Andersons Inc (ANDE) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2007 Andersons Incorporated Earnings Conference Call. My name is Sharon, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session at the end of this conference.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes. I now would like to turn the call over to your first host for today, Gary Smith. Please proceed.

Good morning, everyone, and thank you for joining us for the Andersons 2007 third quarter conference call. 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 [those 34 Act] filings and the prospectuses filed in connection with the company's offerings. It also includes financial information of which, as of the date of the call, the Company's independent auditors have not completed their audit, although the Company believes the assumptions upon which the financial information in it's forward-looking statements are based are reasonable. They can give no assurance that these assumptions will prove to be.

Let me turn the call over to Mike Anderson. And we will be available after the call to handle some questions.

Thanks, Gary, and good morning, everyone. As we announced yesterday in the press release, both our third quarter and first nine months net income and earnings per diluted share set new records for the Company. Our Grain and Ethanol and Plant Nutrients groups led the way.

In total, the Company achieved net income of $10.6 million for this three-month period, or $0.58 per diluted share on revenues of $554 million. In the same three-month period last year, the Company reported net income of $8.4 million or $0.51 per diluted share on revenues of $336 million. Being able to report record quarterly earnings is gratifying.

Through the first nine months, our total net income stands at $45.3 million or $2.48 per diluted share. These are additional records, not only is the net income more than double the net income of $22.6 million earned in the prior year, diluted share earnings are actually over $1.00 higher than the previous record of $1.41 established last year.

Total revenues of $1.6 billion for the first nine months of this year are up $600 million from last year. This revenue growth has come from several sources, including higher grain and plant nutrient prices, higher plant nutrient tonnage and ethanol sales we've made on behalf of our ethanol joint ventures.

I feel I should remind you, however, that some of the year-to-date income has come from unusual items, the most significant of which is a pre-tax $5 million gain from the disposal of Chicago Board of Trade shares we owned. To fully understand the total company results for the quarter, we need to take a look at each of our five business groups.

Starting with the grain and ethanol group. It's third quarter operating income of $13.7 million was $1.8 million higher than the year earlier result. Last year also included a gain of $4.2 million from a business interruption insurance claim.

Although revenues are not necessarily a good indicator of performance in this business, the groups total revenues were up $174 million in the third quarter. However, $85 million of this revenue increase is attributable to sales made for the ethanol joint ventures. Remember as part of our operating agreements, we earn fee income for this service but any sales margin is carried at the separate LLC level.

The income results for the quarter are up due to improved performance within our affiliates, the ethanol joint ventures and Lansing Trade Group that more than offset a substantial drop-off in our base grain business. As I've mentioned earlier this year, our base grain business is not going to repeat the second half that was seen in 2006.

Our income from the groups investments in Lansing Trade Group, however was up significantly for the third quarter, which now brings their year-to-date earnings number higher than last year. Both the Albion, Michigan and Clymers, Indiana ethanol plants were in operation during the entire third quarter, which is the first quarter both plants were in full operation.

This led to a substantial increases of both our share of the ethanol LLC income and management and marketing fees earned for the quarter. Additionally, this increase in ethanol production as an added benefit into the grain business, earns additional fees from originating corn for the ethanol plants, including the two in which we're a significant investor and for selling the distiller's dry grains produced by the ethanol plants.

Construction continues to go well on the third ethanol plant being constructed in Greenville, Ohio. It is scheduled to begin production in the first quarter of 2008. Through the first nine months of 2007, the Grain and Ethanol groups operating income was $35.9 million, which is more than double the $15.7 million earned through September of last year.

This year-to-year increase is due to higher earnings in our ethanol business and increase in space income and a year-to-year increase in development fee income of $3.5 million that relates to fees we earned for the establishment of our ethanol LLCs. Total revenues through September were $950 million, including $170 million in sales of ethanol.

This compares to revenue of $486 million for the same period of 2006, which does not include any sales of ethanol for the joint ventures. Total revenues in the grain ethanol group have increased this year due to an increase in bushels sold, a considerable increase in the average price of the grain sold, and an increase in the gallons of ethanol sold.

The Rail Group continued to achieve growth in revenues, gross profit, and operating income in the third quarter. Contributing to this improvement were the gains we realized from the sale of some railcars. Slightly more than half of these gains resulted from the outright sale and scraping of railcars and the remaining gains were from non-recourse sales and lease assignments of railcars, which remain in the fleet and we control.

Absent gains from sales, operating income from leasing was slightly lower due to an overall softness in the leasing market that has caused the group's transaction lease rates to decline. The railcar utilization rate is at an acceptable level of 93%, which is 3% lower than our best-ever utilization rate of 96% from the prior year.

