Andersons Inc (ANDE) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Andersons' 2003 fourth quarter and year end conference call. All parties have been placed on a listen-only mode and the floor will be open for questions following the presentation. I would now like to turn the floor over to your host, Vice President of Finance and Treasurer of the Andersons', Mr. Gary Smith. Sir you may being.

Thank you, Kim. Good morning, and thank everyone for joining us for the Andersons' fourth quarter and year end conference call. As you know, certain information that will be discussed in today's conference call constitutes forward-looking statement. Actual results could differ materially from those presented in the forward-looking statements as a result of many factors including general economic conditions, weather, and competitive conditions and conditions in the company's industry both in the United States and internationally and additional factors of described in the company's publicly filed documents including 34 Ag filings and the perspectives prepared in connection with the company's offerings. If you do not have a copy of the fourth quarter earnings release please go to www.andersonsinc.com, or give me a call, and I'll get you a copy. We're recording this conference call and it can be accessed from the website Mike Anderson, President and Chief Operatings Officer, and I will be available for questions after the call. Mike.

Thanks, Gary. Good morning everyone. We had a very good fourth quarter in 2003. You'll see as I talk about each business unit the number of factors came together in our favor which enabled us to achieve our best ever fourth quarter earnings performance. Because of these positive factors, we issued a press release about two weeks ago indicating that our full year earning outlook was better than we had previously projected, with our year-end audit had not been completed at the time we said the range would be $1.55 to $1.65.

Now that our outside auditors have completed their work we reported yesterday that our final 2003 earnings number amounted to $1.59, in the middle of the range we indicated. For the fourth quarter we achieved a net income of $6.7 million, or 91cents a share on revenues of $433 million. In the fourth quarter of 2002 we earned $2.4 million of net income, or 32 cents a share on revenues of $355 million.

Our full year 2003 statement show $11.7 million of net income on revenues of $1.25 billion. This resulted in the $1.59 EPS I've already noted. In the previous year we had revenues of $1.08 billion and net income of $14.2 million, or an EPS of $1.92. Before I delve into the business unit details; I need to once again caution everyone that revenues may not necessarily be a good predictor of gross profit or income performance particularly with our grain business.

On some occasions than can move in opposite directions. While, that was not the case in 2003, the correlation was clearly not perfect. If you study the financial statements we issued yesterday you might have noticed that fourth quarter revenues increased by 25% and gross profit for the period rose 17%. For the full year, however, revenues were up 16% while gross profit increased by less than 1%.

Now, let me quickly review our individual businesses. Starting with our Agriculture Group fourth quarter revenues of $363 million were $84 million higher than a year ago, while operating income of $9.8 million was double the 2002 experience. For the full year, the group's operating income amounted to $13.9 million on $899 million in revenues. Last year they achieved an operating income of $15.2 million and revenues of $762 million.

In the fourth quarter this year, the Agriculture Group's grain business took in 27% more bushels than we'd received in 2002. And we had a similar percentage increase in bushels shipped, at good margins, I would add. We also earned more income from storing grain this quarter than we had in the fourth quarter in 2002, which was a pretty poor quarter for space income earnings.

This was a significant change from the first three-quarters of the year. In total, our grain business achieved a significant revenue and income growth in the quarter versus the comparable period in 2002. Grain expenses were higher in the fourth quarter of 2003. The increase was primarily in labor and utility costs associated with a bigger and wetter crop than we saw in 2002.

Full year grain expenses were actually lower than they were compared to the prior year. Although grain revenues were higher for the year, operating income was lower this year due to the reduction in space income we've talked about consistently throughout the year. As we noted in the release yesterday, a number of factors are in play in this business.

A record corn harvest in the U.S. this fall but production problems in several countries around the world, increasing demand from processors, consumers worldwide, and falling carryover stocks in the U.S. and the projected additional production in the U.S. this year. The agriculture business group's plant nutrient business had good year in 2003, Their best full year performance ever.

