Andersons Inc (ANDE) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Andersons Inc. third-quarter 2004 earnings release conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be opened for questions following today's presentation. It is now my pleasure to turn the floor over to your host, Gary Smith. Sir, the floor is yours.

Thank you and good morning. Thanks, everybody, for joining us on our third-quarter conference call.

As you know, certain information that we discuss today constitutes forward-looking statements. As a result -- actual results could differ materially from those presented in the forward-looking statements, as a result of many factors, including general economic conditions, weather, competitive conditions, conditions in the Company's industries, both in the United States an internationally, and additional factors that are described in the Company's publicly filed documents, including its 34 (indiscernible) filings and the prospectuses prepared in connection with the Company's offering.

If you do not have a copy of the press release that was issued yesterday, please go to our Web site or give me a call and I'll be happy to get you one.

This conference call is being recorded and can be accessed through our Web site.

Mike Anderson, CEO, and I will be available for questions at the end of the call. Let me turn it over to Mike.

Thanks, Gary, and good morning ,everyone.

We had a good third quarter this year. In fact, it was our best third-quarter earnings performance ever. As we noted in the release yesterday, the Company generated a positive $1 million of net income for the three-month period, or 14 cents a share, on revenues of 251 million. In the past, we have typically incurred a loss during this quarter. Although our revenues in the third quarter this year were slightly below last year, net income was 3.4 million above last year's result and our earnings per share improved 47 cents.

Through the first nine months of 2004, we have earned 10.9 million, or $1.45 a share, on just over $900 million revenue. Compared to last year, revenues are up almost $100 million and net income and earnings per share have both more than doubled.

Examination of our trailing 12 months EPS shows a similar picture. For the most recent consecutive 12-month period, our fully diluted EPS amounted to $2.36 a share. A year ago, the comparable number was 99 cents. So in the 12-month period that ended Sept. 30 of this year, our earnings improved by $1.37, versus our year-earlier results.

Now, I will go into each of our businesses. Starting with the Agricultural Group, total revenues of 169 million in the third quarter were 9 million below a year ago but operating income improved by $3.1 million from a loss of $2.8 million last year to a positive $300,000 this year.

Both grain and plant nutrient achieved income improvements for the period. Looking at nine months to date, the Ag Group's revenues are up $86 million and total operating income of $9.7 million is 5.6 million better than last year.

During the third quarter this year, the grain business continued to achieve increases in inbound bushels. While our bushel sales were lower than the comparable period in 2003, margins were very good and gross profit improved significantly. Our expenses in the grain business unit were higher this year, since we have an additional facility that we didn't own in the same time frame a year ago.

In total, grain's operating income improved substantially versus the third quarter of 2003 and is well ahead through nine months as well. The fall harvest is progressing well, and we're clearly looking at record yields and production totals in both corn and soybeans in the U.S. this year. This bodes well for the future.

I should also elaborate on the comment we made in the release about our interest in ethanol. This industry is growing rapidly, it makes a lot of sense strategically for the country and it's quite profitable at the present time, especially when corn prices are relatively low and gas prices are high, as they are now.

Accordingly, we're taking a hard look at the possibility of building an ethanol plant at one of our several locations within our region, possibly adjacent to our Albion, Michigan grain elevator.

The plant nutrient business also improved their performance in the past quarter versus last year. Although average market prices were noticeably higher this year, our tonnage volumes were up, making up some of the ground lost during the weak spring season. Average margins also improved this quarter. As a result, plant nutrients' total gross profit improved, as did its operating profitability.

The Rail Group again realized significant growth in revenues, gross profit and operating income in the third quarter. Strong demand for railcars has improved lease rates versus last year and enabled us to further increase the utilization of our base fleet. The large acquisition we made early this year, which basically doubled the side of our business, is turning out very well. We bought the business right and the timing couldn't have been better.

During the most recent quarter, we also sold some railcars. Our year-to-year improvement in gross profit from car sales amounted to $2.5 million. Selling cars is something that we will do from time to time when market conditions present opportunities to us and we feel that it's the appropriate thing to do to balance our portfolios.

