 degrees here today, so hopefully we can start to get some decisions made by the growers and the wholesalers to get active to prepare for spring application season because it hasn't really engaged yet. So we're a little bit behind where we'd normally be. We're optimistic on volume with an expected increase in corn acres. In planting, we think we'll see a good volume of fertilizer production. So that's an area that we think will, like ethanol, start out a little weaker, but then may have a little stronger finish to volume later in the year. On the grain side, I think we haven't seen the Chinese come to the market as big as we did in previous years, but it's expected as they've opened up their economy a little more with COVID restrictions being lifted. But we're still remaining to see that. Having said that, we've got good wheat storage income. Expect a big suffered wheat crop, which is good for our eastern assets. And again, higher corn acres. So I think there's gonna be trading opportunities that can play out well for us later in the year. We'll probably have a slower start and hopefully a stronger finish to the year.

Okay, that makes sense. You know, I know an area of investment and growth for your business has been your renewables and feedstock capabilities around trading, sourcing, origination. Can you talk a little bit about, as we look forward, How much of that business for edification is volume dependent versus price dependent? And maybe any thoughts on, to start the year, you know, why that oil prices might have been a little bit softer? And would it be your expectation that we see things firm as we move through this year and we start to see incremental renewable diesel production come online?

Yeah, a very good point, Ben. So a couple points there. One, as you know, we set up a couple years ago the renewable diesel project. trading desk. We've been successful in originating feedstocks for our de-manufacturers in addition to our own corn oil production. It's an area we'd still like to grow. We've looked at a couple acquisitions there. We haven't done anything big at this time, but we'll still continue to look in that area because we think that it's going to be an area of good opportunities for us as a merchandiser as we go forward. And as you mentioned, I think on the plant startups, some are a So it's a question of when the RD startups are relative to the feedstock demand. So I think we are a little bit behind, which maybe has put some pressure on it. But as those, there's a couple of big ones coming online, which will drive demand back up for feedstocks. So maybe it's taking our breath a little bit on this very important journey on RD growth. And we do expect to see really strong demand at the end of this year and into the next year and the year after that for renewable diesel demand. So we're still very optimistic about that segment.

Okay, great. I want to think longer term, and I do want to ask about your new financial goals that you laid out here, but I want to talk a little bit theoretically longer term about sustainable aviation fuel, the extent to which you expect you'll participate in that, the likelihood of that as a meaningful opportunity to firm up industry S&D and maybe provide you guys with nice offtake? And what sort of partnership, if any, you might be interested in considering as you think about the future?

Yeah, it's another good question, Ben. So it's an area that we're quite excited about. We don't have anything to announce at this point. Sometimes with new technologies, Sometimes, at least personally, I don't want to be on the bleeding edge. I'd like to be a fast follower and be aligned with big players in those segments in the oil industry that's applied to the aviation industry. As you know, our ethanol business, we're partners with Marathon Petroleum, and we've benefited from that outstanding partnership for many years. We both look at opportunities optimistically for SAF in the future. We think this is going to be a key focus for both the government and the industry to look at looking at cleaner fuels for the aviation industry. We think that's going to happen. Exact timing and exact technologies still probably remain to be seen. And it's an area that we see ourselves participating in. We just don't have any specific announcements or partnerships to name at this time. But it's an area that's going to be very good for our industry. It's a thing, when I say our industry, for the renewables industry, and for agriculture in general. So, you know, we've been through a few of these over the years, whether it's the beginning days of ethanol that I was involved in many years ago, or now the beginning days of renewable diesel, the same will be true for sustainable aviation fuel. And we think that can be a nice new opportunity for ag processors to participate in and a nice benefit for the ethanol business. So it's a stay tuned. You hear lots of announcements and a lot of things that have been going on in the last couple years. We're still just continuing to build that segment out, and lots of things are still to be played out in its future.

Okay, fair enough. Brian, if I could ask about the CapEx budget. Can you help bucket out your spending for this year? And then to the extent you guys are spending on growth CapEx, what is a reasonable timeframe in which we should start to see some associated operating profit from those investments and the ramp of those projects?