Maintenance expense continues to be an issue for the group, and increased again slightly in the third quarter. The fleet has grown to approximately 22,600 cars and locomotives, which is about 10% higher than a year earlier total. The groups non-leasing businesses, which are the railcar repair shops and the manufacturing unit experience higher sales but lower operating income in the third quarter.

In total, the rail group achieved an operating income of $5.8 million this quarter on $34 million of revenues. Compared to last year, income increased by $900,000 and revenues were $7 million or 24% higher this quarter. Through the first nine months, the group has generated revenues of $102 million and operating income of 15.7. In the same period of 2006, total revenues were $90 million and operating income amounted to $16.1 million.

This year-to-year drop in the first nine months operating income is attributable to declines in the groups repair and manufacturing units. While the rail industry has been experiencing a slow down in freight volume, railcar values and lease rates continue to be in an acceptable range.

For the first time in it's history, the Plant Nutrient Group reported a profit in the third quarter. The group achieved operating income of $800,000, which is $2.7 million improvement from the third quarter of 2006. Total revenues for the group also reached record levels as they were $77 million, which is almost double the $39 million reported last year.

This net income record resulted from significant increases in both volume and margin. The third quarter volume increase is the result of customers buying earlier and more aggressively in anticipation of rising nutrient prices. This year the Plant Nutrient Group earned $18.4 million through the first nine months on $326 million revenues.

Last year, the group generated operating income of $1.9 million on $198 million of revenues. Through September, the groups revenues are up 65% and operating income is up $16.4 million. As the record income levels this year and the unusually low income levels last year are both outside the groups statistical income norms, we also feel we should compare the current results to 2005.

In 2005, the group had earned $8.7 million through September, which means the year-to-date income is more than even double the 2005 results. The record quarter and year-to-date income and revenue numbers for the group have been heavily influenced by the increased corn acres and inventory appreciation.

The increased demand for corn is a result of ethanol production, is contributed to the group's performance as corn requires more nutrients than other crops. Corn requires approximately 2.5 times the nutrients per acre than soybeans require, and 1.75 times as much as wheat would need.

The Turf and Specialty Group had a disappointing third quarter. The group incurred an operating loss of $1.6 million, in comparison to an operating loss of $400,000 in the prior year. Although it is normal for the group to incur a loss in the third quarter, due to the seasonality of the lawn business, the loss was larger than we expected.

Total revenues were $18 million for the quarter, compared to $20 million in 2006. The sales decline continues to be attributable to a reduced demand for lawn care products. Specifically the group has found this to be particularly true with fungicide and control products due to the unusually dry weather throughout much of the country. Sales in the cob business however increased slightly due to increased volume.

For the first nine months of the year, the group's operating income stands at $900,000 on $85 million in revenues. Versus last year, revenues are down $9 million and operating income is $2.2 million lower. Looking ahead the launch of our new products, particularly our dispersible granule products are being well received and product awareness continues to rise.

A new DG, dispersible granule plant, which is being built to produce these patented and proprietary products, is in the initial stage of startup and is expected to be in full production by December in order to prepare for next years sales.

In our Retail Group, total revenues of $42 million in the third quarter were $1 million above the third quarter of 2006. Total revenues included additional sales generated by the food market store that was opened in Sylvania, Ohio during the second quarter. However, same store sales were down 1.6% for the period. The group's operating loss of $600,000 for the period was slightly higher than the 2006 loss and total customer counts were down 3%.

The group's total revenues of $131 million for the first nine months of 2007 were up $3 million, while operating income of $800,000 was $500,000 below the $1.3 million the group earned in the same period of 2006. This year-to-year income differential is caused primarily by the competitive sales pressure in the Toledo area market and the performance of the Sylvania food market. As we mentioned previously, the new Sylvania food market has not met our performance expectations and the group is working on a number of items to improve the stores performance.

Now, I'll turn the floor over to Gary for his treasurer's comments.

Thanks, Mike. Our effective tax rate for the third quarter, or actually year-to-date, was 36%. That is unchanged from a year earlier [of] 2006 and we are projecting the full-year tax rate to be in that 36% range. Interest expense for the third quarter totaled more than $4 million, very similar to the same period last year.

Year-to-date the Company's interest expenses is $13 million, about $1 million higher than it was a year earlier. The increase is in short-term interest expense, our rates are up slightly and the average outstanding borrowings are also up for the nine-month period.

