The Andersons Inc., a name synonymous with North American agriculture, has been quietly building a resilient and diversified portfolio. While recent earnings calls have focused on weathering shifts in the agricultural cycle, a closer look at the Q1 2024 transcript reveals a hidden gem: the company's strategic positioning for a potential future boom in the Sustainable Aviation Fuel (SAF) market.

The Andersons, a family-owned business for over 75 years, began with a single grain elevator in Maumee, Ohio. Today, this publicly traded company boasts over 50 profit centers across North America, strategically navigating the intricate world of food, feed, and fuel. But it's their commitment to ethanol, particularly its potential for SAF production, that hints at a game-changing strategy.

The transcript reveals a palpable excitement around recent government initiatives supporting regenerative agriculture and SAF. The Andersons are laser-focused on lowering the carbon intensity (CI) of their ethanol production, a critical factor in qualifying for the federal 45Z tax credit for carbon capture and storage (CCUS). This credit, alongside the potential for unbundling of regenerative agriculture practices within the 45Z program, could significantly enhance the economics of carbon capture.

The company has been actively pursuing a multi-pronged approach to CI reduction. They're not just investing in CCUS technology for their three Eastern ethanol plants, but also exploring combined heat and power (CHP) generation projects to further boost efficiency and reduce CI scores. These efforts, coupled with farmer programs encouraging low-carbon corn cultivation, signal a long-term vision that goes beyond short-term market fluctuations.

The transcript indicates a strategic capital expenditure allocation of $150 million to $175 million in 2024, with an even split between maintenance and growth projects. Notably, these figures include allocations for CCUS technology at the ethanol plants, setting the stage for potential breakthroughs in 2025 and beyond.

Financial Performance and Growth Targets

Now, let's look at the numbers. The Andersons set a 2025 run-rate EBITDA target of $475 million, a goal achievable only with a combination of organic growth and strategic acquisitions. Considering their trailing 12-month adjusted EBITDA of $401 million, the company needs to bridge a gap of approximately $74 million.

Reference: https://seekingalpha.com/symbol/ANDE

SAF Market Potential and The Andersons' Positioning

Here's where the hypothesis gets interesting. If the SAF market takes flight, driven by government incentives and growing demand for low-carbon fuels, The Andersons' strategic positioning could unlock significant value. Their large, efficient ethanol plants with favorable CCUS geology and proactive CI reduction strategies could make them a prime supplier in this nascent market.

Assuming a conservative 10% margin on SAF production (based on industry projections), The Andersons would need to produce and sell approximately 740 million gallons of SAF annually to achieve their EBITDA target. While this number may seem daunting, consider the potential market size. The International Air Transport Association (IATA) has set an ambitious goal of achieving net-zero carbon emissions by 2050, relying heavily on SAF to achieve this target.

EBITDA Growth Projections with SAF

The following chart shows the potential EBITDA growth if The Andersons successfully capture a portion of the SAF market.

The Andersons are not just passively waiting for this market to mature. They're actively investing in building the infrastructure and securing the feedstock necessary to become a key player. Their existing expertise in ethanol production, corn oil extraction, and renewable diesel feedstock merchandising gives them a unique competitive edge.

While The Andersons' Q1 2024 performance reflects a transitional agricultural market, their strategic commitment to low-carbon ethanol and the SAF market might just be the hidden catalyst for a future earnings explosion. As the world shifts towards sustainable aviation, this agricultural giant, rooted in tradition, may be poised to soar to new heights.

"Fun Fact: The Andersons' three Eastern ethanol plants are strategically located within a region known as the "Grain Belt," a fertile area responsible for a significant portion of the United States' corn and soybean production. This proximity to abundant feedstock gives them a distinct advantage in sourcing low-carbon corn for SAF production."