Yeah, sure, Ben. I would say for 2023, I would bucket our ballpark CapEx spend in the range of $125 to $150 million. I would characterize, similar to how we have in the past, I would expect about half of that to be in the maintenance capital category and the rest growth. And I would expect, you know, we have a number of projects that have been in our backlog and pipeline, you know, kind of coming online over time. So I would say as you think about modeling those, as you get toward the, you know, the latter half of the year and then into 2024, starting to see those layering in and contributing in a positive way, similar to the ones that we've had in previous years.

If I could add on to that, Ben, you asked about, in a previous conference call, we talked about growth capex, and I used the baseball analogy of singles and doubles, and those being smaller to mid-sized acquisitions. Just wanted to highlight we closed on two in this past quarter. One is Moat Farm Services, a farm service center in our sweet spot here in Ohio-Indiana border, as well as Bridge Agri, which is a pet food ingredients business out in the west. As you remember previously, we purchased the company Capstone Ingredients in the southwest dairy markets. So these are these singles and doubles that have become immediately accretive. These acquisitions have already been integrated and are providing cash right away. So this is kind of bolt-ons that make a lot of sense for us. And we're optimistic with others in the pipeline that we'll be able to close on some of those in this coming year.

And Ben, just to clarify, any acquisitions and similar to these bolt-ons would be above and beyond the 125 to 150. So the 125 to 150 would be our CapEx for maintenance capital and growth capital investments in our facilities. And then M&A could be up on top of that.

Okay, great. Last one for me. Thinking about these new financial goals that you laid out, How much do you have to spend to get to that level of EBITDA? And then how much of it is dependent on just a continuation of tight S&B around all the markets in which you participate?

Yeah, I would say the way we're thinking about it right now is that kind of a balanced mix of organic growth and growth investments, whether they be internal or CapEx. So just kind of modeling those out, depending on which side of the side of the business those are in, you know, could kind of lead you to a number in that regard. I would say we also, as we look at it, Pat referenced singles and doubles. We continue to stay focused on maintaining our long-term debt to EBITDA, you know, two and a half times or below. And we have plenty of capacity within our existing capital structure, we believe, in our balance sheet to be able to fund the growth investments.

In that regard, Ben, we would estimate, if you want to call it 50-50, but as you know, those things are lumpy. And when something comes around, we said at our current debt ratio of 1.4 times, we have capacity to make a bigger deal if the right opportunity comes. But we want to keep it core to our verticals and in areas that make a lot of sense for us. But we do see opportunities for growth and let's just call it a balanced mix, as Brian said, over the next couple of years between our just growth that makes sense to our core businesses as we're putting capital to strengthen our grain elevators and fertilizer plants and ethanol plants, as well as new geographies or new product lines for us.

Okay, understood. Very good. Thanks so much for taking my question.

Thanks, Ben. Appreciate it.

Our next question will come from Eric Larson with Seaport Research Partners. Please go ahead.

Yeah, thanks, guys. Congratulations on a fantastic quarter and year. Well earned. So congrats. Thank you, Art. Appreciate it. So my first question, I know you guys don't guide quarterly. I'm not even asking for that. But can you just give us, Pat, just a little bit better flavor kind of on a cadence basis, maybe first half, second half? You know, you had... the onset of the Ukrainian war last year, you were able to take advantage of a massive increase quickly in board prices, locked in some really good numbers for later on in the year. How should we... Should we think that maybe it's less front-end loaded and more back-end loaded again? Or how... Give us a little, because we don't know how all those contracts actually came to fruition. Just give us a little help on how we should be modeling first half, second half.

