Ladies and gentlemen, thank you for standing by, and welcome to the Otter Tail Corporation 2020 First Quarter Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to the speakers today from Otter Tail Corporation. Thank you. Please go ahead.

Good morning, everyone, and welcome to our call. My name is Loren Hanson, and I manage Otter Tail's Investor Relations area. Last night we announced our first quarter 2020 earnings results. Our complete earnings release and slides accompanying this call are available at our website at ottertail.com. A recording of the call will be available on our website later today. With me on the call today are Chuck MacFarlane, Otter Tail Corporation's President and CEO, and Kevin Moug, Otter Tail Corporation's Senior Vice President and Chief Financial Officer. Before we begin, I want to remind you that we will be making forward-looking statements during this call. As noted on Slide 2, these statements represent our current judgment or opinion of what the future holds. They are subject to risks and uncertainties that may cause actual results to differ materially, so please be advised about placing undue reliance on any of these statements. Our forward-looking statements are described in more detail in our filings with the Securities and Exchange Commission, which we encourage you to review. Otter Tail Corporation disclaims any duty to update or revise our forward-looking statements due to new information, future events, developments or otherwise. For opening remarks, I will now turn the call over to Otter Tail Corporation's President and CEO, Mr. Chuck MacFarlane.

Thank you, Loren. Good morning, everyone. Welcome to our first quarter 2020 earnings call. Before I begin my prepared remarks, I would like to recognize all those who have been impacted by COVID-19, and extra thanks to the medical personnel and first responders serving our communities. Otter Tail Corporation is supporting all the locations we serve with collective efforts to mitigate the spread of COVID-19. Our business continuity plans put the health and safety of our employees and our communities at the forefront and are designed to help ensure continued electric reliability and operational excellence across our companies. Our press release outlines actions we've taken to date. Currently, 21% of our employees are working remotely, with only 12 confirmed cases of COVID-19 across the corporation. We will remain diligent in our precautionary health and safety efforts. We continue to monitor this dynamic event and how it's going to impact the economy and our electric and manufacturing platforms. While all of our operating companies have been deemed critical infrastructure businesses, some of our locations have been impacted more than others. Please refer to Slide 7 as I begin my comments. We earned $0.60 a share this quarter compared with $0.66 a share for the first quarter of 2019. The primary reasons for the decline are electric segment earnings declined $0.07, primarily due to $0.09 of unfavorable weather. Manufacturing segment earnings were flat quarter-over-quarter. However, we estimate the impact on the last half of March from COVID-19 reduced our earnings per share by $0.01. The plastic segment earnings increased $0.05, primarily due to strong volumes, and our corporate costs were negatively impacted by $0.04, primarily due to losses on our investments related to corporate-owned life insurance and investments held at our captive insurance company associated with the volatile equity markets in March.…

Thanks, Chuck, and good morning, everyone. Let me start with an overview of our first quarter results, and please refer to Slide 26 as I discuss the quarter. Our electric segment net earnings decreased $2.5 million quarter-over-quarter. Key drivers of this were a $5 million decrease in retail revenues due to milder weather between the quarters, as evidenced by a 19.6% decrease in heating degree days. Weather negatively impacted earnings by $0.09 a share compared to the first quarter of 2019. There was a $1 million decrease in retail revenue in South Dakota related to the first quarter 2019 reversal of a refund provision recorded in 2018 as part of the 2017 Tax Cuts and Jobs Act. The South Dakota rate case settlement agreement eliminated the refund requirement. The decrease in retail revenues were partially offset by increased Minnesota and North Dakota renewable resource rider revenues related to the Merricourt Wind Energy Center project, increased retail revenues from increased kilowatt-hour sales to industrial and other customers. This is apart from the weather-related decrease in retail kilowatt-hour sales, increased revenues from the generation cost recovery rider in North Dakota in conjunction with the construction of Astoria Station and increased revenues from the South Dakota phase-in rider in conjunction with the Astoria Station and Merricourt projects. Other items impacting electric segment earnings were increased O&M expenses related to increased labor and employee benefit-related costs and higher depreciation expense associated with rate base additions in 2019 and lower income tax expense. Net earnings for the manufacturing segment were flat quarter-over-quarter. Key items impacting the results were at BTD, revenues decreased $10.2 million due to a $9.8 million decline in part sales to its major end markets. $7.1 million in the decreased sales relates to lower material costs passed on to the customer, with…

[Operator Instructions]. Your first question comes from the line of Chris Ellinghaus with Siebert Williams.

Just a couple of things. As you were describing the guidance, so you're expecting some sort of gradual improvement in Q3 and Q4. Kevin, are you not anticipating any kind of impacts from the beginning of flu season in the fourth quarter?

