Andersons Inc (ANDE) 2006 Q1 法說會逐字稿

Good morning, my name is Cynthia and I will be your conference facilitator today. At this time I would like to welcome everyone to The Andersons Inc. 2006 first-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). It is now my pleasure to hand the floor over to your host, Gary Smith. Sir, you may begin your conference.

Thank you, Cynthia. Good morning and welcome to a beautiful day in Sunny Northwest Ohio. As you know, certain information that we discuss today constitutes forward-looking statements; 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, 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 prospectuses prepared in connection with the Company's offerings.

It also includes financial information of which, as of the date of the call, is still under some analysis. Although the Company believes that the assumptions upon which the information and its forward-looking statements are based are reasonable it can give no assurances that these assumptions will prove to be. The final financial information will be included with our 10-Q expected to be filed about May 10th.

Before I turn it over to Mike to talk about the operating unit's performance, you'll note in yesterday's press release that we are now reporting five operating groups in our segregation report versus four in 2005. We are now reporting a new Grain & Ethanol Group and Plant Nutrient Group. Until this quarter our financial reports included both of these groups under the Agriculture Group. The new segment reporting will provide you with better clarity and granularity on the performance of these two important business segments. Let me turn it over to Mike Anderson, President and CEO.

Thank you, Gary. Good morning, everyone. I'm assuming that with the sizable increase in volume that we've had in our shares we may have some new folks on the conference call today and we welcome you. We look forward to dialogue and questions.

Our performance in the first three months this year was somewhat of a mixed bag. In total it was a good quarter with net income of $3.8 million and earnings of $0.49 per diluted share, both well above previous year results. Some parts of our Company achieved very good results during the period with nice year-to-year improvement while others, for a wide variety of reasons, fell short of their 2005 first-quarter performance.

Total revenues of $281 million for the period were up more than 8% because of increased grain sales and continued growth in rail. With that overview I'll talk about each of our individual business units, five now this year.

Starting with the Grain & Ethanol Group, it essentially matched its 2005 total income performance in the first quarter with operating income of $1.8 million, but the components were somewhat different. Although the number of bushels shipped into and out of our elevators is relatively low in the first quarter each year compared to other quarters, the number was higher this year and contributed to an $8 million increase in revenues. Our average grain price for the quarter was almost identical to that of a year ago. But here too the parts varied considerably. Corn, soybeans and oat prices were all higher this year, but wheat values were lower and wheat is one that warrants further explanation.

Strong demand by investors worldwide to own basic commodities has caused futures prices on the Chicago Board of Trade to rise and wheat futures have been no exception. At the same time, actual physical demand for some types of wheat such as soft red wheat, which is what we have, has been somewhat weak. We hold a sizable inventory of soft red wheat in Toledo, a designated delivery location for fulfillment of Chicago Board of Trade futures contracts. With a large supply and wheat demand price declines to bring the two back into equilibrium.

In this business we refer to the difference between the Chicago Board of Trade futures price and the local cash price the basis. As of the end of March the wheat basis in Toledo was very wide, historically wide, about $0.50, with the cash price of the wheat in Toledo much cheaper than the Chicago Board of Trade price. This caused the component of our first-quarter gross profit that we call space income to be significantly lower than it was in the first quarter of 2005.

My purpose in dwelling on these basics of the grain storage business was, first, to explain why grain gross profit was down nearly $4 million in the first quarter; and second, to note that this is not necessarily lost income but primarily a timing issue. If in the months ahead it turns out that the futures market provides us something less than full carry on wheat rather than rolling our future hedges into a subsequent period, we can elect to deliver the wheat in Toledo against the futures contract at option price or an even basis and so doing make up the previously negative basis and recognize the full gross profit at that time.

Corn basis levels widened similarly during the first quarter this year due to the same commodity market dynamics. Since Toledo is not a delivery market for the Chicago Board of Trade on corn however, a portion of the decline in space income may not be realized in subsequent periods but this is not expected to be material. Overall, despite the relatively poor first quarter in our base grain business, we should get most of the basis loss back.

Operating experience in our base grain business was somewhat higher in the first quarter this year primarily due to higher labor benefits and interest costs. I should also note that reconstruction of the ship loading elevator in Toledo that was severely damaged by an explosion and fired last July is continuing. We hope to have it back in full operation by harvest and complete the business interruption insurance process.

