Otter Tail Corp Q1 FY2025 earnings call

• Electric platform: North Dakota rate case completed with final rates implemented in March. Anticipate South Dakota rate case filing mid-2025 and evaluate Minnesota rate case. Affirmed Electric segment capital investment and rate base growth projections through 2029. Advanced metering infrastructure nearly complete, wind repowering project progressing, solar projects in development.
• Manufacturing platform: BTD and T.O. Plastics face end market headwinds, but some stabilization in construction and lawn and garden markets. Monitor low-priced import competition and economic environment. Reshoring manufacturing operations and tariff policy changes could aid long-term growth. Plastics segment pricing declined but volumes increased due to capacity expansion and lower resin costs.

Electric segment earnings increased 10% in Q1, driven by favorable weather, increased sales volumes, and rider revenues from capital investments. Manufacturing segment earnings decreased $0.09 per share primarily due to lower sales volumes, increased production costs, and product pricing pressures. Plastics segment produced diluted earnings per share of $1.03 in Q1 2025, a 7% decrease from Q1 2024, due to continued product price reduction but offset by a 13% increase in sales volumes and lower material costs. Electric segment contributed a certain revenue percentage, Manufacturing and Plastics also had their respective contributions.

• Affirmed 2025 diluted earnings per share guidance range of $5.68 to $6.08. Electric segment earnings expected to grow approximately 7%, while Plastics and Manufacturing segments are expected to decline. Target long-term earnings mix of 65% electric and 35% manufacturing by 2028, with Electric segment earnings per share growing in line with rate base growth of 9% and Manufacturing segment recovering from the down cycle.

• Tariff exposure on materials/components used in Electric segment capital investments, which could impact timing or amount of recovery on investments. Uncertainty around tax policy changes, including possible partial repeal of IRA and potential modification of tax credit transferability. End market demand changes affecting Manufacturing and Plastics segments, such as softening in recreational vehicle, agriculture, and certain other markets.

Q: Hi. Good morning. Just wanted to maybe start with the Plastics. I’m just kind of curious what kind of volumes you have assumed in the guidance for this year. Maybe you can help us think about this directionally? And I guess, looking at Slide 27 here, right, so if you have – if you expect to have an inflationary increase in input costs, why would you simultaneously expect the continued product price declines, right? So wouldn’t those factors be kind of like offsetting each other? The inflationary pressures in the industry would – could they be supportive of pricing? And then also, is it – are you seeing yet any impact from some of your competitors – pipe competitors expanding capacity in your core regions? Or is it too early to kind of see that?

A: Todd Wahlund: In terms of the volume for this year, it’s lower single digits increase in our volume. We had very strong volumes in Q1 increase over 2024. We expect to have strong increases in the second quarter as well, but our guidance reflects a potential downturn in the second half of the year just as we’re looking at housing starts and builder sentiment, we see that there is some risk in the second half of the year. So we factored that into our guidance, but we still expect to be wi based on that potential downturn in the second half of the year. In terms of the inflationary increases. So basically, our core assumption here on our normal Plastics earnings is that we revert back to the same gross margin percentages that we had pre-2021. So, at some point, those converge, and we expect to see that in that end of 2027 time frame. So as costs are increasing, prices are decreasing. Once we get to that gross margin percentage level, we expect that’s when we’ll see the new normal play out. So, we are factoring in basically the continued about 12% decrease in prices per year that we’ve been seeing since September of 2022. Chuck MacFarlane: Sophie, we don’t have complete visibility into that, but we anticipate that competitors are doing similar to us in adding incremental line capacity at various sites or debottlenecking the sites that they have. To our knowledge, we’re not seeing new plants or that type of thing. But we anticipate that there are others replacing equipment, upgrading equipment, adding capacity, very similar to what we would be doing.