Andersons Inc (ANDE) 2003 Q3 法說會逐字稿

Good morning and welcome to The Andersons, Inc. sponsored third quarter 2003 earnings conference call.

At this time all participants have been placed on a listen-only mode ,and the floor will be open for questions following the presentation.

At this time it is my pleasure to turn the floor over to your host, Gary Smith. Sir, you may begin.

Thank you, and good morning. I apologize for a harsh voice this morning but I'll work through that.

Thanks for joining us on our third quarter conference call. As you know, certain information that will be discussed today constitutes forward-looking statements. Actual results could differ materially from those presented in our forward-looking statements as a result of many factors, including general economic conditions, weather and competitive conditions in the company's industries, both in the United States and internationally, and additional factors that are described in the company's publicly filed, documents, including its 34 Act filings and the perspectus as prepared in connection with the company's offerings.

If you did not receive a copy of our third quarter earnings press release, please go to our website or call me direct, and I'll see to it that you get one. Mike Anderson, President and Chief Executive Officer ,and I will be happy to answer questions that you may have after we've concluded our prepared comments.

Let me turn it over to Mike.

Thank you. Good morning, everyone.

You may recall that in our conference call three months ago, I noted that the third quarter of 2002 benefited from an early harvest and earlier than normal grain sales. I went on to indicate that this year's third quarter was shaping up more like the traditional averages, and noted that the 1999 to 2001 average EPS for the period was a 29 cent loss.

As you saw in our press release yesterday, our third quarter results this year were right in line with this projection. In the three month period from July through September this year, we incurred an operating loss of $2.3 million on total revenues of $253 million, with our EPS at a 33 cent loss. This keeps us right on the path toward achieving the full year projection that we've mentioned several times now, which is near the upper end of $1.15 to $1.30 range.

As I explained in our release, however, by holding our current year earnings guidance at this time, in spite of the restatement that we announced a month ago, which had the effect of reducing 2003 income, the first six months of 2003 income, and increasing last year's income, we are, in effect, indicating improved performance over the combined two-year period.

Now I'll talk about each of our individual businesses. Starting with our Agricultural Group, third quarter revenues of $178 million, or 40 million higher than a year ago, while the group's bottom line declined by $3 million from their 2002 experience. For nine months to date, the group's operating income was $4 million on $536 million in revenues. Last year, they reported income of $10.3 million and revenues of $483 million for the same period.

In the third quarter, the Agricultural Group's grain business continued to experience a reduction in space income, the earnings we generate by storing grain. This was consistent with our message in the past several conference calls. The number of grain bushels we sold and shipped during the most recent three-month period, however, was a little higher than a year ago.

Although grains expenses were lower than the prior year levels, operating income declined. At the moment on the plus side, it appears that corn production in the U.S. will benefit from good per acre yields this year and may set a record at 10.2 billion bushels, 13% above last year's production.

For our four-state region, we are seeing even better year-to-year yield improvements in corn per the national projections, and the present forecast shows a 31% increase in corn production in our area. The wheat crop this summer also proved to be quite good, and we're currently holding a sizable stock with wheat in our elevators.

On the negative side, soybeans aren't faring quite so well. The latest forecasts for total U.S. soybean production is about 2.5 billion bushels, down 10% from last year. And it appears that production in our territory will be right in line with this national decline.

As of the 1st of October, we begin operating a grain elevator located in Oakville, Indiana. We're presently operating this business under a lease agreement, with an option to purchase the facility contingent on approval by both Boards of Directors.

The Agricultural Group's Plant Nutrient business had a good third quarter. Increased sales of specialty, agricultural, and industrial products contributed to a nice increase in gross profit and an improved bottom line. This quarter is typically not a big one, however. Since the lion's share of the volume in this industry occurs during the spring, year-to-date data are probably more meaningful than just the third quarter look. And through nine months, Plant Nutrient's business has achieved growth in volume, in revenues, in gross profit, and operating income.

In the press release yesterday, we indicated that we've been unable to reach an agreement with the seller on the final terms concerning our proposed acquisition of the shares of Agrico, Ltd.

The Rail Group's third quarter revenues of $9.3 million were well above the year earlier performance, and total operating income matched the $700,000 earned in the third quarter of 2002.