Chris, our improvements in Q3 and Q4 are expected in large part in manufacturing for BTD as it relates to what we're seeing from our customers and what their announced -- initially, what their announced temporary plant shutdowns were and now what we're seeing them announce as they bring back their plants up -- not necessarily to full production, but they're starting to bring them back up online. And so as we're looking out, we know Q2 is going to be a tough quarter because of the temporary plant shutdowns that were starting to be implemented in the last part of March and through April or early May. And then as they're bringing their plants up, we're basing our assumptions based on, one, the economists' view of a recovery in the third and fourth quarter and then based on what we're seeing from our customers. Typically, I would say our fourth quarter still will be down based on our assumptions and what we're seeing from the economy. We're not assuming a full recovery back to where we were. It's just a bounce back from where the second quarter was, or is expected to be, excuse me.

Okay, so it's some improvement over where you think the second quarter level is, but not normal.

Right.

Okay. The idea of a filing of a Minnesota case in November -- have you spoken to the commission to see what their attitude is towards a filing at that sort of time in the economy?

We are in weekly communication with all of our commissions on COVID-related items including reliability, but also discussions on bad debt and lost late fees, no disconnects -- those types of issues. And our current plan is, and we have not received counter feedback, is to continue to plan on filing in Minnesota in November of this year.

Okay, yes, I just wanted to see if you had gotten any kind of adverse response on that concept. You talk about, in the plastic segment, some lower volumes and some potential margin contraction. Is that sort of level that you're thinking about, is that looking at your guidance with really no change to the plastics? Is that offset by first quarter? Or can you just give us a little more color on -- the way you describe it seems a little more negative than is reflected in the guidance numbers.

We do have roughly baked in here, there's $0.05 of uplift from the strong first quarter results. And then we're seeing through these reduced volumes and potential pressures on margins, I guess it would be another $0.05, then, of reduction to bring us back to the midpoint of the range.

Okay, so the net-net, it's neutral based on the rest of the year offsetting the first quarter?

Right.

Okay. This is maybe outside the scope of today, but what is your general thought process on how the COVID-19 pandemic slips into 2021? Are you anticipating 2021 having adverse impacts as well at this point?

Chris, as we look to 2021, based on the current assumptions we have in place, we certainly would expect that, particularly in the manufacturing side, that there isn't going to -- we're not going to see an immediate bounce back from 2020 to where we would have probably originally thought 2021 was going to be. We would see a recovery, but not back to where we were. We have good rate base investments in place at the utility. I think there's going to be -- our current view would be in manufacturing, there's impacts from COVID into 2021 that we'll continue to monitor, just as it won't come back as quickly as we would have expected, but that's kind of what our current views would be right now.

Your next question comes from the line of Brian Russo with Sidoti.

First of all, thank you for the detailed assumptions and updated guidance. Just on the BTD sales degradation, are you seeing double-digit percentage decreases through the end of this year and/or any margin assumptions you could provide?

The impact from our original budget guidance in terms of revenues, we're seeing a 15% reduction from the original guidance that we came out with in February as it related to BTD to what we now have baked in for our updated guidance here. And that is across all of our end markets that we're seeing that, which has been based on, as I mentioned earlier, these temporary plant shutdowns that we've been monitoring across our entire customer footprint for BTD. And then, of course, in addition to that, we are seeing continued pressure on scrap pricing and the impact there. And then just the fact that the plants aren't as busy, we're seeing a negative impact from applied labor and overhead as well. We were able to implement roughly $0.07 of cost mitigation efforts in the manufacturing segment to help compensate for the COVID items and the lower scrap, which gets us to that $0.15 reduction from midpoint to midpoint.

Okay, so it's a $0.15 per share reduction from the midpoint. That wasn't 15% decrease in volumes?

Well, there's two numbers that I use. They both happen to be 15. One was a 15% reduction in revenue, largely driven at BTD from what we had in the original plans to today. And then the impact of COVID in the manufacturing segment is a net $0.15 a share from the midpoint to the midpoint.

Got it, okay. And just onto the electric side, it looks like, based on your guidance and the assumptions that you've provided, you're able to offset pretty much all of the COVID impacts -- related sales degradation and any incremental bad debt expense, et cetera. Are those O&M cuts sustainable post-2020?

They're made up of -- the utility normally does annual wage increases in April. Those have been frozen at last year's number for the non-union employees at this point. And we have taken a fairly significant reduction in outside contractor and consultant costs, some of which are line clearance. So we would anticipate that a lot of these costs would have to be put back in, in 2021.