In the segment data that was included with our press release yesterday you may have noted that another grain and ethanol line item changed considerably versus the prior year. The line designated as other income and equity and earnings of affiliates was up almost $5 million. Two significant things contributed to this increase. One was the recognition of the current portion of a fee paid to The Andersons by the new Clymers Ethanol LLC during the quarter for the work we performed in putting this project together. The other was recognition of our share of Lansing Grain Group's first-quarter income. This commodity trading affiliate is doing very well in part due to their expansion into ethanol trading. Not only has Lansing's income continued to increase but our ownership share is higher this year as well.

The plant nutrient's operating loss in the first quarter was about $400,000 more this year than last year. Prices for the basic nutrient and formulated products were higher in the first quarter this year than they were in 2005. However, lately wholesale prices for basic products began to soften, notably in nitrogen. This has had a twofold impact on our first-quarter business. The higher price levels resulted in a year-to-year increase in total revenues, about $2 million above the total generated in the first three months of 2005.

But the softening of wholesale prices gave dealers and farmers a reason to defer a portion of their preseason purchasing. Because of this our tonnage volume in the first quarter was lower than last year. It is our belief that real consumption will be down on a full nutrient year basis, that's July through June. In addition an inventory drawdown is occurring and will occur due to the softening of prices. Both of these factors will result in a decline in wholesale as well as retail volume in the first half of 2006.

A post Katrina spike in natural gas cost which dramatically increased nitrogen prices in combination with the higher full prices have growers reducing application rates of phosphate and potash into a lesser degree nitrogen. Total gross profit in the first quarter of 2006 was down for two principal reasons -- first, the reduced volume which I just mentioned, but also as a result in an improvement we made in our cost accounting system in the second quarter of last year. This improved system provides us with a more comprehensive allocation of cost to our products and services.

When comparing the first quarter of 2006 with the first quarter of 2005, some activities which had previously been treated as period expense are now included in cost of goods sold thus negatively impacting gross profit but positively impacting expense. In future quarters the year-to-year comparison will be more apples-to-apples. In most of the core markets served by this group, the second quarter is the primary consumption period and at this time nutrient application and planting is well underway.

In the first quarter this year the Rail Group continued to follow the growth track it's been on for some time. For the period the group achieved year-over-year revenue and income growth in all three of its businesses -- rail car and locomotive leasing, railcar repair and manufacturing. In total the group generated revenues of $34.3 million during this most recent quarter, $16.7 million more than last year. And it achieved an operating income of $6.2 million or $2.6 million better than the first quarter of 2005.

Our 10-Q, which will be filed with the SEC next week, will indicate that during the first three months of this year we realized a gain of $2.8 million from the sale of some cars. In the first quarter of 2005 we had a gain of about $500,000. These gains are generated by three very different types of transactions. First, at times we need to dispose of some rail cars which have reached the end of their AAR approved useful life; scrap values are high at the present time and we had occasion to scrap some equipment like this during the first quarter.

The second type of transaction which can generate income is the sale of an asset and underlying lease where The Andersons remains an age and often holds an option to repurchase the cars at the end of the lease. Some income from this type of transaction also occurred in the first quarter of 2006. The third type of sale is the outright sale of cars to rebalance our portfolio or simply to take advantage of exceptional market opportunities which might arise from time to time. You may recall that we had some gains like this late last year.

Our railcar fleet is somewhat like a portfolio and we will, periodically, sell or scrap some cars which we believe -- when we believe such a move is appropriate. The timing of these transactions has been and will continue to be lumpy. By that I mean not predictable or occurring with anywhere near the regularity of the leasing business. While we sold some rail equipment in the first three months of this year, our ongoing base rail business achieved income growth for the period and our total railcar fleet was 3100 cars larger at the end of March than it had been a year ago.

Our fleet now consists of more than 19,000 rail cars. These are in service throughout North America and in the past year the utilization rate of our fleet has also improved from 93% a year ago to slightly more than 95% is year. Maintenance expense, a key item in the leasing business which can vary widely from period to period, was higher in the first quarter of 2006. The group's Mississippi railcar operation has been very busy during the most recent quarter repairing cars damaged by last summer's hurricanes. Because of this the railcar repair business in total registered higher revenues, gross profit and operating income for the quarter. Similarly our manufacturing business did well in the first three months of this year with growth being driven by the market success of some fluid filtration products we acquired last year.