Yeah, sure. No, exactly. It's interesting to think about it. We're coming up. I mean, it was the 20th when the war broke out of February one year ago, right? And initially, it was quite a concern about positions, et cetera, but really got the grain and fertilizer markets really rocketing, as you remember. I think we have the opposite situation this year with weak fertilizer markets. We talked about earlier, and you know this well, Eric, just not a lot of engagement so far. Ethanol crush has been very weak. So the first quarter is going to disappoint. I think we're going to be behind where we'd like to be. So we'll start out slow. Second quarter, I'm quite optimistic. So I think we'll see that engagement on fertilizer with plant shutdowns and hopefully increased driving miles. We could see ethanol margins turn around. And I think there's good opportunities for the grain trade business. We have, as you know, again, Eric, we have wheat income with wheat carries that look good, and we have a big wheat crop. So as we get into summer, wheat harvest will be good for us in the east. And I think there's going to be good merchandising opportunities when we talk about second, third quarter, still with inverted cash markets in grain. So wheat starts to first quarter, and then we'll see an improvement second, third quarter. Fourth quarter, we've got a whole other crop then, right? So we've got time to wait and see. But we still feel this could be a good year. Like we said back on the pace we said before, we said 350, 375 a couple years ago. We thought that would be a great number. So I think we'll be on pace to do something along the lines of that, just not at that peak pace of last year. That would take a really big change like in ethanol fundamentals or something to make that happen.

Okay, good. So diving a little further into that. So the one thing that you're going to have positive, again, until the new crop gets harvested this fall, we don't have any corn in the western corn belt. You had a great year in the eastern corn belt last year. Good harvest. You've got corn there. Are you getting corn? Are you shipping corn to the western corn belt to feed lots? Will that continue? And the basis in the west is just, off the charts. It's pretty amazing where some of these numbers are. Can you give us a little help on that?

Yeah, sure. Absolutely. One of our product lines we call Midwest Truck, and that's a very active business and a big business for us where we're moving trucks across the Midwest from points of surplus to points of deficit. So this is a lot into the Texas feedlot, Kansas, Oklahoma markets and moving Nebraska and then further eastern grain to these areas of shortfalls. That's been a very good business for us the last couple years. We expect that to continue. So that's on the positive side. Also on the positive side, our ethanol plants, our big plants located east are well-positioned with good corn basis, and we've been operating well from a run rate perspective. Our western plants, as you know, we have the Colwich, Kansas, newer plant, has really struggled because of high basis levels there that's been difficult And some of those premiums we anticipated originally for the California market just haven't been there. So that's been difficult for us, as well as Denison, Iowa, also has a little bit higher corn basis, but it's not quite as bad as Kansas. So we have had some of the negative side of that, although Kansas is a smaller plant. We have made up for that with our trading opportunities in grain. So that's a good place for us to be as far as – our Midwest merchandising business, and we continue to see that to be an active profit center in 23.

Okay, next question. So we had some really difficult export conditions on the Mississippi last fall, really dry conditions, low water levels. I think it restricted a bunch of exports. Now, we haven't seen China. We're all expecting China to come back in, but We're going to get that Mississippi replenished here pretty quickly. We've had a lot of snowfall. It's warming up. We had an inch and a half of rain up here yesterday. So this is going to end. Do you think that that low Mississippi, that getting the Mississippi back to a better, you know, water level for our barges, do you think that's going to help the exports in the next month or two? Or do we need to see, you know, Brazil kind of run more out of corn before it comes back to the U.S.? ?

No, you make a good point, Eric. I think we'll get back to more normal navigation on the Mississippi. I mean, those challenges with low water, the mid-miss last year, really kind of upset things. At the same time, as you remember, we had pretty poor service from the major railroads last year. So logistics was a difficult challenge last year. Interestingly enough, as the barge market has improved or navigation improved, so has rail logistics. So rail logistics has improved. in our industry here of late in the last couple months, which is a good thing for all of our customers. The big question is the demand. And as you know, Brazil crop conditions have improved. Chinese have approved Brazilian corn for imports. So maybe we're just late to see Chinese demand. Hopefully we will see it come back to the market to drive Gulf values. That's going to be very important for the US basis this year. We'd really like to see that export program kick back in. The other side, container freight is actually improved, too. So we might start to see some shipments by container. So the export markets, as far as the US is concerned, is ready to serve. We just need to see the customers show up.

OK. So are you still shipping a lot out of the Great Lakes right now?