Once again, the rail equipment fleet we control grew during the quarter, and utilization rates continued to improve. We're also seeing some uptick in lease rates and car values for most car types. Both of the shops in Maumee were very busy throughout the period, and we're booked solid for the balance of the year, and the railcar repair business we opened in South Carolina recently is meeting our expectations.

For nine months to date, the Rail Group has earned $2.4 million on revenue of $26 million. Both of these are approximately double their year earlier levels.

The third quarter is always an off season for the Processing Group. This year the group's revenues increased by 15% due to volume gains in lawn products. The Group's operating loss for the period was $200,000 less than the prior year as a result of volume and gross profit growth in the cob business.

Through nine months, revenues are up $19.3 million, or 21%. Operating income of $2.6 million is $1.6 million above last year. Total lawn products tonnage has increased 20% from 2002.

Professional markets, that's golf and lawn care operators, are up 14%, and our consumer and industrial volume is up 24%. Average margins have declined, however, due to a changing customer mix and urea cost increases.

In our Retail Group, same-store sales of [$41.9 million] were 2.8% above the third quarter of 2002. Average gross margins were slightly lower, however, and store operating expenses rose somewhat, resulting in a $100,000 operating loss for the period, essentially matching year earlier experience. Through nine months sales are down about 2%, and operating income lags last year by just under $1 million.

Now I'll ask Gary to share his Treasurer's comments.

Thanks, Mike. Interest expense for the third quarter was $1.6 million, a decrease of about $400,000 from the same quarter a year earlier. Lower interest rates were the primary factor driving interest expense down. Actually, we borrowed a little bit more than we did in 2002.

Our EBITDA this quarter was actually improved after you adjusted for the interest that we used to carry grain inventories. Looking at the balance sheet, our current assets decreased $11 million to $276 million by the end of the third quarter.

Since the third quarter of 2002, our trade receivables and margin deposits have actually increased about $7 million. The increase was driven by higher receivables in Grain, Processing, and Rail. All of these groups achieved higher revenue during the quarter, so we expected higher receivable balances.

Inventories decreased about $17 million to $184 million from the year earlier level. Compared to last year, inventories were up about $5 million in both Plant Nutrient and Processing. Grain and Retail inventories were down a little bit in Retail, but substantially down in Grain, about $26 million. Total grain bushels in store at the end of September '03 were 29 million bushels, down about 4 million from a year earlier.

Working capital ended the quarter at $83 million, up $2 million from 2002. Our total assets at the end of September were $410 million, a decrease of $7 million over year earlier levels, and our property, plant, and equipment, essentially, are the same as they were year earlier, so little change there.

Year-to-date depreciation totalled approximately $11 million, and year-to-date cap ex is at about 8, and that's versus 7 a year earlier. And that's exclusive of our railcar purchases. Net railcar purchases for the nine month period were $6.6 million. We purchased about $17 million and sold $10 million.

Our long-term debt is standing at $83 million, a decrease of $2 million from last year, and our total equity at this point is about $104 million, up $4 million from last year's level. In our dividend, we just paid a dividend the fourth quarter on October 21, hopefully you received your check.

And, Mike, let me turn it back to you.

Thank you, Gary.

Before Gary and I address any questions, you may wish to pose, I'd simply like to emphasize again that our overall third quarter performance was consistent with our earlier projections. Last year, again, we benefited from an early harvest, earlier than normal grain sales at well above normal margins, and significantly better space income than we've achieved this year. Therefore we lost 9 cents a share for that quarter last year.

As I stated earlier, our third quarter this year was more like the traditional averages, and I feel good about that. Being in the grain business we'll always be subject to a certain amount of volatility. I'll call it grain's roller coaster, nature. Food product is clearly a vital industry, but subject to cyclical factors, such as weather and shifts in worldwide supply-and-demand balances, commodity issues, and that will cause this roller coaster effect, and we are comfortable with managing that.

I also feel very good about the year-to-date improvement we've achieved in our Plant Nutrient Division, our Processing, and our Rail Groups. Looking forward, we still have much of the corn crop yet to be harvested, and the Christmas season that's crucial to retail's overall performance for the year is right in front of us. But as I've already noted, I continue to feel quite good about the guidance we've provided for the full year on earnings per share. This means that this year's fourth quarter should be substantially better than last years.

Now Gary and I will be happy to address any questions you may have. So Keri, we'll turn it back to you at this time.

Thank you. The floor is now open for questions.