EBITDA for the third quarter of 2007 was $28 million, versus $23 million a year earlier. Year-to-date our EBITDA totals a [$104 million], an increase of $37 million from 2006. Pre-tax earnings for the quarter include $9.6 million in earnings from affiliates and $2.1 million of other income. Year-to-date our earnings from our affiliates totaled $17 million, up $12 million from the same period last year.

Other income for the Company totals $19 million for the first nine months. As I said earlier, this year's numbers include things like insurance gains, we had some both in '06 and '07, gain on the sale of the CBOT shares that were talked about earlier, there were some development fees for transactions that we've completed on ethanol plants. Rental income, gain on sale of land, and things like that are all included in those other income items.

Turning to the balance sheet, our 2007 third quarter is the largest balance sheet we've ever reported, over $1 billion. There is a number of things that are going into this large number. One element that is impacting that number by over 10% is a recent accounting change that we made during the second quarter of 2007 to reflect FASB FIN 39-1 and I want to talk about this a minute and just re-emphasize what's going on.

We adopted this recent interpretation which allows for the net reporting of margin dollars along with the fair value of our future and option contracts held on the Chicago Board of Trade. We have also elected to revise our presentation of commodity contracts from our previously disclosed net method to a gross method.

Our prior presentation was consistent with industry practice, but this revised presentation will provide additional information about our activities and counter-party risk. So you'll find additional lines in the balance sheet where you'll see margin deposits net, commodity driven assets current, commodity driven assets long-term, and then commodity driven liabilities current and also long-term.

Current assets increased to $642 million by the end of the third quarter from our revised year-end balance sheet of $348 million. Since the third quarter 2006 trade receivables have increased by $48 million, the increase was driven by the Grain and Ethanol Group, $33 million in our Plant and Nutrient Group, up by $13 million. Margin deposits net have increased $16 million from the same period last year, the higher receivable balances are a result of higher grain and plant nutrient inventory prices and related sales.

Inventories have increased $135 million, from -- to $307 million from last year's revised third quarter ending level of $172 million. Compared to the ending levels for the third quarter 2006, the increase by far, the biggest increase really is coming from the Grain and Ethanol Group with inventories up by $113 million. Plant Nutrients and Turf and Specialty inventories were up $17 million and $4 million respectively. Other groups were essentially unchanged.

At the end of the third quarter, the Company's total grain inventory was more than 45 million bushels, this is an increase of about 7 million bushels from our year-earlier positions. Net working capital at the end of the third quarter was $156 million, that's a decrease of $8 million from the third quarter last year.

Cash and cash equivalents ended the third quarter at about $25 million -- down $25 million at $22 million compared to last year. Of this balance, over $15 million is held in an account which is routinely used for certain like kind exchange rail transaction. Total assets at the end of September 2007 were $1 billion, an increase of $372 million over the revised 2006 third quarter.

Along with the increases in working capital, investments and advances to our affiliates added $59 million, and of course, the accounting change added to the balance as well. At the end of the third quarter, our depreciation totaled $19.5 million, that's year-to-date depreciation.

Capital spending, including investments in affiliates and exclusive of railcar purchases and sales at the end of the third quarter were $56 million, versus $34 million in the same period in 2006. Railcar purchases and sales were $43 million and $45 million respectively during the nine months ended September 30th. Those same numbers a year earlier were $61 million and $38 million respectively.

Our long-term debt stands at a $145 million, a decrease of about $19 million from a year earlier and our long-term funded debt to equity ratio, exclusive of non-recourse debt, is 0.26 to 1, so it's pretty good number. And our total number long-term debt, the average interest rate is running just shy of 6% and we have about 95% of our long-term debt locked up in fixed rate instruments.

So, let me turn it back to Mike for Q&A.

Before we take your questions, a few more points. First, I'm obviously extremely pleased with the earnings growth we've achieved this year. Our third quarter income and earnings per diluted share were both records. As I've already indicated, the third quarter results are even stronger than they initially appear relative to 2006, since 2006 third quarter earnings included $4.6 million in gains recognized to insurance settlements.

Conversely however, when evaluating the year-to-year income numbers, just remember that we had sales of non-operating assets, insurance recoveries and development fees on ethanol projects. And in the first nine months of 2007 included $6 million more in pre-tax dollars than in 2006 for these items.

I don't want to miss this opportunity to thank our entire team that has made our current year performance possible. The results we've seen this year in our Grain and Ethanol and Plant and Nutrient groups have been phenomenal. Although please remember that many of the company's businesses are cyclical in nature, for instance we currently anticipate a drop in corn acres next year.