Yes, it's been a really good year for Great Lakes shipment for us, and not frozen, which is unusual. We had, I think, almost record volumes led by soybeans. So we'll also have, like I said, a big year on wheat. The Ontario crop plantings were really good, as well as Michigan and Ohio. So it's going to be a big soft red wheat year for the lakes as far as potential delivery and economics for wheat. So there's a good situation for the Andersons when it comes to the lakes.

So another demand question here, and this relates to our U.S. livestock. We obviously know that the beef herd is down very substantially. It's the lowest in something like 50 or 60 years in terms of total numbers. It looks like we could actually give a look at hog production margins. We could actually maybe see hog production start to kick back up again. How do you look at overall... U.S. livestock demand for feed. It seems to be an area of controversy today.

Yeah. I'm by far an expert on livestock demand. But you nailed it there. We've seen a lot of cattle come off feed. Economics in the West have just been really difficult with high grain prices. But we do see it's going to be interesting to just follow the consumer, right? So is inflation, will it continue to trim demand or will people be Again, chicken and pork eaters as well as, you know, just basic hamburger barbecue season this year, will we see it come back at the retail level, thus driving demand? And we could see that, obviously, in the chicken and hog sector first. I think this drought in the west is going to have to be, you know, relieved in order to see cattle back on feed in a big way in the far west. So that's kind of a different fundamentals as far as it is the feeding demand. And, you know, these are cycles that take quite a while to turn. But long term, we're still in good position as an industry for cattle feeding in the United States. But I think we're going to see, you know, like you said, some some tight supplies here this year.

OK, so we're halfway through the month of February. Crop insurance prices are, you know, we're in price discovery for crop insurance for the farmers. So far, probably better than I would have thought, honestly. We've had pretty good grain prices this month so far, which means that you will have farmers trying to maximize yields next year. Your liquids should be strong. Farmers are going to have the income. Do you think that this could compare favorably year over year in your second quarter? I mean, you had a good... Your second and fourth quarters are obviously the ones that we really have to focus on. Obviously, third's getting more important, too. But how does all that stack up for your second quarter? Right.

Everything you said is totally true. In fact, we just had one of our big growers in Michigan come through town this morning, who I met for breakfast on his way to the big farm show in Louisville this year. And it was interesting to hear his input about his cash returns being, you know, the highest last year and spending on seed and inputs and how much more expensive they are, but still getting good returns per acre on that, all the things that you know. So they want to maximize yields. We think that's positive for liquid specialties. We think it's positive for volume. We're still concerned about margins because it's just a late, you know, remember last year prices were really skyrocketing at the time. There was a shortage of The river was out, as you said, and supplies were tight. So farmers were all concerned and wholesalers about getting volume. This year, that's not the concern. There's more of a pressure on prices. So I'm concerned a little bit about margins as we enter the spring season. I think volume could be up, though, on our ag wholesale business. The other thing that hurt us in the fourth quarter was a weak consumer business. So the consumer products in lawn and garden really just fell off a cliff. and left a lot of people with excess inventories. And we were a victim of that as a wholesale producer there. And we had to discontinue and eliminate some of the products we had in storage, which took some write downs on that in the quarter, which we don't like to do. Seeing that come back will probably be a slow return too. So we're kind of moderate on how quickly the fertilizer market is going to rebound. We do feel good about the volume. And once we get the grower to engage, We should have a really good volume side. Margins remain to be seen, Eric. So that's one I'm going to be cautious on. We're not hitting the panic, but we just don't think we'll be as good as last year. And it'll be hard to top last year's margins.

Yeah, okay. I mean, that makes sense. So look, there's a lot of concern out there about farmer income this year. And I've tried to kind of disseminate some of those fears. I mean, we're not going to have the government support that we had last year. farmer returns are going to be down. But what people, I think, forget is that we're still going to generate, let's say, $120 of profit per acre. That's still mounds and steps above what average income is for us on the farm. So the farmers are going to have money this year, as we see it right now, obviously. I mean, things could change, as you know, and they can change quickly. But It should be a really good farmer income year, again, and well above average, even though it'll be down, and down pretty substantially in some cases year over year. But with all that being said, Pat, you know, what would be your – you've already highlighted some of your top concerns, fertilizer margins. What else, in terms of a headwind – that we should or headwinds that we should keep an eye on? What are the top three or four concerns?

