Andersons Inc (ANDE) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2008 The Andersons, Inc. Earnings Conference Call. My name is [Towanda], and I will be your coordinator for today.

At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Gary Smith. Please proceed, sir.

Thank you, Towanda, and good morning, and thanks for joining us on our quarterly conference call.

As you know, certain information that will be discussed today constitutes forward-looking statements. Actual results could differ materially from those presented in 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 this date of the -- time of the call, the Company's independent auditors have not completed their review. Although the Company believes the assumptions upon which the financial information and its forward-looking statements are based are reasonable, they can give no assurance that these assumptions will prove to be.

Mike Anderson, Chief Executive Officer, and I will be available for questions at the end of the call. Mike?

Thanks, Gary, and good morning, everyone.

As noted in our press release, we generated net income of $7.8 million, or $0.42 per diluted share, on revenues of $713 million. In 2007, we reported net income of $9.2 million, or $0.51 per diluted share, on $407 million of revenues.

Although our first quarter results did not exceed the earnings record we established during the same period last year, it was our highest first quarter earnings from operations when one-time and non-recurring items are considered.

Remember that the first quarter record established last year of 9.2 million included $3 million gain on the sale of a Chicago Board of Trade stock and $5.4 million in non-recurring development fees related to the ethanol plants. These two items are included in Other Income.

Comparatively, the only non-recurring fee received this quarter was the final $1.3 million development fee for the Greenville ethanol plant.

Therefore, I feel great about our overall performance, especially considering that the Plant Nutrient Group and Rail Group both established new first quarter earning records.

However, to be fully -- to fully understand the total Company results for the quarter, we'll take a look at each of our five business units.

Starting with the Grain and Ethanol Group, it had an operating income of $2.2 million in the first quarter versus $10.2 million a year ago. It should be noted that part of this $8 million differential is due to the prior year's first quarter having $4.1 million more in non-recurring development fees included in the earnings, which I mentioned earlier.

The other significant change is that our grain business suffered a basis loss during the quarter of just over $11 million, as the cash markets for corn, beans, and wheat did not rise at the same pace as the futures market, mainly, in the new crop grains.

In contrast, income from the ethanol joint ventures grew significantly during the most recent quarter. The Albion and Clymers ethanol plants were in operation during the entire quarter, and the Greenville plant opened in February. This compares to last year, when only the Albion facility was operating during the first quarter. All three plants are now operational. Both our share of the ethanol LLC income and management and marketing fees earned for the quarter have increased.

Additionally, this increase in ethanol production has had an added benefit in that our grain business earns additional fees for originating corn for the ethanol plants and for marketing the distillers' dry grain produced at the ethanol plants.

Further, first quarter income from the group's investment in Lansing Trade Group was significantly higher in the first quarter of this year.

As it relates to our grain business -- and this is an important point -- I want to mention that we expect to regain the majority of the basis losses realized during the first quarter later in the year. We've already seen some of this basis begin to return in April and early May, and we expect more to return as basis levels improve.

I need to make one additional observation about the grain business, and that is that corn planting progress in our region and the U.S. is quite a bit behind the five-year average. While it's possible to make up a lot of this up in a short period of time if the weather cooperates, as of now, it is behind.

Although revenues are not necessarily a good indicator of performance within the Grain and Ethanol Group, total revenues were $499 million, up $255 million from the first quarter of 2007. This quarter includes $186 million of grain and ethanol sales made by the group in accordance with origination and marketing agreements between the Company and its ethanol joint ventures, for which it receives a fee. This is $146 million more than was reported for these sales in prior -- in the prior year.

Other factors that have influenced the higher revenue result in the Grain and Ethanol Group are considerable increases in bushels sold, significant increases in the average price of grains sold, and the more-than-tripling of the gallons of ethanol sold.

The Rail Group established a new first quarter earnings record with an operating income of $6.4 million, which more than doubled the $3 million earned during the same three-month period a year ago.

In total, group revenues of $35 million for the quarter were up $9 million. The group has continued to achieve growth in revenues, gross profit, and operating income. Contributing to this improvement was $2.2 million in gross margin we realized from the sale of some railcars. Almost all of these gains were from the preferred non-recourse sales and lease financings and not from outright selling or disposing of the railcars.

Last year's gains on sales were approximately $1 million. Absent gains from sales, operating income from leasing was still higher in spite of the fact that some lease renewals were made at lower rates. This is partially due to the fact that our asset base has been depreciated to a level that has led to wider re-let spreads.

Maintenance costs per car were slightly lower this quarter. However, I feel I should note that it's too soon to know if this expense reduction will become a long-term trend.