The turf and specialty products group doubled its first-quarter operating income this year recording $39.5 million in revenues and operating income of 2.1 million or the period. Some restructuring actions which were undertaken last year are having a positive impact. While total lawn tonnage is down, the average gross margins have improved and expenses have declined resulting in the improved operating income. The group has also been able to reduce its working capital investment.

Lawn's professional markets, especially golf, did well in the first quarter. Some new products we're offering have been well accepted and the number of rounds played on U.S. courses, an important statistic in the golf industry, has shown some signs of improvement. This follows a decline which began several years ago. Turf and specialty's cob business also achieved operating income improvement for the quarter and we're in the process of fine-tuning some operational changes made last year in that business as well. It's also begun shipping a new product which holds promise for the future growth.

In our Retail Group, total first-quarter revenues were down 8.4% this year. The winter months were fairly mild in our region putting a damper on cold weather merchandise like snow removal equipment, ice melters and outdoor workwear. The timing of Easter in the first quarter last year but the second quarter this year also hurt 2006 first-quarter sales.

Our total customer count was pretty comparable for the first quarter and average gross margins improved with continued good result in some food categories. We're also pleased with an excellent inventory control performance. In total the Group incurred an operating loss of $2.4 million for the first quarter of 2006 with $32.1 million of revenues. In the same period the Group lost $2.1 million on $35.1 million of revenues. Now I'll turn the floor over to Gary Smith for his treasurer's comments.

Thanks, Mike. The taxes in the first quarter of 2006 were 36% versus our 2005 full-year rate of 34%. We expect the full year to end up at 36% in 2006. Interest expense for the quarter totaled $4 million, an increase of $1 million from last year's first quarter. The biggest issue here is our first-quarter borrowing rates are up 2% versus a year ago. EBITDA, earnings before interest, taxes, depreciation and amortization, totaled 16 million for the quarter versus 10 the same quarter last year. Our current assets increased to $414 million, so that's $14 million above last year.

The only significant change here is there's a higher number in our Rail Group and that's mainly because of a late quarter transaction that was yet to be collected, but it has been since collected. And our inventories decreased by $8 million to $262 million versus last year's first quarter of $271 million. I should note that within the whole working capital -- as least current assets, our turf and specialty group had dropped their investment by $8 million which is a good sign.

At the end of the first quarter our grain inventories ended at 58 million bushels which was a decrease of 5 million bushels from the year earlier level. Working capital ended the first quarter at $72 million, down about $16 million from a year earlier. This was a result of our capital investments which mainly show up in other assets and that would be our investments in ethanol and our grain trading affiliate, Lansing Trade Group.

Total assets ended at $701 million, an increase of $75 million versus the first quarter last year. Two major things that caused that increase which was the other assets which was up by $43 million and a $19 million increase in our railcar assets leased to others. Those are the two major items. Through the first quarter of 2006 depreciation totaled $6 million. Our total capital spending, including the investments in affiliates, ended -- for the quarter end was $24 million versus $16 million a year earlier. Railcar purchases and sales for the quarter were 12 and $13 million respectively and this compares to 2005's first quarter of 22 and $10 million respectively.

Our long-term debt totaled $163 million, $86 million of that is nonrecourse, $77 million is recourse. That's an increase of $13 million from last year's first quarter. Our long-term funded debt to equity is 0.48 to 1, that's exclusive of the nonrecourse debt. And our long-term debt rate is approximately 5.8%. So I think we've got a pretty good position in our long-term debt portfolio at this point. Mike?

Thanks, Gary. Before we open it up for questions I've just got a few more comments. First, you're all very well aware of the price performance of ANDE's stock recently. Obviously the investing community is pleased with our recent operating performance and prospects for profitable growth going forward in our existing business, especially rail, but also clearly through our entry into the ethanol industry. We're also benefiting from Lansing Grain's entry into ethanol trading.