I think let's start with the positive side. As I mentioned, we have high farmer income, as you just talked about. We've had high commodity prices. We still have a tight global commodity backdrop that keeps our business pretty excited. And this trend is continuing because, unfortunately, on the heels of the extended Ukraine war, Brazil production has gotten better. They've gotten good rains. Their production should be better. It's a little bigger crop. Waiting to see what's going to happen with China on demand. So we'll watch that, what's happening there. And near-term ethanol has been a little weaker than it was a year ago. The backdrop, though, is still pretty positive. This renewable diesel demand growth is a big impact to our industry. And that's going to be helpful. I think we still see global exports as attractive on a broad scale. And we still have our customers on both ends, on the food and feed and fuel side, still very strong. So in general, I think you've heard from others in our industry already, we feel the overall trend continues to be tight and optimistic, but just not at the fervor pace we had last year where we started out so strong.

Okay. One final question. Wheat has generally been a big... a big merchandising crop for you guys, particularly spring, particularly the soft wheat varieties. How did your wheat business do last year, and how should we look at wheat this year? Do you have much in storage? Are the plantings looking good, favorable for you in the eastern Corn Belt? Give us a quick rundown on how we should look at wheat.

Yeah, good good point circuit. I don't know the exact numbers off top my head, but your answer is just that we have strong wheat volumes and storage higher than we had a year ago. We have wider carries on the wheat board than we did a year ago. We have higher plantings that we did a year ago and looks to be crop conditions so far in our draw area on soft red wheat, which is Ontario Province in Canada as well as Michigan and Ohio all look to be in good shape and no big winter kill. So we're expecting a good soft red wheat production. And with carries in the market, we will have a higher wheat income, period. U.S. wheat isn't really, especially soft wheat, isn't factoring into the global export grid. Russia is still dominating the export trade. We still participate in a global export trade that we're involved in with wheat in all parts of the world. And hopefully we'll have wheat exports out of the U.S. and hard wheat out of Texas Gulf in good shape that can help our overall wheat program this year. So bottom line, we're bullish on wheat, even though wheat prices are relatively, you know, a little bit calmer than when it comes to corn or soybeans. It's going to be a good income source for Andy.

Okay, so one final question in for Brian. Brian, you said in your prepared comments, RMI is higher than all of your short-term debt. You guys got a great balance sheet here. The last few years have really liquefied you guys dramatically. So prioritize in front of, for me, what you're going to do with the balance sheet. Obviously, some bolt-ons. You've had some small share buybacks. You've got dividends. I mean, what's your priority for all the cash that you're generating right now?

Yeah, I would say it continues with the balanced approach. I would say our first preference would be to invest in good, solid growth projects and bolt-on acquisitions that will help us continue to make good progress toward that $475 million goal by 2025. At the same time, you just said it, we have a share repurchase program that we've started to execute under, and I would expect us to continue to to utilize that program as makes sense. We've paid a dividend now for probably, I don't know, as long as the company has been public and over 100 consecutive quarters, I would expect us to continue to just take a, call it a very logical approach to that and wouldn't anticipate any kind of big special dividend or anything like that. But I would say a balanced approach that enables us to hopefully prioritize good, solid growth projects and returns, but with some balanced return to shareholders.

All right, gentlemen. Thank you much. I'll look forward to a follow-up call later. Talk to you soon.

Thank you, Eric. With no remaining questions, this will conclude our question and answer session. I would like to turn the conference back over to Mike Holton for any closing remarks.

Thanks, Joe. We want to thank you all for joining us this morning. Our next earnings conference call is scheduled for Wednesday, May 3, 2023, at 11 a.m. Eastern Time, when we will review our first quarter results. As always, thank you for your interest in the Andersons, and we look forward to speaking with you again soon.

The conference is now concluded. Thank you very much for attending today's presentation. You may now disconnect your