Okay, got it. And you mentioned on the ATM of $0.04 as if that's incremental to your corporate expense outlook. But I thought that ATM of $40 million to $45 million was already in place and expected throughout 2020. Is it just a reflection of the decline in stock price, or am I missing something there?

No, that was all baked into our original guidance; you're correct. And we're just reaffirming that that's still in there. It's nothing new. It's just an affirmation of what the expected impact -- I mean, we said in the first, in the February call, that the guidance anticipated $0.05 of dilution. This is just an update to that. The dilution is now, instead of $0.05, we expect it to be about $0.04. But it's not in addition to what we were doing.

Okay, got it. Okay, understood. And then just on the Merricourt commentary earlier, it's still on schedule for yearend 2020, but it might slip into 2021. And the way to put that in context in terms of earnings, it just means that the recovery under the rider mechanisms just get stretched out over a longer period or window of time until that's operational?

Yes, Brian. The extension, you are correct. If the capital investment is delayed, it runs through our rider, sort of as an automatic tracker mechanism on the investment. We still anticipate that the project will be completed before the end of the year, and it will be PTC qualified mid-fourth quarter. But you are correct. The earnings impact would be a delay in capital investment flowing through a rider that reduces revenue.

All right. Then just a -- what's really the downside risk in the manufacturing? Is it extended stay-at-home provisions and nonessential business closures extended past what you've assumed in your guidance? Or is it a prolonged recession post lifting of the various provisions that we have across the country?

Yes, Brian, it could be a combination of both. To the extent that the customers' temporary plant shutdowns that have occurred and now, as they start to bring those back up, to the extent that there's an event that causes those to go back into shutdown mode, there would be downside risk to our forecast. And then, of course, if there is ultimately a prolonged recession, that would cause us to have to make adjustments as well.

Okay, and then just on an unrelated topic, I'm just curious. With the plastic subsidiaries that you have, have you pursued the idea of providing products and/or supplies to the health industry response efforts in terms of PPE or anything like that? Or that's just totally way off?

Our T.O. Plastics, our thermal forming plastics company, is making face shields for PPE for hospitals and other places, just normal, other plant production. So we are doing that already.

Maybe just to add to your earlier question, I think that's -- you see that we have a $0.09 range in our guidance for the manufacturing segment, which is clearly wider than the other segments and the corporate cost center. And that's, as we look at that segment, we certainly have recognized there is risk here to the plan in terms of where we're at and what potential things could still create downside risk. So we've tried to reflect that in our current guidance range. But to the extent, based on our current assumptions as we've talked about, but to the extent that we did see changes in those assumptions driven through customers having extended plant shutdowns or those types of things or an extended recession, that could certainly impact that guidance.

Your next question comes from the line of Sophie Karp with KeyBanc.

Can you guys maybe give us some color on how your volumes are shaping up across different customer classes, and also the way, maybe, how your rate structure is set up? Are you seeing the potential to offset some of the volume loss to C&I customers to residential? Or is it just not feasible in your service territory?

I'll give you a couple of things. April, just for April sales, and we really viewed that the majority of the -- we did not see significant electric impacts in the last half of March. But for April, and our residential, our commercial and our industrial are effectively -- you see on Page 14 of the presentation -- really a third residential, a third commercial, a third industrial. We knew that our residential sales for April were up approximately 3%, commercial was down 5% and industrial was down 15%. And within industrial, I would comment that a majority of that are components of oil pumping and ethanol production, which are both impacted by the reduction in driving and petroleum usage. If you look out for a full year, we anticipate that overall, residential will be up 0.5% over what we had budgeted, small commercial will be down 3% to 5% over 2020 and industrial will be down in the 10% to 12% range, with much smaller margins on the industrial load.

[Operator Instructions]. There are currently no other questions. I would like to turn the call back to the company CEO, Chuck MacFarlane, for closing remarks.

Thank you for your questions and your interest in Otter Tail Corporation. While our short-term focus has shifted to mitigation efforts of COVID-19 related impacts, our long-term focus remains on executing our growth strategies that are expected to increase shareholder value. For the utility, our strategy is to continue to invest in rate base growth opportunities. The utility is complemented by well-run strategic manufacturing and plastic pipe businesses, which provide organic growth from new products and services, market expansion and increased efficiencies. In light of the recent COVID-19 outbreak and uncertainty regarding the extent and duration of efforts to mitigate the transmission of the virus, we are revising our 2020 diluted earnings per share guidance to be in the range of $2.00 to $2.25 from the previous guidance of $2.20 to $2.37. Thank you for joining our call. We appreciate your interest in Otter Tail Corporation and look forward to speaking with you next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.