While construction of the Albion, Michigan plant is going very well, you should know that we'll be hiring and training -- we are, in fact, hiring and training people to staff that plant right now and in the coming months under our management agreement with the LLC. But ethanol production at that location won't start until the third quarter of this year. Thus the LLC will be incurring startup expenses for several months without any operating revenue.

Similarly, we'll begin hiring for the Clymers Indiana plant in the second half of this year, again under a management agreement, but that LLC won't start production until first quarter of 2007. So in that case we'll have preopening costs this year and no revenue from the sales of ethanol until next year.

Continued growth in our rail business is definitely in our forward plans. We'll keep on growing our railcar fleet, rebalancing it when prudent and expect to be able to renew expiring leases at higher rates in the near future. And obviously we'll continue to endeavor to improve efficiency throughout the Company making process improvement a part of our makeup, just like customer service always has been.

Pulling all this together we believe at this time that our 2006 full-year earnings could reasonably be expected to fall within the range of $3.40 to $3.80 per diluted share. I recognize that that's a pretty wide spread, but we'll revisit it as we progress through the year and try to narrow the spread in these projections as he pictures become clearer. Remember that we'll be incurring ramp up costs associated with the Albion and Clymers ethanol plants throughout the remainder of the year and only generating revenue at Albion in the last few months of the year and none at Clymers until early next year.

Also, while our first-quarter earnings included some income from railcar sales, our guidance does not assume that there will be any significant railcar sales made during the remainder of the year. We'll address that as the year goes by. And in closing I'd like to state publicly once again that our excellent performance is directly attributable to the dedication and hard work of all of our employees. Now Gary and I look forward to any questions you may have. So Cynthia, I'll turn it back to you.

(OPERATOR INSTRUCTIONS). Charlie Rentschler, Foresight Research Solutions.

Mike, you just said that with regards to the Rail Group that continued growth is definitely in our forward plan. I guess the uppermost question on my mind is would you make the same comment about ethanol and might you also give us some more color on Dunkirk in terms -- I don't think it's been announced what the size of that plant would be, for example, and what the capacity would be?

Sure I would, yes. Growth is an our plans, especially since we're not producing a gallon yet, and the only actual commitments that we've made is at Albion, Michigan and at Clymers, Indiana where we're providing full operations and management and we also have a small stake, 8%, in a facility in Rensselaer, Indiana. So those are committed and going forward. At Dunkirk the press release that we put out a little while ago says that we filed for an air permit.

At this time we do not have the ability to -- we're looking at other alternatives. If we would do with Clymers it would be 110 million gallons similar -- I'm sorry, at Dunkirk, it would likely be 110 million gallons. But please don't interpret that as a commitment at this point in time. So although we're looking at other opportunities, there are no firm commitments or Board approved commitments, but we are looking for a way to expand beyond what we had without promising that at this time. Gary, would you want to add to that?

I would say, Charlie, that we're looking at a couple different areas. One is direct equity investment in the industry, but also significant service offerings to the industry. You know that we're doing the management of a couple of facilities in grain origination and ethanol DDG marketing for a few as well. And we'll continue to pursue that in our offering of services to the industry.

Thanks, Gary; that's additive.

But is this to say that you might not build any additional plants beyond Dunkirk?

I think what's to say, at least the way I operate, until we know for sure we are I'm not going to say one way or the other. I have a phrase here I've used with our team which is call me from closing. We're looking for opportunity, we hope it might develop, but I'm not going to at this stage give anything that looks like or suggests a promise to do that, Charlie.

The Dunkirk location is an interesting location. There are a lot of things that look attractive about it, but at the same time you can only imagine the different things that you have to -- the checklist you have to go down in order to secure a pretty good transaction, if you will. Not only the equity holders and all those kinds of things, but also economic incentives that are available from state and local governments and the kinds of permits that we need to have complete, the transportation available and the competitive environment around which things are going on all the time. But I agree, we'll call you from the closing.

One more question and I don't want to hog the time, but related to that are you a bit concerned about the size of your borrowings now short- and long-term? And might an equity offering be possible here at some point soon?