In total, the Group had revenues of $19.4 million this quarter, more than double last year's number, and they tripled the amount of gross profit from last year. Operating income rose from $700,000 a year ago to $4.9 million in the third quarter this year.

With this strong third-quarter performance, Rail's year-to-date results are also impressive. Revenues of $43.6 million are up 66 percent from last year, and operating income of 8.2 million is more than triple its year-earlier performance. The future continues to look bright for this business.

While car demand and monthly lease rates are both strong, high steel prices have kept new car construction somewhat curtailed. These market conditions are very good for the niche we occupy.

The Processing Group's third-quarter operating loss widened this year. In this most recent three-month period, the Group incurred a loss of $1.9 million on revenues of 20.8 million. In the same period of 2003 -- that's the third quarter -- the business lost 1.1 million on 23.5 million of revenues.

Although average gross margins on lawn products improved somewhat, volumes were lower. The lawn season this year has been a bit of a challenge. It was hindered by poor weather in the spring and carryover product in the retail distribution pipeline. Third-quarter results in the Group's cobb (ph) business also declined somewhat from its prior-year experience. Although volumes were higher, margin pressure caused operating income to erode.

Through nine months, the Processing Group's operating income is 2.4 million on revenues of 106 million. This left year-to-date revenues 7 million below last year, and operating income is about unchanged, although it is down $200,000.

We also noted, in our release yesterday, that Processing may not able to match last year's better-than-normal fourth quarter. Higher energy prices have caused the costs of some key raw materials, notably urea, to escalate and some unusually early sales made in December of 2003 are not expected to occur -- or recur at this year.

In our Retail Group, same-source sales of 41.0 million for the third quarter were 800,000 below the same quarter in 2003. The Group incurred an operating loss of $200,000, which was 100,000 larger than the previous year.

While our food business continues to grow, Retail's lawn and garden product categories were down for many of the same reasons I described in my comments about our lawn business.

A real bright spot has been our sawmill store in Columbus. It has seen increased customer traffic this year and has racked up nice sales growth in food and other categories as well.

Through nine months, the Retail Group's same-store sales were up 1.4 percent, and gross margins are also slightly higher. Operating income, however, at 1.2 million, is $400,000 below last year. Contributing to this are increased labor and utility costs.

Now, I will turn it back to Gary to share his treasurer's comments.

Thanks, Mike.

For the first nine months of 2004, effective tax rate was 38 percent compared to 34 percent a year earlier. That's the rates we are projecting for the full year, 38 percent, and this higher rate is really due to higher state and local income taxes -- tax rates.

Interest expense for the third quarter was $2.5 million, an increase of about 900,000 from the previous year's third quarter. Year-to-date, the interest expense totals about 7.9 million versus 6.1 a year earlier. All of this is due to higher increases in long-term debt outstanding, mainly due to the acquisition of the railcars in this first quarter of 2004.

EBITDA for the third quarter was 9.5 million versus 3 million a year earlier, so we've seen substantially better cash flows this last quarter. Year-to-date, we are at 41.2 million, 15 million better than the year-to-date in 2003.

Current assets ended 2004 third quarter at just shy at $300 million, up 23 million from the previous-year quarter. Since the third quarter of 2003, trade receivables and margin deposits decreased about $7.6 million, a 14.8 million decrease in margin deposit and about a $7 million increase in trade receivables. The increase in trade receivables is from the units that really are experiencing higher sales, plant nutrient and rail, so those are expected as a normal part of the business -- normal fluctuations in the Accounts Receivables.

Inventories increased about $20 million to 204 million since last year. Most of this increase is in the grain inventories, 16 million specifically. At the end of this quarter, we were holding 44.1 million bushels, an increase of more than 15 million bushels from September 2003's ending position. I think, as you know, more bushels in the store usually is a positive sign for future space income in our business.

Net working capital ended the quarter at $98 million, up $15 million from the previous year. Total assets were 514 million, an increase of 105 million over the year-earlier levels. Property, plant and equipment at 194, 76 million higher than a year earlier. All of that increase is essentially due to the acquisition of the railcars in the first quarter of 2004.