They continued to achieve volume growth, this year, in an industry that doesn't typically experience much volume growth. Consistent with their stated growth strategy this business increased volumes of new higher margin products in the industrial and specialty Ag applications. And were also able to achieve market share gains in traditional products and markets.

They also took advantage of an opportunity to benefit from the appreciation of values in some commodities during the year. While their fourth quarter income lagged 2002 just a little they exceeded the most recent two-year average and contributed to an excellent full-year performance. The Rail Group's's fourth quarter revenues of $8.9 million were again well above their year earlier performance.

Their operating income of $1.7 million in the quarter was $1.4 million higher than the same period in 2002. Once again, the rail equipment suite we control, grew during the quarter and utilization rates were very good. In addition, we completed a refinancing transaction on a number of cars during the period.

Gratifying also was the continuation of the uptick in lease rates and car values that we noted three months ago. Also noteworthy was the performance of our shops this year, the railcar repair and fabrication shops in Maumee and the new railcar repair business that we just added in South Carolina. In total, the shops had their best full-year performance ever in 2003.

For the full year the Rail Group generated an operating income of $4.1 million on $35.2 million of revenue, both well above 2002 performance levels. The rail team and our services organization have put a great deal of time and effort during the past year into the due diligence and negotiation process concerning the opportunity to acquire a large number of railcars and locomotives being divested by Railcar Limited.

While this deal hasn't been finalized yet, we are hopeful and expect that it will close soon. As we mentioned in the release, however, if, for some unforeseen reason this deal does not come to fruition we would need to write off the accumulated deal costs which we've capitalized so far. That eventuality, if it would occur, would have a negative impact on 2004 income.

Looking at the Processing Group we need to remember that the fourth quarter is always an off season. While we incurred a loss for the period again this year it showed definite improvement from recent years. Revenues grew by almost a half million, although some of this was related to shipments that normally would have occurred in January. Average margins improved for the quarter.

Operating expenses were reduced noticeably, and the group's operating loss was reduced by $700,000. For the full year the group's revenues increased by 17% due primarily to volume gains in lawn products. Most importantly the group broke into the black this year, achieving a positive $1 million operating income for the full year.

This was a $2.3 million improvement from 2002. Total lawn products tonnage increased by 18% from 2002 with growth coming from the professional markets, golf and lawn care operations, as well as consumer and industrial markets. The group's cob-based products business also contributed to the revenue and income improvements this year.

In our Retail Group, same-store sales of $50.2 million were three-tenths of a percent higher than the fourth quarter of 2002. Average gross margins were slightly higher, primarily from growing strength in our specialty food categories. As a result, operating income for the period was up $300,000.

Contributing to this was a big jump in sales in the last week or so of the Christmas season. For the year, sales were $179 million, down 1.4% from 2002, while average margins were up slightly. Operating income of $3.4 million, was $600,000 lower than the previous year. Now I'll turn it back to Gary for the Treasurer's report.

Thanks, Mike. Our 2003 effective tax rate was 35%, up 2% from 2002. This is mainly due to higher state and local income tax. We're projecting our 2004 effective tax rate to be 38%, the increase again is based on projected higher state and local income tax and less benefit from the resulting phase-out of the Federal Extra Territorial Income Exclusion, better known as the [FISK, DISK], and previous versions of the same.

Interest expense for the fourth quarter was $1.9 million. A decrease of half million dollars from the same quarter last year for the full year 2003 our expense was down $1.8 million from the 2002 level. Overall interest expense reduction was due to both lower rates as well as a little bit less outstanding during the year.

Our EBITDA for the fourth quarter was $19- I'm sorry $14.9 million, versus $10.9 million for the previous quarter last year, $41.2 million for the year, that's a million higher than it was in 2002. Turning to the balance sheet our current assets increased to $357 million by year end, up somewhat from the $337 (million) , $337 million of the previous year. Since 2002 year end our trade receivables and margin accounts have increased by $8.7 million, all of this increase is in the receiveable area from the Rail Group.

Other business units essentially were the similar balances to the previous year. Inventories increased by approximately $3.5 million to $260 million from last year's level of $256 million. Compared to last year, inventories and plant nutrient were up about $8 million and down $4 million in the grain division.