Gross profit from the leasing business was also higher due to a higher utilization rate and growth in the size of the fleet. The group now has over 23,200 cars and locomotives, which is 10% more than its year-earlier total.

Also, the average utilization rate, which is the percentage of the fleet in service for the quarter, was 93.4%, in comparison to 92.5% last year.

The gross profit of the railcar repair business also grew during the first quarter as a fifth repair shop was added in the second half of 2007. We also added a sixth repair shop last month in Anaconda, Montana.

The Plant Nutrient Group also had a record quarter, reporting operating income of $7.5 million on revenues of $105 million. These earnings are unprecedented in the first quarter, as it is typical for the group to break even or record a loss during this period. In the same three-month period of 2007, the group reported a $400,000 operating profit on $67 million of revenue.

Those of you who were following us last year will remember that 2007 was a great year for this industry as the sales volumes were high and margins increased due, in part, to the appreciation of inventory on hand that was then sold.

Although volume during the first quarter was down slightly in comparison to the prior year, margins have continued to increase primarily due to continuing inventory appreciation, and we believe that the Plant Nutrient Group's first quarter results are a clear indication that the group will have an excellent year in 2008.

Of course, this is partially predicated on the belief that approximately 86 million acres of corn will, in fact, be planted this spring. I also feel I should mention that at some point in the future, there is a risk that the inventory price appreciation could reverse on one or more of our products. In other words, what goes up will likely come down.

As was recently announced, the Plant Nutrient Group purchased Douglass Fertilizer and Chemical, Inc. at the end of April. Douglass has five facilities in Florida and one in Puerto Rico and a specialty liquid nutrient manufacturer and retailer/wholesaler, whose product lines complement the group's existing product lines. Douglass had sales of $47 million in 2007, and we are anticipating a smooth integration of Douglass into our Company. Further, we believe that the acquisition will be additive to earnings this year.

The Turf and Specialty Group had operating income of $2 million this quarter on $40 million of revenue. Last year, the group reported $1.8 million of income on $36 million of revenue. Turf products' tonnage was up slightly year to year. Gross profit per ton was also up slightly in spite of record high raw material prices due to a larger percentage of sales coming from proprietary products, such as ContecDG.

The new disbursable products plant that opened at the end of 2007 has been performing well and is exceeding original production expectations.

We are expecting the Turf and Specialty Group to have a significantly improved year in comparison to 2007 operating income results of basically breakeven.

The Retail Group had a disappointing first quarter. The group incurred an operating loss of $3.4 million, which compares to a $2.3 million loss for the same period last year.

Total revenues of $33.7 million for the first quarter of 2008 were similar to the $33.8 million in revenue recorded for the same period in 2007.

The 2008 revenues, however, included sales from Sylvania, Ohio Market store, which opened in the second quarter of 2008. Same-store sales actually decreased 4.9% for the period.

The sales decline is believed to be primarily due to the overall decline in consumer spending. Margins for the group were also reduced due to competitive sales pressures.

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

Thank you, Mike.

Taxes for the first quarter, our rate was 37%. That's up 2% from the first quarter of 2007. The tax benefits related to the 2007 charitable contribution of our Chicago Board of Trade shares was the primary reason for the increase in the rate for 2008. We're projecting a full-year tax rate this year to be 37%.

You'll note that we have an allowance for doubtful account that appears at a separate line on the income statement at the end of this quarter, which balance is $1.8 million. This is due to increasing prices, grain prices. We feel that there's a higher risk for our Grain and Ethanol Group, so we've set aside some reserves, plus we've had an additional increase in allowance for the Rail Group.

Interest expense for the first quarter of 2008 was about $9 million, and that's up $4 million from the same period last year. This change is all in short-term interest expense -- or mainly in short-term interest expense, where the rates were actually down 1% on average, but our average borrowings were really higher than they were a year earlier. The skyrocketing grain prices were the principal reason for the additional borrowing.

EBITDA for the first quarter was $28 million versus 26 a year earlier, and the earnings from affiliates this particular quarter were up substantially by $5.8 million to 8.6 for the first quarter.

Our current assets increased to $1.2 billion by the end of the first quarter from a revised year-earlier balance sheet of $641 million. The majority of the increase was from a $208 million commodity derivative asset. We have discussed these commodity derivative assets and liability accounts at length in the past three conference calls, so I'll not repeat those comments unless you ask in the Q&A.