Charlie, our lines of credit are $200 million and we've got the ability to expand that by $50 million. We renew those every year and I think that's scheduled for September of 2006. I'm confident that we'll have plenty of working capital to do everything we need to do. As you note, our working capital did decline $20 or so million this last quarter and we did not go in and kick in a revolver to secure more long-term debt at that point. My sense is we'll increase our long-term debt temporarily. And as we get into the season when more cash flow comes in then we can ease up on that. With respect to selling additional equity, we'll tell the Market what our plans are if and when we make that decision.

Okay, call me from closing. Thank you very much. I'll get back in line.

Heather Jones, BB&T Capital Markets.

Good morning, great quarter. Also just wanted to tell you I appreciate the more specificity there was in the press release, it was good. I wanted to go back to ethanol first. As far as this air permit, I mean how dirty or not dirty are these plants? Are these difficult to receive? What are the issues with the locality giving you an air permit?

Virtually in any manufacturing setting where you're going to go into an area there's any number of permits that have to come in and a lot of processing facilities there are going to tend to be particulate matter that could be omitted and what you have to do is submit all the engineering plans to make sure that in fact what you do is consistent with the requirements and we've been able to secure those with no major issue in Michigan and Indiana. But it's a long and very detailed process.

We found as we worked -- and these plants, I would not call them dirty. But you've got to absolutely technically know that you're in compliance. Get drawings, engineering drawings, you get involved with the State Department's environmental departments. It's a rigorous and I think very appropriate process, it just takes a while. So what we've decided in this case is that it was prudent for us maybe out ahead of any actual total commitment at Dunkirk to get that process going.

I guess as a follow-up to Charlie's question, as we look to the second half of '07 and you've got Clymers up, you've got Albion up, is it likely that you will have announced intentions to have gone ahead with another facility or are you seriously considering at this point not doing any more facilities and just sticking to the management consulting side?

We are looking at options around both management and potential more facilities. Just the way I'm wired I just do not like to get out ahead and suggest anything that looks like a promise. There's any number of things that could come in that would allow that to happen or not happen, but there's an intent to look at both and hopefully do both.

Okay. And from our perspective, with the exception of an ADM and possibly a Cargill, you all look like you are the best positioned to be in ethanol production, given the proximity of your rail logistics, proximity to grain elevators, experience in the business. And I'm just wondering if you could speak to that, if I may be missing something?

I'm not going to suggest that we are or are not more equipped or better. There is some -- the company's New Energy ethanol in South Bend has been in the business for a long time. They do a good job, and I suspect and I know that there will be others in there. But relative to our capabilities, part of our strategy over the last several years, growth strategies, is to look at one where in the industries were' in or I'll call it adjacent industries we saw opportunity and where we felt that the capabilities we have matched that.

The fact is in ethanol, even before getting into it, we know that there are several components of that that we know that we are good at. One is grain originations, especially in our region. We are extremely good at that and have almost 60 years of experience there. One of the products, one of the key products that is made with the ethanol process besides ethanol is distillers dried grain, which is a feed ingredient. Although we have not marketed in any volume at all, distillers dried grain is a feed ingredient that goes to a number of users and customers that we either buy grain from or sell grain to. So that is up our alley.

You mentioned transportation. We have developed quite an expertise in the area of rail transportation, and that no question is a plus, not a minus, as we go forward. We had not manufactured or operated an ethanol plant before, and we have not marketed ethanol before. As we looked at the opportunity that was there and really inspected it, especially on the operating side we feel we have aligned with a very good quality builder and ICM, and they are absolutely critical to our developing an expertise in the operating side. We have been fortunate that we have within our ranks some individuals that have been in the processing industry before.

What we found out on the marketing of ethanol, it is a commodity, it is a different market. It is not the same, it is energy, but a lot of the aspects of it, especially when you get into the logistics side of it, are things that we have done and do well. So we do have substantial amount of capabilities in this particular space that we are moving into.

I just have two more questions. I was wondering if you could provide some detail as to the tax incentives you received. I want to say you receive those in Clymers, and I think maybe Albion as well.

Yes, we did in both cases, and in the area of tax abatements and grants for specific services. So those are essentially the kinds of things we are talking about. The amounts we're costing about, we have not disclosed them and don't plan to at this point.