Also, as you are all probably well aware, the economics in the ethanol industry have changed substantially over the course of the last year. I also want to again reiterate that the company's committed to positive, sustainable growth. We've been deliberately growing various business units for several years and we intend to continue doing so. In recent years, we've increased the size of our railcar fleet, entered the ethanol business, added physical locations and developed proprietary product lines.

Finally, a few weeks ago we revised our projected full-year outlook to 315 to 335 per diluted share, and we continue to believe this is the appropriate guidance. Of course our revised earnings guidance was strongly impacted by the unprecedented performance within our Plant Nutrient Group and the strong results of our Grain and Ethanol Group.

That concludes my prepared remarks. Gary and I will be now be happy to answer any questions you may have. So, Sharon we will turn it back to you.

Thank you gentlemen for your presentation.

(OPERATOR INSTRUCTIONS)

And our first question will come from the line of Brian Millberg from Piper Jaffray, please proceed.

Congratulations guys, great quarter.

Thanks, Brian.

I had several quick questions. I'm looking at the relative margins on the grain and ethanol, and while revenue was not up substantially, it appears this year that the margins have been dropping as time goes on. Could you comment on that at all?

Yes.

Yes we can.

But will you?

No, we will. In fact we were just having a discussion Brian ahead of time about our need to get better granularity on the revenue numbers because when we talked about this one that -- this one in the commodity businesses, revenue is not necessarily a good predictor of economic performance and some of that gets evidence in the calculated margins that come up.

For example, as we take corn, soybean and wheat price up substantially, the margin per bushel that we earned is not in absolute sense is not changed, so the percent margin deteriorates. In addition, we mention the roughly $80 million in sales in the quarter, and I forget the number I just gave you for the year-to-date.

It's [$170 million].

$170 million now in ethanol sales. The way we've structured this, the Andersons actually takes care of selling ethanol to the market and passes it through to the LLCs. And we make -- and as we pass that through, we make a small fee for the transaction, but it's a relatively low margin. The actual margin then gets experienced in the LLCs themselves, and as you know those aren't consolidated.

So, it is -- it's kind of messing up historical margins in analysis, but my perspective is although the calculated margin appears worse, our economic health is better, frankly. When you look at -- the problem is the percentage margin is just not a good way to look at it. Gary do you want -- I stumbled a little on that, do you want to --?

No I think you did it really well. The equity earnings and affiliates is where you'll get the return for the majority of the investment in the ethanol industry. In addition to the fees that we receive, but those are more consistent whereas the return on equity will be the one that really gives you the performance of that specific unit.

So you'll see revenues going up for two reasons; one because we're reporting the sale of ethanol, which we don't get a processing margin on, we get a fee on, and secondly, the higher price of grain. That doesn't necessarily provide you with the same percentage of gross margin relative to when it was half of the same price it is today.

Okay, that certainly makes sense. I had one other question. On the maintenance in rail, is this still the wheel issue that continues to plague the industry?

Yes it is. You may have seen that in some other rail releases that have come out recently. It is by far and away the single biggest material item still. And I guess until all wheel sets ultimately get changed out, that it is going to continue to plague us with higher levels.

I'm just not in a position because I just don't know right now at this table how long that's going to take before we really effective a full change-out. And even then, there will be the periodic change-outs after that, so it's a real issue.

Okay, one last question and then I'll let other people in. Just going back to the margins a bit. Knowing that you typically contract forward a significant amount of time on your ethanol, I -- even though prices have deteriorated this year, shouldn't your margins still be fairly decent?

Are you talking about margins in the ethanol --?

Just the sale of your equity portion in the ethanol.

This year, certainly, in the year we're in that's true because we've communicated that we've sold ahead. Is your question maybe looking out beyond '07 also?

Well, yes that was going to be a follow-up.

Mike Anderson. We have -- I'm going to just say hedge roughly 70% of the ethanol hedged in the sense of have ethanol sold/corn bought from 2008, which we feel good about. Now, back at the time we were doing that and we've talked about this before, if you move back a year and look forward, the ethanol prices forward were lower than the spot ethanol prices and the price for corn forward was higher than the spot corn.

So when we locked it in, it was at lower apparent margins from the spot margin. Today, those margins look quite nice. So we still have a good chunk locked in, a little more than 70% we still have more to do.

For the two plants in our operation.

That's, that's--

Very good, thank you.

Thank you. And our next question will come from the line of Eric Brown from Bank of America Securities. Please proceed.

Thanks, just to follow-up on that first question is, for the facility opening up in Q1, have you hedged anything at this point?

Very little.

Okay, so would the --

--substantially hedged on the other ones, my 70% relates to the Andersons' portion of the total investment.