Since the first quarter of 2007, trade receivables were up about $55 million -- Grain and Ethanol was up $27 million, and Plant Nutrient was up $16 million. Both groups experienced higher selling prices, which increased the outstanding receivables.

And the Rail Group was up about $10 million, and that was mainly driven by a quarter-end sale-leaseback, which the money came in shortly thereafter, as well as some higher revenues for the quarter.

You'll also note that when you get the 10-Q, the higher commodity prices have increased our margin deposits -- our net margin deposits by about $19 million versus the same period last year.

Inventories increased by $241 million to $558 million from last year's revised balance sheet. Compared to 2007, the first quarter levels, the highest increase, by far, came from Grain and Ethanol, with inventories up about $190 million. This increase is due to the higher grain prices, as well as 2 million bushels -- more bushels owned than we had a year earlier. Plant Nutrient inventories were up 49 million, once again, with the higher raw material prices. Turf & Specialty was up slightly, and everything else was about even, about unchanged.

At the end of March 2008, the Company's total grain inventory -- and this is in-house -- was 61 million bushels. That's down 4 million bushels from the year-earlier position. So just keep in mind, our ownership position is actually higher, but our total bushels in-house were actually down.

Net working capital at the end of the quarter was $275 million, an increase of $114 million from the first quarter of '07. Total assets at the end of the first quarter were $1.7 billion, an increase of $671 million over last year's level.

Along with the increase in current assets, investments in and advances to our affiliates added $50 million, and we have an additional pension asset of $10 million, and our railcar assets leased to others increased by $38 million.

At the end of the first quarter, depreciation totaled $7 million. Total capital spending, including investment and affiliates, at the end of the quarter was $52 million versus $39 million at the same period in '07.

Railcar purchases and sales were $28 million and $2 million, respectively, during the first quarter. Those same numbers for 2007 were $7 million and $17 million, respectively.

Our total long-term debt is at $331 million. That's an increase of $177 million from last year. You'll recall in some of our recent securities filings that we issued $195 million in senior unsecured notes on March 27 in 2008.

Our long-term funded debt to equity at this point is 0.76 to 1, and that's exclusive of the non-recourse debt, so that includes the $195 million that we just received.

And our average interest rate still is below 6%, so that's on the long-term side I'm talking about.

We paid our second quarter dividend on April 22 of $0.0775. We continue to enjoy outstanding support from our bankers. We have a syndicated line of credit right now of just over $900 million. That's up from $350 million at the end of the year. The average long-term borrowing for the quarter was about $516 million, so we've been using quite a bit of that $900 million.

Our business has traditionally experienced seasonal peaks and valleys in earnings and cash needs. We understand this. We try to work with lenders that have a fundamental understanding of these normal business cycles, as well.

Mike, back to you.

Thanks, Gary.

Before we take questions, I've got a couple more points.

As I mentioned earlier, our results for the first quarter did not establish an earnings record. However, when non-recurring items are considered, we did have the highest first quarter earnings from operations we ever had.

I want to again reiterate the Company is committed to growth, positive, sustainable growth, both organic and adjacent, that is, next to us, in areas next to us.

We've been deliberately growing various business units for several years, and we intend to continue doing so.

Just since the beginning of the year, we've added another railcar repair shop, opened the third ethanol plant, and purchased Douglass Fertilizer and Chemical, which has five locations in Florida and one in Puerto Rico.

I'm particularly excited about the addition of Douglass Fertilizer that just occurred last week, as this acquisition is consistent with the Plant Nutrient Group's strategic goal to increase its -- to increase their footprint and national market share through geographic expansion.

Next, as I do with each first quarter earnings release, I want to communicate our earnings expectation for 2008.

We currently anticipate that our full-year earnings will be in the range of $3.65 to $4.00 per share. This compares to our earnings per share of $3.75 reported in 2007. Please remember, however, with the diversity of our business units, there are numerous factors that could impact these results, samples of which are weather patterns in the agricultural planting and growing seasons; timing of sales of railcars; plant nutrient prices; and performance of our equity investments [inaudible] ethanol production plants and Lansing Trade Group. As the year progresses, we'll again revisit our earnings forecast, and if warranted, we will update our guidance at that time.

This concludes our prepared remarks. Gary and I will now be happy to answer any questions you may have, so, Towanda, we'll turn it back to you.

Thank you. (OPERATOR INSTRUCTIONS)

Your first question comes from the line of Farha Aslam with Stephens, Incorporated. Please proceed.

Hi. Good morning.

Morning, Farha.

Hi.

Just could you, Mike, share with us some color on basis? How much of this is an issue of simply timing, similar to what happened in 2006, and how much of it with what's going on right now with delivery and the convergence between futures and cash?