Okay. And finally, I was just looking at your guidance and even assuming no further rail car sales, the kind of pricing you're getting and I would assume the nice margin leverage that brings with it as well as the improvement you're seeing in processing -- and given that you'll have a full quarter or almost a full quarter of ethanol production, I was just wondering, your guidance seemed a little conservative and I was just wondering if you're assuming a substantial decline in your core grain business this year or in plant nutrient? Just was wondering if you could give us some further detail about what you're assuming.

I can't remember exactly what I said a few minutes ago about plant nutrient, but I did say we see volume drops. I talked about the fact that the inventory pipeline is being flushed out as we move from maybe peak pricing to a little lower pricing. And so there's been some carryover in the system, in the wholesale fertilizer system and retail side, carryover from last year that's being flushed out. And we see a little lower application rate with a little -- we benefited from appreciation the last several years with our big story.

So we do see a year in plant nutrient that would be lower than the prior year. The first quarter is a little lower, it's just not -- it's generally a lost quarter and it's $400,000 lower. So you are right in picking up that we've got some defensiveness in there. In our base grain business, this first quarter was substantially lower from what I explained, but we do expect to see most of that come back.

Last year we had -- Heather, I think you were around. As we were coming out of the third quarter we substantially exceeded in the fourth quarter what we thought we would do even in the third quarter. So we're going up against numbers last year in the fourth quarter that were pretty sizable. And the crop continued to get better as the year wore on. At this stage of the game, for those of you who've not been with us for awhile, and I'm not going to say that I'm conservative or not conservative, I don't know the right word, but we don't have the crop planted yet. We will most years have two crop scares or more that can in fact reduce yields, they don't always reduce yields, and then you get into just what's the supply demand dynamics in the fourth quarter and it's a pretty variable situation.

And so with that in mind, I don't tend to sit here, especially having had a big fourth quarter last year, to suggest we'll necessarily go over that in our base grain business. But fundamentally we're feeling reasonably good about that. It is nice to see the improvement in processing, but we've got a long year ahead of us. We expect improvement for the year, but we're $1 million this year, I think at this stage to think that we'd be $1 million better every quarter, we're not expecting that at this point in time. Although there are some thing's in place that are positive.

And as you recall last year, it was in the last half of the year where we had substantial amount of rail sales and you alluded to that earlier and I said I'm just not assuming that we will have any such sales in this guidance or any material amount. Now that's probably conservative in the sense that we won't go below zero. It doesn't mean that we will have sales, we'll address that as the opportunity presents itself. So I don't know if it's conservative or not, but at this stage I feel reasonably good about what we've put out there.

To your point about the ethanol income in the fourth quarter and part of the third, that's a little wildcard because with the current relationship of corn and ethanol, each day that we're early or late from a target date could be significant in that business for this year. So if we get delayed, and we're not seeing that today, that's a negative. If we're able to move startup dates up that's a positive. And we're going to have -- at the time of our next quarterly conference in August hopefully we'll be up and running. We'll find out, but we'll certainly be able to peg that a lot closer at that point in time.

Okay, thank you.

Tim [Creden], Neuberger Berman.

What is the capacity of the two plants where you've started construction at Albion and Clymers?

At Albion, Michigan roughly 55 million gallons, that would be plate capacity, we'd hope to exceed that. And Clymers is 110 million gallons.

And the Michigan one comes on in 3Q. What about the Indiana plant?

First quarter next year.

Okay. And then also just wondering, are you guys selling ethanol on forward contracts yet in terms of for those plants that are coming on in the third quarter. Have you started selling that yet?

I'll answer it this way, we've been in the commodity business a long time in the grain side of the business and we participate in spot, we participate in markets that are a little forward and we participate in markets that are a long way forward based on our view of appropriate risk management. And we're using the same -- as part of the capability I think we bring -- at least our perspective is that we bring to this market is that we have to understand and know what the forward markets are, the various ways you can participate in them whether it's cash, futures, derivatives and handle the risk management appropriately. So that was a long winded way of saying, yes, we'll be in the forward markets.

Okay. And then I guess the last question. What would cause any delay in the ethanol plant? I know a lot of people are out there trying to get kind of similar equipment, but if you could give us some color on what would be the biggest risk to a delay?