At the end of the third quarter, depreciation totaled 16 million and our capital spending and investment in affiliate, exclusive of railcar purchases and sales, was at 11.7 million versus 9.2 year-to-date in 2003. Our net railcar purchases and sales were 77 million for the nine-month period. Once again, this essentially was the railcar limited purchases from Progress Energy and some acquisitions in the grain sector, mainly Oakville Elevator in Oakville, Indiana and additional investments in Lansing Grain. The balance was mainly maintenance capital.

Our long-term debt totaled $156 million. 67 million of that in the long-term debt category is a nonrecourse; 89 million is recourse. So the total increase of 73 million is mainly in the nonrecourse sector. In addition, $10 million of our current maturities is also classified as nonrecourse to the Andersons. Our long-term debt-to-equity ratio, exclusive of nonrecourse debt, is 0.7-to-1. Our current forecasted average rate for long-term debt is 5.6 percent for the balance of this year.

Equity grew by 17 million to 126 million from year-earlier levels. By now, you should've received your fourth-quarter dividend of 8 cents a share, an increase from 7.5 we had been issuing up to this point.

We continue to enjoy good support from our bankers. Our syndicated line of credit is 200 million. During the third quarter, we renewed this line with our syndicate banks, and the new agreement provides additional flexibility. It's now split 100 million in short-term for a 365-day note and 100 million in the three-year long-term revolver. In addition, we have the flexibility to borrow an additional 50 million under the short-term line when the cash demand is high.

As you know, in the grain business, there's margin calls and a lot of fluctuation. To point this out, our peak borrowings during the last nine months was $188.5 million on April 8, and at the beginning of the third quarter, we essentially had paid off all of our short-term borrowings. I think we were out of the bank in a total of 30 days during this period. Our average short-term borrowings in the third quarter were only $5.5 million.

I'd like to point out a slight correction in the seg data report under the Agricultural Group gross profit and total gross profit for both the three-month periods and year-to-date periods that you received in the press release yesterday. Under the quarter ended September 30, under Agricultural, the gross profit should read 15.447. I'm sorry, 15.448 million as opposed to 15.71, and the total column should read 40.740 million as opposed to 41.011 million. Under the non-month period, the same column, same lines, under Agriculture Gross Profit, it should read 56.355 million as opposed to 56.626 million. Under the total column, it should read 132.870 million as opposed to 133.141 million.

The operating income in all of these statements under the seg data are correct as you receive them. It's just that minor change in gross profit, just to make that clear.

Let me turn it back to Mike.

Thanks, Gary.

I continue to be pleased with our overall performance to date this year. The growth in our trailing 12 months EPS is impressive. I'm also optimistic about the prospects, going forward. The big corn and soybean crops this fall will be good for our grain business through the rest of this year and 2005, and Rail's prospects are also good.

This year, we've doubled the size of this business, and we are renewing expiring leases at better rates and for longer durations. We accomplished this without jeopardizing our balance sheet.

I should also say something about our Sarbanes-Oxley work. An enormous number of employee hours and considerable, unusual and external expense has been incurred so far this year. It has been incurred to define and document and test our financial controls, as required by this recent legislation. This is new ground for everyone, not just us. We're working very hard on this project, as are companies across the country, in an attempt to be in compliance with both the spirit and the letter of this requirement by year-end.

Finally, in the past, you've heard me describe the roller coaster nature of some of our businesses, as well as the balance provided by the diversity of business segments we participate in. This is just as true now as ever. Some units achieved income growth in the most recent quarter, while others did not. In total, however, we set new income and EPS records. During the quarter, we increased our earnings guidance range to $1.80 to $2.05 per share. This remains our current guidance. As harvest nears completion and we get a better read on the fall fertilizer sales and the all-important Christmas season, we will reexamine this forecast and, if necessary, update it.

Now, Gary and I will be happy to address any questions you may have. So Ashley, we will turn it back to you.