This -- we had -- none of this has real relevance to prior years. It's an issue that we've experienced -- are experiencing now. Maybe there was a little bit of this with wheat before, but when we saw this unbelievable run-up of futures prices in the first quarter -- Minneapolis wheat at one point in time got over $20 a bushel, soybean -- wheat over $12, and -- well, now, we had beans $15-ish. We had a situation where the ability to sell the cash grain -- or the cash grain just did not move up at the same level as the futures.

And, in fact, that is exactly what you're talking about, convergence, where you would expect it, especially in delivery markets, where at some point in time the basis levels would approach the futures price. For example, at the end of the year, our new crop wheat basis in Toledo, and this is -- you can get this readily every day from the market -- was 60 under the July. By the end of March, we were $1.50 under the July. By the end of April, we were back to $1.10 under the July.

And the circumstance we had is that as the futures are going up, if we would keep buying at the base -- we mark to market -- our inventories, our forward contracts, and the futures positions, we mark to market every day. And our perspective was that we needed to slow down the pace of buying, and the way you do that is you lower your basis, and we needed to slow it down because we weren't sure where we were going to be able to sell it.

Well, the markets, although still high, have settled down a bit. For example, wheat -- July -- or May wheat, which was $4.38 a bushel a year ago March was $9.29 at the end of March, and like I said, it got up over $12. As of the close yesterday, May wheat was $7.95 a bushel. Corn actually is a bit higher. Beans are down from their peak. So it's now settling down.

But we're in a volatile situation right now, but I would say the bulk of what -- I'd say the bulk of our basis write-down was on the forward positions we owned for new crop corn, wheat, and soybeans. Typically, we're accumulating our storage bins and harvest, and we hold through the harvest and post-harvest season, and honestly, we believe that the bulk of that loss -- and I mentioned that we had a little over $11 million pretax operating loss on basis in the quarter -- should come back this year.

Okay, and that's what's figured into your guidance?

Correct.

Okay. And when you look at your Plant Nutrients business, you had sort of calculated out 77% increase in your inventory level from the end of the year. Would you say most of that is pricing, or how much of that is volume?

I'm not sure I understand the 77%, Farha.

Did you -- Mark, your inventory level at the end of the year in Plant Nutrition was $63 million? And, Gary, did you say it was up $49 million from the end of the year, your inventory positions today?

Oh, yes. That's -- just trying to figure out where you were coming from. That was -- the inventory position was up $49 million.

Right. So that $49 million, how much of that was just the mark to market, and how much was that -- any volume increase?

Well, keep in mind, on Plant Nutrient, we do not mark to market the inventory for profit purposes when we're -- with the exception of -- yes. With the exception of when there's a deterioration of value, then we mark to market at the end of a quarter. But whatever we buy it at, that's what we're carrying at, for the most part. So that $49 million is a purchase price increase.

Okay. And so, Mike, could you share with us how you got that sort of 15-times increase in fertilizer in your Plant Nutrients business? What really fueled the increase? Was it --

Margins.

Oh, first quarter [inaudible] 15, well, what? Okay, yes, I will.

One, the 15 times, of course, when you're just above breakeven, that multiplier's maybe not the best thing to use. But what fueled the increase is margin, and the margin was fueled by having accumulated product in our storage space and having -- and prior to selling it, inventory appreciation occurs, and in selling at the market, we capture a sizable margin increase. Our volume was -- actually, sales volume was actually slightly lower in the quarter. So --

Tonnage.

Tonnage was actually slightly lower. So it came from the fact that we were able to sell at prices that -- at the markets that were substantially above where we bought it and put it into inventory. And we -- that's occurring even as we speak right now.

But at some point in time, and what -- we're replacing some at the current market, and obviously, if you're replacing the current market, there's not as much opportunity, and at some point in time, we will run through this pretty amazing situation, positive situation, that we've had, but we should have -- as I indicated, we should have a very good year in this group.

Agree. And my final question is interest expense for the full year, Gary, what would be your estimate?

Oh, I don't have an estimate right now.

Tell us what grain prices are going to do.

Yes, yes. I just -- well, you know what we've done with our long-term debt, and you can just multiply that by 6%, and that's probably fairly close. So looking at that balance with some increases and decreases, but I wouldn't expect a huge amount of change in the balance that we've got right now.

But just to put it in perspective, on the demand for cash, $9 million of the interest for the quarter was $4 million above what it was a year ago. That's substantial. And if you look at the peak, we hit $660 million at one point and -- $666 million at one point in time during the quarter in March.