Right now we're on schedule. You never know -- in the case of Albion we're well along. You never know what happens in the way of parts that do or don't show up or you run into something that -- these are the first ones we've built, although we're using I think one of the most or the most experienced company in ICM to build these. So I'm not anticipating delays, it's just I've been around now in the building of plants not in ethanol for a long time and sometimes stuff shows up tomorrow that you didn't see today. So I'm not expecting delays, but we just know they can happen.

Okay, thanks a lot.

Jane [Meady], [Seal] Capital.

Good morning. Just a couple of questions. It looks like the operating income as a percentage of the revenue in the rail business was down compared to last year and certainly last quarter. I didn't catch what had caused that.

You've got Gary and myself being silent right here, so I don't think either of us can give you a really, really quick answer on that.

Let's talk a little bit about it.

About the components of revenue.

Yes. Because I think that's it. We probably have more lease income in the 2005 number than we do in the 2006 number because when we have a sale there's a gross sale of an asset and when it's just leased spread our margin is quite a bit different. And that's probably going to be the biggest difference. But I don't have that specifically analyzed.

Okay. Obviously leased spreads has a lower margin, I presume. Or higher margin actually.

Let's look at one other thing just in case we do have it here.

Okay. If I can ask another question and if something comes up let me know. If you look at the capacity of Clymers in Albion, I know you've been marketing that capacity and trying to sell its ahead a time, how far are you in that process?

The capacity? You're saying how much of the capacity -- we're not going to disclose that.

Okay.

I appreciate the question though, it's a good question. I don't think we have a -- we're just not going to disclose.

Right. But our approach to risk management around these facilities would be to use forward contracts to the extent that it protects using gives us of give us and performance.

Okay. And then the other thing that I wanted to get is in total how much have you invested in Clymers, Albion and (indiscernible)?

If you look at our 10-Qs and 10-Ks I think you'll find that we've invested approximately $15 million in Albion, $21 million in Clymers, and $2 million in Rensselaer. That's equity investment. And the percentage of ownership in Albion is 44%; in Clymers it's 37%; and it's approximately 8% in Rensselaer.

And 44% of the equity in Albion?

That's right. So none of those operations -- they're all limited liability companies -- are consolidated with our financial statements. They're listed as another asset, an investment in -- an advance to an affiliate. That's how it will show up on the 10-Q.

And then my last question, the fee that you got from I believe Clymers is all reflected in the equity line and earnings of affiliates line?

No, I don't think it is.

The income portion, Gary.

Hold on just a second.

It actually shows up -- in the segment data it shows up in other income which is equity and earnings of affiliates, which is I think what you asked, correct?

Yes.

You will C2 line items. One is other income.

On the consolidated statement of income, not the segment data.

It will be included in the other income and then equity and earnings of affiliates is a separate line item.

So, on the consolidated income it's in the other.

The fees shows up in other and.

In other. In the segment data it's in the combined line, other income and equity and earnings of affiliates.

Right. And I guess my question is what's the difference between what you're recognizing in the revenue line and what you're recognizing in the equity and earnings affiliates?

Well, for the earnings of nonconsolidated affiliates, all of that would show up in equity and earnings of affiliates. There won't be anything on the revenue side.

Great, thanks.

Good questions.

(OPERATOR INSTRUCTIONS). Charlie Rentschler, Foresight Research Solutions.

Mike and Gary, when I was visiting you last and we were talking about ethanol you explained to me as the industry rolled out across the corn belt that it was very important to site locations and obviously to grab locations early on and I wondered if you could expand on that a little bit. And I noticed the other day, for example, that I think it was (indiscernible) or one of these outfits that announced that they were going to put in a refinery in Montpelier, Indiana which I don't think is all that far from Dunkirk. And can you kind of talk about that in terms of your strategy going forward?

I figured, Charlie, you'd come back around us what's our strategy and are you going to do more one way or another.

I feel like a bird dog.

You're sounding like one, but that's okay. The one that was announced in Montpelier that is north of Dunkirk and I think everyone who's following ethanol is well aware that just from minimum that the mandate's that we have out there from the federal government around usage are well above what we are producing today and then the economics of where ethanol is trading. Some questions were asked about the forward market, it's trading quite a bit lower in forward markets and spot markets but still at levels well above the cost of production using corn. So that's getting a number of entities, companies, individuals aggressively looking at trying to get sites identified and locked up and we are included in that.