If you have a question, please press number 1, followed by 4 on your touch tone phone. If at any point your question is answered, you may remove yourself from the cue by pressing the pound key. Questions will be taken in the order they are received. We do ask that while you pose your question that you pick up your handset to provide optimum sound quality. Once again, if you do have a question, you may press 1, followed by 4 on your touch tone phone at this time.

Our first question comes from Michael Sweeney. Please pose your question.

Gary, I just wanted to see if you had any updates on -- that you can share on the, I believe when you were in New York, you were talking about an acquisition, if I remember correctly in Canada?

Right. Mike, you want to go ahead?

That's the one I mentioned --

I'm sorry, I jumped in in the middle of the call, so maybe I --

Okay. Yeah, that's fine, and I'll tell you what I just said during the call.

We said in the press release yesterday, we indicated we've been unable to reach an agreement with the seller on the final terms concerning the proposed acquisition of the shares of Agrico Canada, Ltd., so we've broken off negotiations. Strategically, it still was a fit for both sides, but we were not able to bring this one together. We continue to make progress on the opportunity we have with Railcar Ltd.

And Oakville.

And Oakville Farmers Elevator Company of Oakville in Oakville, Indiana.

Okay. Thank you.

Once again, if you do have a question, you may press 1, followed by 4 on your touch tone phone at this time.

Our next question comes from Scott Barbee. Please pose your question.

Hi, guys.

Hey, Scott.

Hey, Scott.

You know, seeing how we have a little bit of time, I'd like to get your comments, and fill me in a little bit more detail on the Lansing Grain limited liability company, you know, partnership, I guess, that you guys have there.

Gary, you want me to?

Lansing Grain, it's actually a limited liability company, Scott, it's not a partnership. So -- And we're a minority investor in the company and we have the ability to acquire additional shares over an extended period of time into the future.

And what -- how does that relate to the rest of your business? Can you talk a little bit about that?

Yeah, I sure will. Of course, you know that we are heavily invested in grain storage space, and if you look at the volume we handle compared to the storage space we have, we turn our space a couple times a year. And I would say, not say, we are exceedingly good originators of grain from farmers. We're very good at serving -- and grain dealers -- serving that constituency, storing grain, blending grain, improving the quality of grain in, what I'll call, merchants of space, as we work to sell our grain into the markets that we use.

There's another approach to the grain business which, what I would call, is more of a training and an arbitraging skill set, and Lansing has developed that skill set over a number of years, they're older than we are, as a matter of fact. They have very little storage space and they handle significant volume. In fact, their total revenues in grain will probably exceed ours, I think. Is that correct?

[$700 million.]

-- Just in grain. And that's trading in the absence of facility. And it's a skill set that for, I would say, literally 20 years -- and my background is grain and grain trading, but I've watched a number of companies have out there, with a combination of interest in that skill set and interest for us to develop that skill set, also understanding that it's different risk management that takes place in there. And we determined that that was something we were not going to be able to develop internally, but we still felt that it would be a complement to us.

And we have a wonderful relationship with Lansing, and our team worked with their team for a number of -- for a long period of time to get into this position where we are a minority investor right now, and we're working well together and we'll see where this goes. But it's a, I would call it, a complimentary skill set to ours that, I believe, makes us an overall stronger participant in this grain business in the United States.

Geographic diversification.

And it adds geographic diversification. Good point, although the name is Lansing, and their headquarters is Lansing, Michigan, they expanded into the West, and they have a sizable office in Kansas City and trade substantial quantities of grain and ingredients west of the Mississippi, and that's an area where we have not ever really participated.

So that is consistent with our strategy, also. From their perspective, they'll get some of the benefits of what we bring to the table and vice versa.

Excellent. You know, the other question I had was, in the Processing Group, I know you guys have worked very hard at getting that business sort of right-sized and, I guess, growing volumes.

I guess what I'm wondering, is the return on assets in that business at this point -- you know, I realize it's a seasonal business. I know year-to-date operating income you've reported as 2.6.

Is there -- how do I want to say this, -- if you annualize, if you come up with an annualized number, how is that compared -- you know, what's your expectation for that business, and how is that compared with the capital that you've kind of sunk into that at this point?

Typically, the fourth quarter is a loss in that particular business, which would tend to create attrition from the earnings, which -- the earnings generally come in the first half, so we'd expect that operating income to decline. And, as you're well aware, we had substantial losses two years ago. We had losses last year and we're -- been fighting to get our head above water.