So just so you know, we've never seen those kinds of levels in this company before, and that's the reason we went out to the banks and requested an increase, and they've taken it up to $900 million. And our balance right now is quite a bit below that 666, but -- and one of the reasons it's down is because we've brought in the senior unsecured notes, which was $195 million, as well. But I can't give you an estimate at this point on where that interest expense is going to --

We have pretty high confidence it's going to stay high for the year.

Right.

Okay. Thank you very much.

Your next question comes from the line of Brian Millberg with Piper Jaffray. Please proceed.

Yes, I'd like to talk a little bit more about the fertilizer inventory. You've mentioned this cautionary statement. As the year goes on, obviously, fertilizer costs are going to increase for you as you run through this older inventory. Can you give us any color on that? I mean we're talking -- some of these numbers are coming out anywhere from 100 to 200% higher at the wholesale level right now.

We've -- as you recall, we had a very good year last year and very good fourth -- certain fourth quarter as we experiencing the run-off. And as we're managing our positions through this spring season, this spring season will be good throughout -- in this second quarter.

But then we're in the position of recharging for the next year, and from our perspective, these unprecedented fertilizer prices, even though they could go higher, we would -- we don't think it would be prudent to be filling up our storage space at these kinds of numbers. So we're going to take a more cautious approach as we move into that, and I've said -- I gave the caution of what goes up comes down. I don't know for sure it comes down, but at some point, don't you just wonder, well, how long can it just keep going up and give you this, what I'll call, tailwind on inventory appreciation? I've got to believe at some point in time things settle down in that regard.

I guess my -- I totally agree, and I guess my question is if prices continue to go up, let's say, 25% on a year basis, something a little more reasonable, how much of that do you think you're going to be able to pass on? Are farmers going to be able to afford that at $6 grain?

You know, that's a good question, and of course, if it gets to a point where the farmer -- you've got a U.S. farmer and you've got a world market, and if you get to a point where the markets says, "Too much," that in and of itself will likely cause price deflation.

At the present time, though, with $6 corn and soybeans and wheat where they're at, despite the -- just the absolute increase in cost for those basic crops, the economics are still pretty solid. Not every crop, not all produce has gone up consistent with that, and so not every crop -- if the same economics -- is our main ones, but corn is the big driver, and today, it [pencils] still. So a farmer's going to use nutrients.

Um-hmm. Two other quick questions. Do you think you might re-look at issuing guidance again, let's say, first week in June once we really know what's been planted?

Yes, good question. If we feel at any time that we feel that our guidance that was issued needs to be revised, we would revise it. And whether that's first of June or middle next week or next quarter, we will -- we would do that if we felt it were appropriate.

Okay. And then, obviously, the number for the quarter, the EPS missed consensus, and I was just wondering how you felt about the quarter. Did it meet your expectations?

I'd tell you, one, and I appreciate the need and desire for you guys to put out quarterly numbers, I think and it's helpful. As you know, we don't put out quarterly numbers because when you get things like just where our basis pricing is at the end of a month, it can really impact a quarterly number.

But I feel fantastic about this quarter for two reasons -- or all three -- record P&G, record rail, and if you dissect the rail and pull out, we're only got a little over 1 million of income if rail comes from additional sales, and those are non-recourse, not dispositions.

So the base business got lift. You've got -- in this Grain Ethanol Group, you take that, we'll call it roughly over $11 million of a basis loss, highly unusual for us, in my opinion, today -- if it was changed, we would communicate it -- that will come back. You translate that into EPS if we hadn't had that, and I know it's real. I'm not trying to hide from it. I just feel it comes back.

And then you add in the fact that we had some unusual items in last year's number that did not recur this year, positive items last year that did not recur --

Substantial.

And it was substantial. This is a -- and you go back just a few years, in our first quarters, you often didn't see income, or if you did, it was very little. I feel fantastic about what this team's doing right now.

Excellent. Thank you.

(OPERATOR INSTRUCTIONS)

Your next question comes from the line of Heather Jones with BB&T Capital Markets. Please proceed.

Good morning.

Good morning.

Hi, Heather.

Hi. Thanks for the commentary on the quarter. I guess -- I guess my question would be you've seen some significant narrowing of the basis in corn and soybeans and maybe in certain contracts on wheat, but in some contracts, wheat has widened. And I guess I'm wondering does your guidance assume that wheat narrows to normal levels or just narrows some, or just if you could give us more color on what that explicitly assumes?