Okay, so --

In other words that 70% relates to Albion and Clymers which have been open and Greenville that hasn't. If you segmented them, we're highly hedged at Albion and Clymers and very little hedged at Greenville, as by the time we finally committed to go with that one already we'd seen deterioration in ethanol prices and escalation in corn prices. So, in total we're roughly 70% hedged for our portion of all three.

And when you say hedged, you're talking about the ethanol, corn and natural gas?

Yes. And I'm not going to say that in any given point it may not be a perfect 1 to 1, but we're essentially, we call it crunched, on 70% crunched being sold ethanol, bought natural gas, bought corn.

How about the distillers grains? Can you hedge that?

Oh, that doesn't -- that's hard to trade out ahead, but it trades in relation to corn price. So we can manage our total corn position to take that into account.

Okay, the reason why I ask is because you may have hedged, I mean I guess typically distillers grains would offset about one-third of corn. So --

Roughly.

So where you're hedged, is it offsetting around one-third or is there a -- because of the timing is there a difference?

It's approximately one-third.

Okay. As far as your equity income, would it be possible to break out Lansing versus the equity investments in ethanol?

You can talk about the actual returns themselves, the numbers will probably show up in the 10-Q.

Okay, is there a rough breakdown, percentage wise?

No, we do report in the Q.

As far as the corn acres, you mentioned that you're expecting less corn acres for next year.

Yes.

At this point, what are you expecting and how will that affect your business next year? You obviously have a lot of inventory of grain at this point, so you're well positioned, but --

Sure. Couple things, we were just under -- I'm going to go back to '06 and we were just under $80 million acres and we were roughly $94 million acres in '07. In our current view, and this will change by tomorrow, so I'm saying the price activity -- action in corn, wheat and soybeans especially, and you can add cotton in that, will have an impact going forward, so I'm convinced that what we see today is not exactly what will happen. But it appears as if there is a lot of logic to have corn acres go down I think between 5 million and 7 million acres, which would still put it at substantially greater acreage than 2006.

A couple things then on the impact. One, one of the reasons we drop down is corn price is, although a year ago it gained substantially relative to wheat and soybeans [and incented] acres in, wheat prices and bean prices are substantially higher than corn now and that kind of pushes it the other way.

It appears as if we are going to grow the carry out in the U.S. corn market this year upwards of two billion bushels total. That suggests that we're going to have grain in inventory and have carrying charges which is good for our base grain business.

More grain is moving to feed ethanol plants, which is good for our trading business and -- within the Andersons, as well as within our affiliate Lansing Trade Group. The negative comes I would say to the Plant Nutrient Group, which I gave the statistics on nutrients per acre, and we would expect lower acres and that would impact volume of nutrients we put down last year.

And also we had huge escalation in nutrient prices in 2007 and I think as you well know, we invest substantially in hard assets to store inventory and we were able to enjoy some nice appreciation and it's questionable as to whether we'll get quite as much appreciation going into next year. So, some stuff it helps, some stuff it doesn't.

Okay.

If you look at just the flat price of corn forward out to next year, over $4 in December corn of next year, and you look at where the ethanol prices are, obviously the margins -- if you need to sell ethanol and buy corn and haven't done it, the margins out there are compressed and depending on your cost structure could be negative, so to modestly positive.

Okay, thanks a lot.

Thank you. And your next question will come from the line of Heather Jones from BB&T Capital Market.

Good morning.

Good morning.

Good morning, Heather.

Have a few questions. One just to clarify one of your comments you just made. So the high carryout, should that be beneficial to your grain storage business in the first half --

Yes

-- given it won't go through as quickly as some people were expecting?

Yes, well let's put it this way. It should be beneficial in the entire crop year which is September 1 through August. One of the things we never know, even at this time of the year is how much appreciation in basis occurs in the last two months of the year, in November and December.

And to the extent that the basis comes back real strong in the last two months, we might not get as much next year, but in total it's -- this is indicative of more carry in the market, which over the crop year is beneficial to us as opposed to a situation where we would have less carryover.

Heather Jones. Okay. Secondly, looking -- talking about basis. It looks right now basis threads are tracking close to last year's [Q4], so it -- just looking at which -- at comments you made on Lansing and ethanol production seems like you're core grain business was down pretty significantly for Q3, but looking at the trends in Q4 are you -- would you, setting aside ethanol production fees, etc., would you expect a comparable performance in Q4 for your core grain business?