So, no matter how you cut any analysis on return on assets, it's not acceptable, it's below any measure that you want. And I would say we -- right-size is an interesting choice of words, and I think it's consistent with what we would call, that our focus has been to get the ship righted, to get the blood stopped, and get into position to grow our overall earnings to a position where it is an acceptable return on assets. We believe that's doable.

We've got to admit, two years ago when we were so far under water, we had a lot of questions relative to that. And it's not a certainty because we've still got a tough row to hoe in this. And the industry's got -- still got over capacity, and continuing push and fight on margins. But I'm just gratified to -- that we've gotten to where are, understand that the summit's ahead of us, and we've got significant work to do.

Are you seeing capacity reduction in the industry?

Not really much in the way of reduction, but we're not seeing additions. And, at least in the consumer side of the business, we're seeing volume growth, which is a result, is increasing the percent of capacity that's utilized.

So -- and we're seeing stabilization in the professional side on the golf, and we're seeing growth in the lawn care side, industry-wise, as far as tonnage. So we're seeing capacity utilization starting to improve. Not from wiping out capacity, but having some volume growth overall. But it could go faster. We wouldn't complain.

But that's a good turn from two years ago, though.

Yeah, it is. And there's no one here feeling cocky, at all, but we're feeling gratified with the hard work that's gotten us significant improvement, and know we've got real work ahead of us.

I'm tickled, but, I mean, this has not been easy for the team from a shareholder perspective. They're not -- no one's looking to make things easy for us, and they shouldn't. But there's been some wonderful learning that's being now converted into improved results as a result of the experience we've had.

Thanks, guys.

Gentlemen, there appear to be no further questions at this time.

Okay --

Actually, gentlemen, we do have one further question. Would you like to take it?

Yes.

Absolutely.

Our next question comes from Bill Katen. Please pose your question.

Yeah, hi. Bill Katen, First Wilshire Securities.

In regards to the Retail Group, I guess you had somewhat lower margins, a little margin compression. Is that due to a more competitive, you know, marketplace in the Ohio area?

And also, can you touch on the operating cost in the Retail Group?

Yeah -- you know Bill, now that you mentioned, what was the second part of that question? I was listening to the first one to get my answer. What was the final thing you asked? I want to make sure I answer that also.

If you could touch on the operating expenses level versus, maybe, last year.

Yeah. A couple things. One, through the first half we had actually had some improved margins, and we had attrition in this third quarter. We don't have as big a volume in the third quarter. And I would say if you look within our store, the home center side of the business that has been impacted most by -- in the Toledo market, by additional Lowe's stores being opened. And I just say that market, in general, somewhat economically impacted too, that's where we're seeing some attrition in margin. Because we're committed to make sure that our retail prices are in line competitively to serve our customers, and pleased that year-to-date -- that we're ahead of the game on margin, and hoping to date back on that in the fourth quarter. But there's no question that it's a tough environment in there.

On the operating expense side, although we're up a little in third quarter, overall for the year we're feeling pretty doggone good. And there's just -- some natural inflation takes place. But I'm pleased with the expense control that we're showing in that business, in particular. And year-to-date we're down a couple percent of sales.

And so, I would say my biggest concern despite the third quarter margin drop a little, and a little bit up on operating expenses, you know, if I look at the nine months, I feel generally good about margin and I feel generally good about expenses and feel that the top line where we've got to do most of our work. And most of that we are seeing the challenge of additional home center competition, but we still have pretty doggone nice sales numbers in those businesses.

Okay. And then also, you touched on the Lansing Grain, and you said you could buy additional shares, you know, have you made public -- or what additional shares you could buy, up to what percentage of the company?

No, we have not.

Okay. Okay, well, good luck in the fourth quarter.

Thank you.

Thank you. We are looking forward to a better one than last year. So much, these third quarter/fourth quarters end up just with, how does the harvest come in, and when does it come in, and when are we selling stuff? So we got more normal this third quarter, and even though it's a big loss. But -- and then --we know it will result in significant improvement in the fourth quarter.

Okay?

Once again, gentleman, there appear to be no further questions at this time.

Okay.

Thank you. I'm glad you could join us. Next call is scheduled for Thursday, January 29, at which time we'll review our fourth quarter and full year results. I hope you can join us there. We'll see you all later.

Alright. Thank you.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time, and have a wonderful day.