So we have been looking at sites and there is -- in some cases there's the risk that you get if you end up building too many sites too close to each other there may be plenty of corn in a macro sense in the U.S., but in the local market it could get very expensive and that's one of the risks. And so as we're looking at the various opportunities for us to be linked at or sites that we'll be linked at, we're very cognizant of what others are doing I'm sure as they are with us. In the eastern corn belt where we operate we're going to go from very few ethanol plants to quite a number of them.

I would say, Charlie, that finding the right location is a simultaneous equation. You need availability of corn at a reasonable price, there should be class one rail and unit train loading capacity nearby. My sense is there ought to be feeding opportunities to sell the DDG in an area that isn't too costly for transportation, the population that would be consuming the ethanol is a critical part of the whole process, so the closeness to the overall population is important. Access to utilities is critically important because utility prices can range all over the map so it's important that we have the right kind of utilities at a reasonable price. And then the local incentives that are available from the economic development authorities is also very important. So I think you kind of put all of those in a hopper and run a simultaneous equation to figure out where you ought to be in this industry.

Okay. As a follow-up, going back to your legacy agra business -- Mike, can you give us your thoughts on how you think the U.S. farmer is positioned this brain? What's his mood?

Good question. One -- a couple of things. One, on the input side we've been into a multiyear increase in the cost of inputs and by input I'm going to talk about land cost has gone up for those who rent, obviously fuel costs have gone up and in general the cost of nutrients and [P&K] have gone up. Last year at this time I would say a number of the producer groups from a pricing of nutrients perspective had nutrients bought, a substantial amount at prices lower preplanting prices and we know fuel was lower. So, on the input side there's not a good attitude in the producer leveled today from virtually all types of inputs because cost of production is up.

However, on the other side of the coin we've seen in general some better commodity prices than we have seen in the last couple of years, not anywhere near record, but there's I would say a little bit of a buoyant attitude at least looking forward that there's going to be demand for -- more demand for the crops that they've been planting, especially soybeans and corn, not necessarily wheat, and they've been planting for some time. And so that bodes well. Then another thing that affects them at this time of the year is just weather, the ability to get in and get it planted. For the most part right now today it's been a good planting season so far with some exceptions.

So it always helps when you can get your seed into the ground in good conditions because it increases the odds that you're going to have better yield. Now we've got a long season to go, but on the input side -- and one of the things that they're doing on the input side, and I referenced that -- I think you're going to see a little bit of a management of the volume of inputs that goes in especially phosphate and potassium. I think potassium potash, it will tend to say in the soil and I think you'll see with higher prices there will be a tendency to put a little less down and mine the soil a bit. Now longer-term that ends up being a source of demand down the road when you have to replenish that nutrient.

Thank you.

Jane Meady, Seal Capital.

I just did some rough numbers on what Clymers and Albion could be capitalized at. And it looks like Clymers is valued much higher than Albion. Is there a reason for this?

If I'm understanding your question, it's twice the capacity. It will produce -- on the input side Albion will use roughly 20 million bushels of corn to produce 55 million gallons of ethanol and Clymers will consume annually roughly 40 million bushels of corn to produce 110 million gallons of ethanol. Does that address your question or did I miss the point of your question?

No, that's good. And how long in general does it take to put a facility up?

We broke ground in late summer last year in Albion and we would hope to be producing late summer this year, roughly a year. Clymers is a -- because it's a little bigger is -- so we're talking about a 12-month cycle for what we're doing, maybe slightly more than that for Clymers. And although we had the official groundbreaking last week at Clymers, we actually broke ground around the first of the year. So at least at this stage we'll call it roughly a year or a little more if things go well and for us so far they're going well.

Thanks.

Thank you. There appear to be no further questions at this time. Mr. Smith, do you have any concluding remarks?

Mike does.

Yes, real quick I will. I'll just say thanks for being with us today. We appreciate your interest, appreciate the questions and the dialog. Look forward to seeing you on Wednesday, August 2nd at which time we'll review second-quarter performance and re-examine our outlook for the year. Gary and I hope you can join us then. Until then have a great day and goodbye.

Thank you.

Thank you. This concludes today's conference call. You may disconnect your lines and have a great day.