Thank you. The floor is now open for questions. (OPERATOR INSTRUCTIONS). There appear to be no questions at this time. I'm sorry, we did get our first question. Our first question is coming from Mark Hughes of Lafayette Investors.

Good morning. Just a question -- you mentioned the possibility of investing in an ethanol production facility. Just ballpark, how much capital are you talking about if you choose to pursue that option?

I would say, round numbers, the cost of an ethanol plant -- let's say it's a 20 million bushel, 50-plus million gallon plant, and I would say that would probably be the minimum we would go for, you would be in the range of 75 to $80 million total cost to build and complete and have working capital to get such a plant going.

Would you be looking to do it by yourself, or doing this with someone else, partnering up, or --?

We are studying the possibility of one. Does it make sense? Then if it makes sense, how would we want to structure it? But relative to -- we specifically mentioned in here that we are looking at some of our sights and specifically mentioned maybe Albion, and if we have it next to one of our sights, our thinking at this time, understanding it can change -- that at least, at a minimum, we would want to have control. That could then create a range of percentages of control from, say, 51 to 100 percent.

Many of the projects have been financed with project financing that just relate to the project itself. The debt is only related to that project. That's not saying that's where we would go, but we would certainly try to minimize the risk wherever possible.

Great. Thank you very much.

Bruce Geller of DGHM.

I'm sorry, I just came on the call late and I apologize for that. I did have one question regarding your earnings guidance in the press release. Looking at what you've done year-to-date, which has clearly been spectacular, and considering the strength of the harvest and how well your Ag Group should do in the fourth quarter and additionally, how well this Railcar acquisition is going for you, which also seems like it should do very well in the fourth quarter, by holding your guidance the same, you're actually implying, you know, even at the high end of guidance, roughly 60 cents, which is actually down significantly from last year, but I find it hard to believe that that would be the case, considering the many positives you have going for you right now. I mean, are you just being overly conservative, which I can respect being conservative, but it almost seems like you're -- (multiple speakers) -- being extreme?

I was hoping that question would come up, frankly. I think the perspective that you have around could we -- being conservative or extreme in that is -- I appreciate that and respect it. But a couple of thoughts -- I'm just going to give you the last three year's third quarters -- or fourth quarter -- then I'm going to just talk a bit about fourth quarter in our business.

Last year, it was 91 cents, as you said, and we had a good corn crop last year, by the way. The year before, it was 32 cents, and the year before, it was 59 cents. So you can see it's really highly volatile.

Last year -- one of the things -- I will talk about a couple of key businesses. One, grain in particular, within our Ag business -- so it's our Ag Group in total -- but especially influenced by grain. Two major things really, really impact volatility that often you can't see and know what's going to happen at this time of the year. For example, last year, we had a mammoth corn crop. We're expecting some sizable carrying charges to come into the market that would suggest that we store a substantial amount of corn and carry it into the year to sell in subsequent years, and we weren't necessarily expecting to have what we call basis levels at levels that would encourage us to sell substantial quantities ahead. Well, it turned out that ,by the time the harvest was over, exactly the opposite happened. The market signals said sell, sell, sell. Whether we sold it for the -- in '03 for the calendar year '04 or whether we sold it for that calendar year, we ended up having sizable, more than normal amount of sales at really good margins. Then it turned out the first half of the year was also good.

In addition, the soybean gave big, strong sell signals. The way the harvest is -- and the harvest was not as early last year as it is this year. This year, we have had as early a harvest as we can remember, at least to get the harvest kicked off, so as we explained in the press release, our grain income this third quarter and Ag income better than the third quarter a year ago. One of the reasons was that we were getting some volume in at the front end of harvest that we were able to sell and put through and make income on that was third-quarter income.

The other thing is, right now, we sit here and we are uncertain as to exactly what will or won't happen relative to the dynamic I mentioned earlier on how much will we sell this year for next year and how much will the market signal us to liquidate inventories? As we are accumulating inventories -- and now we've gotten into kind of a delay in harvest because a substantial rain, so that's pushing things back. So how much does our inventory value increase by year-end?