Yes, to give you an example, we started the -- this is Toledo, Ohio. Started the year at 60 under the July for new crop, and we started the year on new crop beans at 43 under the November. At the end of March, we were $1.50 under in new crop soybean, wheat, in Toledo, $1.15 under the November, down $0.72 in the soybeans, now $1.10 under for new crop soybeans in Toledo and actually the same basis for wheat in July.

Our assumption is that we'll -- by the end of the year, not necessarily in new crop -- but, remember, these new crop positions, we've got all the space, 80-some million bushels of space, that we'll be filling up, and then generally, after new crop basis appreciates again. Our assumption is that by the end of the year, we will have come back past the numbers that we had -- value of these new crop -- I mentioned wheat and beans because that's where the big basis losses were for the period -- that we will, in fact, come back and improve against the numbers we had, where we entered the year at. I feel pretty confident about that.

Now, what we -- will we improve to those levels right in July for wheat or right in October for soybeans? I'm not so sure. But by the end of the year, I feel pretty confident.

So you're saying that wheat was the biggest problem; by the end of the year, fast-forward into '09, you believe that basis levels will be around that 16.40 discount for July and November '09 futures?

Well --

Is that what I'm hearing you say?

No, the '09 won't be very relevant then. It will really be the wheat we buy in '08 and have bought already, and what will it be worth by the end of this year?

And what I'm saying is I feel reasonably confident that we will have gotten back to, call it, 60 under the -- we will have appreciated 60 under the December or the May, which will be substantial improvements to the 60-under-July number for '08.

Okay, okay.

December wheats trade well above the July, and I just feel that we'll be back to -- and even those numbers are not historically strong numbers, to tell you the truth, Heather.

Right, right. No, no, I agree. [Inaudible] concern -- and this is positive, several companies I follow -- is do you think there's -- I hate to use the word prominent, but a long, long-term dislocation relative to spot and futures just given the level of speculation in the futures market but also the influence of the weak dollar on futures prices?

I think the former for sure, and I think the latter, also. Now, whether it's -- I mean you used the word permanent. I would say temporary [inaudible] --

Yes, I don't want to use the word permanent, but longer-term.

Well, yes, we have had a substantial inflow of various type of fund money that's supporting futures levels and has supported future levels at above levels that are represented by the cash market. But [inaudible] wheat, in particular, that got over $12; it's now down to $8. It's in a much more rational relationship to corn. That's going to cause wheat -- more wheat to be fed than would've been fed before, and the futures market is doing a lot of that work. My fear was if wheat stayed at $12 and we had all this wheat produced, we might have to have $3 under basis to get it into the feed market and had no relationship in the delivery markets. We appear to be coming back to where there are correlations now between cash and futures.

Okay, okay, that makes sense.

Do we have perfect -- do we have perfect convergence? No. I think there are issues around the long-term viability of the Chicago Board of Trade market that we've got to find out how this shakes out because if we don't feel comfortable using it as a hedging mechanism, then we have to find another alternative, but at least stuff's coming together again now.

Right, right. Now, going -- have you sold -- given that you're having to bring in inventories now as higher prices on the Plant Nutrient side, have you sold forward? I guess my concern is is there any chance that fertilizer prices come back to earth and you've brought in high-cost inventory? Or as you're bringing in inventory, are you selling it forward?

We have that conversation a couple times a day. It's --

Well, I'm glad to know that I'm on the same wavelength as you all.

And concern might not be the right word. It's just managing the price risk of a commodity -- something that's moved this far. If it turns and goes the other way and drops and you have ownership, it can cost you. We're -- our team is spending a significant amount of time trying to make sure that we've got our positions in line with what we think is comfortable for us, and to --

Okay.

And, yet, you want to have product for your customer, too. So our expectation would be if and when that happens, that if we've done a reasonable job, that we won't be perfectly protected, but we'll have done a very fine job and have gained substantially more on what we've been able to sell at large margins than maybe a hit that would occur on [inaudible].

Okay. I apologize for the noise in the background, but real quick, so do you all now anticipate Plant Nutrients and Lansing earnings to be up year on year for the full year?

Yes, I know last year I said that Plant Nutrient would be harder to see it repeating, but given that the first half is the most important half for Plant Nutrient, we're feeling pretty good about the ability to meet or exceed at this point in time.

Lansing's off to a good start, and it's a training business. We'd expect it to continue. They had a very, very fine fourth quarter last year, so -- but I feel pretty good about it. I just don't want to try and overly predict the Lansing one at this point in time.

Right.

We're just -- we're off to a good start. We're involved in some more things in Lansing. It feels pretty doggone good, but we'll see.