Total bushels -- total grain bushels in store at the end of December 2003 were 56.1 million bushels, down about quarter million bushels from the previous year. Our storage capacity is an all-time high at 82 million bushels, that's after the addition of the Oakville, Indiana facility.

However, the cash versus futures market has encouraged more selling on behalf of the Andersons than in previous years, thus our current inventory position is somewhat lower than we've enjoyed in some of the most recent years, year-ends at least. Net working capital was up to $90 million, $8 million higher than it was a year previous. Total assets at December 31st were $493 million, an increase of $23 million over the previous year.

Our total depreciation last year was $15.1 million, capital spending and investment in affiliates, that's exclusive of railcar purchases and sales at year-end was $13 million verses $10 million in 2002. Our railcar purchases in 2003 were $20.5 million and the sales were $17 million, for the year. Long-term debt ended at $82 million.

Minor decrease of $2.1 million from the previous year. 90% of our long-term debt is at fixed rate, so we're -- we've locked in a lot of these good rates at these lower levels. Last year we had about a 6% interest rate versus -- this is on long term -- versus 6.6% from the previous year.

And the equity ended the year at $116 million, a $10 million increase, and by now you should have received your first quarter 2004 dividend of 7.5 cents per share, a 7% increase over the previous year. So the balance sheet is quite a bit stronger than it was previously and let me turn it back to Mike for conclusion.

Thank you, Gary. Before Gary and I address any questions you may pose, I'd like to emphasize again that we're proud of the accomplishments of -- that all of our business units have achieved this past quarter, collectively realizing the best fourth quarter income performance our company has ever had.

Our operating, administrative, and general expenses for the quarter were $2.6 million higher than the previous year, about half of this was higher labor and utility cost associated with the bigger and wetter grain crop. Another component of the expense increase were fees for outside professional and contract services on numerous projects we're working on.

For the full year total operating admin and general expenses increased by only $2.1 million, or 1.5%. I'm also pleased that we ended the year well below our stated leverage objective with our debt to equity, funded debt-to-equity ratio ending the year at 0.7 to 1. Our stated objective for years has been 0.8 to 1.

That's consistent with Gary's statement about the improved balance sheet. Looking forward we're optimistic about the outlook for grain bushel volumes for the coming year. But space income represented by spreads on the Chicago board of trade are not as we would have hoped. I should also mention that we're pleased to have had the opportunity to acquire an elevator in Oakville Indiana recently.

We've been operating it under a lease agreement since October 1st. Our plant nutrient business is anticipating that volumes will be good this spring. But they can't necessarily expect to duplicate the income from price appreciation that was experienced last year.

In rail, the upward movement we're seeing in car values and leased rates is bullish but we still need to consummate some big rail deals to keep the income generating capability going. While I expect this will be accomplished in the -- let me back up. We still need to consummate the big rail deal that we're working on.

I'm hopeful and expect that this will be accomplished in the near future. As of today it's still an open item. In processing, some product shipments in December of 2003 that we'd expected to ship in January of 2004, put us behind in this year just a bit right out of the chute.

Finally while retail had a strong finish in 2003 and the economic trends seem to be favorable there's new competitive offerings in our market and they're a fact of life. All considered I'd prefer to wait until we know the outcome of the rail transaction and we have a better feel for planning intentions by grain producers and we're into the spring fertilizer season before we make an earnings projection for the year.

I'll do so at the time of our next earnings release and conference call. Along these lines I'd suggest, however, that you should look at our numbers in terms of two or three-year averages rather than the distinct year-to-year differences. As I've said, we're somewhat of a roller coaster in nature and not a hocky stick. And some of our businesses, especially grain, which I've mentioned numerous times in the past, multiyear outlook is probably most appropriate.

All in all we're pleased with the results of this last quarter. Now Gary and I will be happy to address any questions you may have so Kim we'll turn it back to you at this time.