Yes, comparable. We've said in the previous things that last half of grain would not be anywhere near in '07 what is was last year. Q3 was really the big quarter in that in '06. When we had the business interruption claim of $4 million and we also had significant deliveries of wheat against Chicago Board of Trade contracts, we got out a one-time nice margin from that. That was, I wouldn't call it a one-time income, but it was a big pop to the P&L. And to your point, I would expect much more normal and healthy fourth quarter grain business.

Okay.

In fact, frankly the third quarter grain business was a healthy third quarter versus history. Last year just was a moon-shot.

It seems like it's tracking more normal this year.

Yes.

Right.

Yes. Now given in the past few weeks ethanol prices have stabilized somewhat and started to move up, are you hedging any more of your Greenville production at this time, or are you just going to wait for the margins to become more attractive?

Actually, we're leaning into it. But I wouldn't say we've gone and made a huge leap if you will.

Yes.

Okay, okay. And then cash flow from these ethanol investments. How is that tracking and how much of a lag is it typically between when you see their earnings and when you get the cash in?

Well, the agreements are set up and really driven by the loan agreements that we first have to get through a cycle before we start making distributions and that cycle would be a typical year-end. So, we start getting distributions after the first year-end, and then we'll work with the lender to try to get cash out earlier than that if we have tax obligations and the like. But at this point, we're really tied into the loan agreements.

Okay. And on your rail business, you answered the maintenance expense question, but on the fabrication/manufacturing side, when do those comps ease?

I'm sorry, what's the question?

On the manufacturing/fabrication side, earnings have been down for the last couple of quarters and I understand there was a difficult Katrina comp and just wondering when comparisons will ease or I guess in another way, when is performance going to improve there?

Yeah, I'm with you. We had in '07, we had a real healthy, we had two healthy things that helped us. One was the amount of Katrina work in the South, and that rolls off and we get to comparing '07 to '08, but frankly, we've also -- so then we'll have better comps. But frankly, we've had business softening this year just in like our main rail shop in Maumee, so I'd say as the comments were down in general, if we had good comps, and we're also down because last year we got some real healthy pops.

Okay.

Having said that, if you look at what we are generating in income, in total out of our shops compared to our asset investment, I feel pretty good about that. What I don't feel good about is we have more potential out of the assets that we have invested. So I don't feel good that we're down, but we still have highly productive assets.

Heather Jones. And what is your outlook for '08 as far as rail goes? You are obviously growing your assets base and I interpreted your comments on lease rates as they're down from last year but you're renewing lease on average that were signed say five years ago. I interpret it to mean the rates are higher than they were five years ago, they're just lower than they were last year.

One -- first they are lower than last year. As far as renewals go, there is a bit of a mixed bag on that. We're renewing a fair amount at higher rates than the lease expiring, and that would be -- you used a five-year analogy example, and that would be typical for that, but some of the rates might have been a three-year rate that was put on three years ago.

So we've got some renewals now coming off a little lower cost posted the same and a little higher. I'd say the outlook for next, for '08, is that we're in now this cycle where we've built new car inventory, we've got a little slowdown across the company, so we've got to work through that just like we had to do in the early 2000's. So I don't expect a real pop in '08 and that, often that creates some opportunity for us. It creates the opportunity to do some acquisitions.

Right, have you seen any -- I mean I know you said lease rates and I think you said railcar values have held up, so you haven't seen the prices you're having to pay -- you've haven't seen those really coming in?

We've been able -- we're seeing a -- there's still -- that's a good question. We're seeing a little more ability to get maybe closer to our buy number, and as you've noticed we're up 10% in cars, so we feel we've been -- and we're patient buyers.

Value buyers.

And value buyers, that's a niche that we play. And so I would suspect that if you've got the basic lease economics suggesting lower values for the cars, we'll get our shots and be able to acquire some stuff.

We are at the table we see quite a few transactions and we have [buy sight] disciplines that are very important and we follow those and we believe they work for us.

And I should say, when we look at the structure of the leases that we have, we've got assets we own total, we've got some recourse leases, non-recourse leases. I feel pretty good with the lease income we're earning on our asset investment. And that continues to afford us the opportunity to get in and grow the fleet right now.

Right. How big are you all now, as far as market share on the used side?

Gary.

We're on 23, 22,500, 23,000 cars, which I think puts us number six in the United States.

Six or seven. Exclusive of the class one railroads.

Right, right. But including like GE Capital and all?

Right.

Right.

Okay. And then my final question is on Lansing a back, into at least, they must have done at least $3 million for the quarter. Was that just, say, had some unusual market movements as far as weed etc. or was the first half unusually depressed and we should be expecting better performance from them?

Well I think it's a little bit of both in that in a trading company you're not going to always hit the ball out of the park.

Right.