Okay. And then my final question is the Greenville plant -- have you all locked in any more of that ethanol crush margin for this year, and have you begun to lock in your ethanol exposure for '09 yet?

The second one first, and that's beyond Greenville. We have not really done much of anything for any of the plants for '09 since we last talked. We have very little locked in. Forward margins for all of our plants -- forward meaning if I get out more than a month to two months -- the ability to lock in what we call crunch core natural gas and ethanol is still in the negative in all the positions out there forward.

In the spot market, it's generally remained positive, and so we've been able to get off to a reasonable start at Greenville, and that's continued up to the present day. But it's -- we're not getting the opportunity to get what I'll call freebies -- not -- freebies isn't the right word. Don't -- to lock stuff in ahead at numbers that make sense to us. But --

Okay.

But it's still staying positive in the spot.

Okay. All right. Thank you very much.

Yes.

Your next question is a follow-up from the line of Brian Millberg with Piper Jaffray. Please proceed.

I'm not exactly sure how to say this.

Then let's talk about retail!

Do you think-- you know, I live in the Midwest, and I see the outer-ring suburbs slowly sucking up the farmland. And do you think the time for your retail stores may have passed because the customer basis has changed because of their locations?

No, not from a location perspective. We've got three still prime locations that are still prime from demographics, and the three that are prime, there's been some changes. But let's take it beyond just the demographics.

Retail in the U.S. is -- the consumer in the U.S. is just not spending as much money, so I would expect that's going to have an impact throughout retail, in general, and so that just creates appropriate pressure for us on running a tight business.

Okay, and then --

The demographics are not a -- as you were speaking to, Brian, are not a major factor for our --

Okay.

-- our stores, and we don't have that many of them. We have six total --

Yes.

-- big stores.

Okay, and then -- I can't remember my next question. I'm hoping that your lower maintenance cost in Rail means you didn't replace as many wheels this quarter. Am I whistling in the dark here with the --

No, I can't answer because I just don't know. I did not -- I do not have the detail on that. We do know that eventually we felt that this wheel set stuff would catch up with us, but it's going to be -- it's going to be over multiple years.

Yes.

In any item where you see big cost increases, it creates a lot of incentive for the team to spend more time on understanding, analyzing, and managing it, and that's what our team has done. And we've said in the release I don't want to predict that we have a trend yet, but it did turn a little, and that's good, and we're focusing on it.

Okay, I remember my question now. The Douglass Fertilizer business that you purchased -- I think we discussed this a little bit before -- again, it seems fairly labor-intensive compared to your existing fertilizer turf -- specialty and turf business.

Yes, it is.

How are those margins going to work out? Are you able to keep prices up high enough as proprietary products and with the service-added component of the pricing, or how's that going to work?

Yes. And I don't mean that -- you said to keep prices higher. They do have some proprietary stuff, some of their own brands. And within our business, we have about 10% of our business, maybe a little less than that, is our own retail farm centers. So, actually, some similar [tonnies] that Douglass has, we have about the same amount of tons where we've got that high labor component just like you're talking about. And the services you provide need to be compensated sufficiently in pricing, and we believe we'll be able to do that.

They also distribute some wholesale stuff throughout most of the United States and do a fine job with that. So I think this is going to be -- really feel good about this being a win-win. We think we're going to -- we, the Andersons, will be able to benefit from some of the things that Douglass has done, and we know that some of the stuff that we've been doing will be able to introduce them to Douglass. So we'd expect some mutual top-line opportunities.

And will all of that income go into the Plant Nutrient?

Correct.

None into Turf and Specialty?

No, there could be a small amount that goes into Turf, yes, if it actually -- to the extent that it's in primarily professional and golf course industry, you could see some of that show up in the Turf. But Douglass itself, the historic Douglass entity, will be part of the Plant Nutrient Group.

Okay. And then on the Turf and Specialty, you had a great quarter, I think, and I'm a little curious. I'm looking at some of the numbers coming out now. Scott's, for example, showing downturns. Do you -- as the economy tightens, do you think any of that's going to affect that business?

Well, that's a great question. We -- as you -- anybody (who's) been following us for a while knows that we suffered big-time of our strategy to move into the consumer market as a house brand manufacturer across the nation did not work, and we retreated from that, and we do have some small consumer accounts. Our Anderson stores would be one of them. And that segment, there's no -- and that's the segment that Scott's heavily serves -- that segment is reacting to higher nutrient prices, and sales are down a little.

But our focus was to move into an area where we felt we had capabilities, which was professional, which was quality products. We've moved into patented, disbursable stuff. So the growth you're seeing is really -- it's our technology strategy is working.