The only thing I know from history is that it's really, really hard to predict. I can remember times in December 18th thinking we're going to end up in one place and by January 1st ,it's substantially different. I tend to have a -- well, then the other thing I should say is Christmas season in retail is a huge deal. We are a little soft year-to-date. We think things line up reasonably well, but it's a big swing number from year-to-year, so those things have me wanting to make sure that when we put out a guidance at this time that we don't put something out that we later have to come back and retract.

I do have my own internal makeup; I have a bias. I try -- if I err, I would like to err on the side of conservatism, yet I also don't want to over-promise and underdeliver, but I think, if you look at the volatility of the last three years and from our side knowing how much that can swing in the last eight weeks of the year, it's really hard to put out a number that you can have high confidence in one way or the other. I think the things that you indicated that are (indiscernible) there's no question that they create the potential for improvement but our own internal forecasts say don't put that out in the way of guidance at this point in time.

Sure, I could respect that. You know, if the stars do align for you in the fourth quarter, is it feasible that you actually beat last year's fourth quarter, or is that totally out of the question?

I would say that would be hard but -- you know, I mentioned this -- and this time, we sold some railcars. We didn't sell very many, and that added to our gross profit. With the high rates that we have, I mean things could happen that could affect us maybe to look at doing that this quarter or not doing that this quarter. So, that creates another element of volatility. But it would be hard to exceed last year's third quarter without -- you mentioned some good stars aligning -- or last year's fourth quarter, I'm sorry. That was an extremely good fourth quarter but I'll tell you, around December 1 of last year, I was -- I mean, things just lined up as wonderfully over the next four weeks. That just can happen in this business. So, I mean, I'm not going to say that is outside the range of the possibility, but I sure wouldn't want to predict it here.

If we get to a point through the quarter, as I just said, where we feel it's appropriate to update guidance because we have more certainty around what's going on, we will.

Just like we did a quarter ago.

Yes.

Okay, great. Just one last quick question -- you referenced, that your -- in the Retail Group, your home center products were a little soft, particularly lawn and garden. Is there anything in particular you would attribute that to? I mean, it seems like some of the larger home centers, Home Depot and Lowe's are doing fine. I'm curious why you guys may have -- (multiple speakers) -- a litte more negative impact.

Yes, just a couple of things on that. One, we are more regional, so lawn and garden in particular, if I look at lawn and garden and nursery, we have real swings year-to-year because we're so impacted by what is the weather in Columbus, Toledo and Lima, Ohio, a very small region. This was a year that was no -- no questions about it in our region was impacted more negative than I would say kind of a normal year. So that's a factor.

Specific to lawn and garden, I don't think that has been highly competitively impacted, even though there's been new competition, so to some extent, maybe that's so. We've had new Home Depots and Lowe's in our markets here, and so that's a factor, but I think that particular segment has been more weather-related than anything else. There are some segments of our home center business that are -- no question that you open up more competitive storefronts and create more alternatives, that it has impact -- home remodeling, building supply, kitchen and bath, as examples. It's just a natural outcome. We are I think somewhat blessed by the format with the more for your home, that we are able to temper that with those areas that aren't as impacted by the home center, like I mentioned (indiscernible) food has continued to be good for us right now.

Just lastly ,on the retail business, have you guys decided where you're going to go with that ultimately or are you going to look to open stores, or -- (multiple speakers) -- something else with it?

That is in-process. We have not fully decided. I can only say that, if you look at where we have been putting our capital here recently, it's notably been directed to our agriculture and our Rail businesses.

Okay.

We are also noticeably hitting the ball there. (multiple speakers).

Thank you.

(OPERATOR INSTRUCTIONS). Ladies and gentlemen, at this time, there appear to be no further questions coming from the phone lines.

Okay, thank you, Ashley and everyone who's listening today. We are glad you could join us this morning. Our next call is scheduled for Thursday, February 10, at which time we will review our fourth quarter and find out what happens -- and our full-year performance. Gary and I hope you can join us at this time and again, we're pleased to be here three quarters through the year with really good results.

Thanks.

Thanks and goodbye.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.