And so we did have a softer first half, and we did have some really good opportunities we took advantage of, but I would say we're fully back on track and we're expanding that business. That team over there has moved into a couple of other related businesses that take advantage of their capabilities. We feel just really, really pleased and proud of what they continue to do. But it's a little bit of -- I think you explained it well, we didn't do great in the first half and we're doing better now.

That's what I'm here for.

Quarter over quarter has really been excellent.

Yes. All right, well thank you and great job on the quarter.

Thanks, Heather.

I should say, Heather that that crew out there is an opportunistic group and when an opportunity comes they're good at taking advantage of it.

Thanks.

And our next question will come from the line of Farha Aslam from Stephens Incorporated. Please proceed.

Hi, good morning.

Good morning

Hi Farha.

Congratulations.

Thank you.

Thank you.

Could you provide us a little more color on your color on your Rail Group, in particular could you share with us what your railcar sales were?

Yes, I can. And I realize I went through the thing and I said oh, I forgot to give that specifically. We had gains on sales in the third quarter of about $2.8 million that will show up in the Q, and that compares about 1.4 last year. And I did mention in the conference thing that a little over half were from actual liquidations or scraping where the cars were gone and a little under half were from markups on financing transactions where we still retain control over the cars.

Great. And when you look at your Plant/Nutrients Group, the sales number was really significantly higher. And could you share with us what the breakdown is, just roughly, in terms of volume and what it is in terms of price?

I'm searching. We've got, oh man, Gary are you finding that?

Yes, it's -- our tons were up--

60 volume, 40 price.

Right.

About 60% volume driven, 40% price driven.

And going forward, do you expect that pricing to hold or how much of that pricing component do you anticipate --?

Nutrient values are higher, right now today than they have been throughout the year. So from the price side, it appears and world demand continues strong. Now we'll see a little drop off in demand for some nutrients for corn, but I think the whole world dynamic, commodity dynamic is going to continue to keep prices at high levels.

Are you at all concerned about the current potash situation in Russia and --

Yes. Well, concerned. There's a sinkhole that is now impaired up one single rail-line that is the access for about 10% of the world's potash production and a new bypass line is going to put in, but that probably won't be open until February or so and that's had an impact on escalation prices.

For us, our potash all comes from North America, and although the potash manufacturers have indicated they won't be making new sales, we're in real good position with our suppliers as we look to the coming season. And I believe that Russian issue will be rectified within four to five months.

Okay, so you're okay with your potash supply. How about the weakening U.S. dollar? Is that at all impacting your fertilizer cost?

Not really.

So you're pretty much well hedged in for fertilizer going into next year.

We still have more to buy. But we buy a lot of it -- is North American, well of course Canadian.

The Canadian dollar of course [is] going up too.

And it's an impact because we're working to do a little more offshore sourcing, but we're basically a U.S. dollar buyer. And we -- in the wholesale side of the business, we generally have the ability to pass on pricing. Our risk then gets more of do we own the inventory above the market or the benefit, do we own it below the market? And that's what we pay our team to do well.

Okay. And could you share with us some detail about rain movement and elevator volumes? You have added storage volume in your third quarter. No? You're grain and ethanol --

We added a small amount of storage in our system and we're putting outdoor piles out even as we speak right now just to take advantage of the corn harvest. But we didn't add that much. We've got more storage being added at the Greenville ethanol facility that will open in January, or first quarter rather that's not being utilized right now, so we didn't add a whole lot. Lansing Trade Group did buy a grain facility, [Terral] elevator down in the South, so that's in addition within the total system.

The amount of storage maybe of volume of corn that you are handling this year, or grain overall versus last year in the third quarter, would you say it's 20% higher?

Oh, yes, just a -- I don't have a good handle on the exact thing because I don't --

We have $7 million more bushels--

Receipts into our conventional facilities is pretty much the same, but what we have is now the Albion and Clymers ethanol facilities, that between the two of them will consume roughly 60 million bushels of corn a year, maybe a little less than that so you can divide that by four and that's what we're handling in the quarter. Plus we're originating grain to the IBEC facility in Indiana. So Farha, I don't have that data in a position to give you an exact percent increase.

Okay, that's fair. [I was] just trying to get a deeper granularity in your business. Can you look at the Grain/Ethanol group, it looked like you had $5 million or so in lower profitability in the quarter from just your grain business, excluding your equity earnings. Is that fair in kind of looking into the fourth quarter, are you looking at similar type drop-off, are you looking at again earning the $10 million to $11 million that you earned last year in that business?