Now, the quarter itself, this is always our best quarter. So wait till about -- wait a little later in the year before you tell us how good we're doing.

Okay.

But we like -- we believe our switch in strategy is working, at least in the sense that we have stopped the bleeding and we're moving in a northerly direction.

Excellent. Thank you.

Yes.

Yes. Thanks, Brian.

Your next question is a follow-up from the line of Farha Aslam with Stephens, Incorporated. Please proceed.

Hey, Mike?

Hey, Farha.

Could you please go through a little bit more detail on your Rail Group in terms of you had a very high utilization rate despite the fact that the economy is slowing. What do you think allowed you to get that?

Yes, a couple things. We do have some issues -- let's see. Railcar loadings continued to be a little slower, so that would work against our utilization.

Working for it is that we're in the used car space. We've given up opportunity in the new car possibly by going the way we do. As our assets get written down and we go to re-let, we're in a reasonably good position to be able to just say, "Okay, I'll accept an equal or lower monthly rate."

And the team -- we also happen to have a few sets of cars that we were -- that have been parked that we were able to find good customers for and get them back into service. So our niche is working.

Now, I think what's -- these high fuel prices, I believe, are going to -- and the efficiency improvements of the railroad will continue to drive traffic off the highways onto the railroads. That should be good for us.

We're not big in container cars, so we don't feel the impact of a slowdown in business that relates to containers coming into the U.S.

We're big into some basic commodities. Commodities, as you know, are wanted and desired. There are a number of things that just have worked well and the team is working to get stuff placed.

One other thing. Rasesh Shah, for those that don't know, runs our rail business. We were just talking yesterday about from -- we came off, we just -- we peaked on railcar rates just a year-and-a-half, two years ago, and we -- as that was going on, we were ramping up new car building, and that's shut down pretty much, for the most part, and this cycle from peak to peak was a quicker cycle than the previous two before it, which I'm hoping did not allow for the building of quite as many cars so that by going peak to peak quicker, we're going to be able to come out of the trough a little quicker.

So things feel pretty stable, frankly, right now in that business. Stable may be understated. I feel like we've got some stuff going in our favor right there right now.

The majority of the cars, Farha, are also on five-year leases, and so literally 20% of those are coming off each year. And I think there's another advantage we have in that we do offer full-service leases, and not everybody does.

Yes.

So it's not just a financial lease.

Oh, and that's a good point. The integration of the rail shops that we keep opening up across the U.S. is just one -- it's always been part of our strategy, and it's one more little additive thing -- a shop in Georgia last year, a shop in Montana, so the full-service we offer is just a little fuller now.

Great. And could you give us some color on railcar rate, kind of where a grain hopper traded at the peak a year-and-a-half ago, kind of where it is now? And --

You know, I have that -- I have that chart in my office, and I can tell you that kind of average rates are in the 3.50, 3.60 range now, and I don't want to say what it was a year or two years ago because I'd be going from my memory, and I don't have it right at my fingertips.

Okay. We have that number. The current rate --

I don't want to speculate on it.

Okay, that's fair. And could you just share with us your deal flow that you're seeing in that Rail business?

We've -- it's been -- we've seen some deal flow. It's not huge, but we've been able to add to our fleet. And I'd suspect that will continue.

And is the credit crunch currently affecting pricing at all, or are the players better in the market?

Gary?

I'm sorry; I didn't catch that part.

The credit crunch that's currently going on in the market, the tighter credit conditions, is that affecting deal flow at all and the prices that are being paid?

Yes, actually, it is. We've actually seen some opportunities come up where some higher-leveraged companies are looking -- or maybe not high leveraged, but people are just looking for cash flow, and doing a sale and leaseback with somebody else owning that asset makes some sense. And so, yes, we've seen transactions come in front of us that just -- somebody's just looking for non-owner -- ownership positions, just leasing them.

Okay. Thank you very much.

Farha, if you -- we can get that information to you. That's -- if you want to follow up.

And at this time, there are no additional questions in the queue. I would now like to turn the call back over to Mr. Mike Anderson for the final remarks.

Okay. Hey, thanks, everybody. Next conference call is scheduled for Thursday, August 7 at 11 AM Easter -- not Easter -- Eastern Time to review second quarter. We'll hope you'll join us, and if there's reason to upgrade -- update our guidance between now and then, we'll, of course, do it. Have a great day.

Thanks.

Thank you for joining today's presentation. That concludes the conference. You may now disconnect, and have a wonderful day.