Thank you. The floor is now open for questions. If you do have a question please press 1 followed by 4 on your touch-tone telephone at this time. If at any point your question is answered you may remove yourself from queue by pressing the pound key. Questions will be taken in the order they are received. Our first question is coming from Bill Cattin of First Wilshire.

Good morning. Great quarter.

Thanks Bill. How are you doing?

Doing fine, thank you. In terms of your Ag plant nutrient business, how are you able to consistently keep growing the volumes when industry wide it's -- you're not seeing that type of volume growth?

Three reasons, and when we talk industry wide we're talking about ag-agriculture -- historical agricultural inputs of NP&K to Ag ground, and in general the trend of application just total tonnage, has been going down a little bit year-over-year. Here the reasons for us. One, we've been able to gain some market share in our existing territories, and I attribute that to our team, the quality of the team. We have added some capacity over the last several years. We moved into Southern Indiana and Eastern Ohio, added some more capacity in Eastern Ohio last year so that's been a plus.

Then we have had a very well articulated emphasis on growing a piece of business that we barely participated in ten years ago, and that's in the more specialty Ag business. That's primarily liquids and micronutrients and specific formulations, and in non-Ag industrial businesses, runway de-icers is an example of one, providing we just recently got a patent on an application, a product that we use for the wood pulp industry that stimulates bacteria to consume the wood pulp faster than previous applications.

So although those tonnages are not huge at this point in time we consistently have double-digit increases over about a five-year period and so it's starting to have a noticeable impact. So I'd call it some modest market share growth and some good growth in kind of the other side of the business. And then last year besides volume we had a nice -- some good margins, too, but I'm real pleased with the effort to specifically articulate objectives around volume and then to deliver on them.

Okay. I guess currently what is your utilization of the 82 million bushel capacity, and also, you know, kind of seasonally, I guess it depends on the CBOE prices, but do you see seasonally a certain time of the year a peak space demand?

I'm going to let Gary -- I'll answer part of the question while Gary is figuring out exactly where we are as a percent of capacity but generally when we get into the first of the year we're practically full relative to usable capacity, not necessarily rated capacity. We're lower this year. Gary, do you have the number?

Yeah, it's 68%, where we are right now.

And I would say, when we're above 80% we're starting to get into, with the working space we need, about as full as we can. And we would expect- I'll be candid, if I looked back to August and September as we were looking at lush bean plants and we knew we were going to have huge corn I was expecting that we'd see an increase in the balance table, certainly for corn, carryout for next year, and for a number of factors that isn't happening.

And so with the situation where the spread relationships and beans says "sell beans now, don't carry them", we have very little bean inventory, that's giving us better margin opportunity but not good space income. And in corn there's a little carry in corn, say between the March contract today and the May contract, so we're going to carry corn for awhile. We typically like to get it to the summer.

It's just not, if I look over the period of ten years with a few years ago we used the phrase "as good as it gets in carry". This isn't as bad as it gets but it's on the lower side of kind of averages that we've seen over time. So, that's been a bit of a downer in the income and a little bit for the outlook for the first half of this year. Fortunately on wheel inventory, we have, we still continue to realize good earnings on wheat that we have in our elevators.

The highest we've had in the last five year, our capacity percentage, is 85%.

85%. Okay.

Yeah.

And you said the wheat that there's some good carry right now in the wheat?

Yeah, we've been able, if you look at the market it suggests that ends in a few months but the market might suggest we won't be able to carry the new crop but our -- we'll to have wait and see. There's the possibility that the same thing may happen this year as last year where it didn't look that way but as things unfolded the market changed in our favor. So -- but at least for right now it's good earnings.

Okay. Well, thank you.

Thanks.

Once again if you do after question, please press 1 followed by 4 on your touch-tone telephone at this time. I'm showing no further questions in queue.

Okay. Certainly if you have any reason to follow up with Gary or myself please do. We're glad you could join us this morning. Our next call is scheduled for Thursday, May 6th, at which time we'll review the first quarter results, and at that point in time hopefully we'll have a little better arrow or target on the full-year outlook, and hope you can join us then. So have a great day.

Thanks.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time.