Actually, the drop-off was a little more, but as we look to the fourth quarter -- and that's the thing we talked about earlier in the year that it was with high confidence, was saying that we won't do in our traditional grain business in the second half of '07 what we did in '06 because of a couple things that I've talked about before about the third quarter grain.

We would expect the last quarter grain to be in the ballpark of last year, understanding that even as we get to the last ten days of the year we don't know exactly what the grain basis is going to do and how that will affect the inventory evaluation. But it's a nice, good grain harvest going on right now. It's been wonderful weather, sizable volume, especially as you move towards the west, and so we're expecting a healthy fourth quarter.

Farha Aslam. Fantastic. Thank you for all the details.

Sure.

Thank you. And your next question will come from the line of Charlie Rentschler from Wall Street Access. Please proceed.

Yes, etiquette is going to limit me to just two questions. First, can you give us your thoughts on the supply/demand situation currently in the ethanol business? Are there -- with more blenders possibly coming on stream?

Oh, yes Charlie, that gets daily attention, in fact I wake up during the night wondering what's going on in any given day. What we have is a situation -- we'll round numbers -- when you get ethanol at such a discount to unleaded it's a heck of an economic stimulus to try and advance blending throughout the United States.

But the reality is -- and I think that's one of the reasons we bounced off the lows in ethanol here in the last few weeks, is that the blending is happening at a more rapid pace than maybe was predicted a few months ago. It was also of course lifted by oil price going up.

But we're still in a situation with what we'll call the blend wall, the blend wall being is let's just take a state like Florida that's not actively blending, is until you get to the point that they do blend there's a heck of a lot of potential ethanol that could go in there. And once it can go in there it's a big shot of volume.

But the fact is we're adding production of ethanol plants at a slightly faster pace than we're adding blending and distribution of ethanol, which is why the margins are crunched the way they are now. We've seen some announcements out there of a few projects slowing down or being delayed or being canceled, but in any given week you'll hear about the next one that's continuing to move forward.

But in general you see a little slowdown on the build-out, but not on the stuff that's being built real-time and is going to open in the next three, six, nine months. And you're seeing a little pickup in the pace of being able to blend the ethanol. Which should happen with these economics.

And my follow-up question, related to the first. You mentioned that you're a value buyer for used railcars, do you have appetite for more ethanol capacity maybe not another greenfield site, but an acquisition that might fit somebody that's maybe in trouble or -- ?

We have to be -- let's see, how to, how should we answer that, Gary? Just say yes?

We're always looking for opportunity, but today the valuation of facilities being put up versus values that you would probably buy are getting fairly close. And so new construction will slow down and as supply-demand gets back in sync, opportunities are going to be there and my sense is in the future we'll look at those to come our way.

And we'll look at those together with our partners too. And Marathon I think you may have seen recently came in to be one of the owners of our Clymer's facility and they have an expressed interest in -- they came in at Clymers', as an owner in Clymer's, and of course they already were an owner at Greenville which we'll open, and they have an expressed interest of getting more control over more ethanol production. So together with Marathon and Mitsui, our other partner, we'll evaluate opportunities.

Thank you.

Operator. Thank you. And our final question will come from the line of [Pree Ocamenan] from Thomas Weisel International. Please proceed.

Hi good morning.

Good morning.

Good morning.

Most of my questions got answered. Actually, I was looking at some more clarity on merchandising revenue during the third quarter. I just wanted to know how we did in this quarter, compared to let's say year-on-year or previous quarters.

Well, for example if you look at space income. Space income a year ago was substantially higher than it was in 2007. So that was probably the biggest difference purchase in sale or what we call put-through. Put-through a year ago was better as well. So, we've seen -- we're not going to see the same kind of numbers that we saw in 2006.

Okay. And how would be your outlook for 2008 on merchandising revenues considering that in Q4, a bumper harvest is expected?

Yeah, and you are specifically talking about the grain side of the business, is that correct?

Yes.

Yeah, we have every reason to be optimistic for next year's business. At this stage we've got more grain to store going into the first half, and then of course we have to get into the planning season, what gets planted, even though we'll likely produce less corn, it's still going to be a sizable crop. So, we feel pretty good about the fundamentals in grain.

And the carryover numbers are pretty well documented through the USDA

Okay. Thank you.

Thank you.

Thank you gentlemen. I'll turn the call back over to you for closing remarks.

Okay, thank you very much Sharon. We want to thank everybody else for joining us. The next conference call scheduled for Thursday, February 7th at 11:00 am Eastern to review the 2007 full year results. Hope you'll be able to join us and then have a great day.

Thanks.

Thank you everyone for your participation, you may now disconnect.