Andersons Inc (ANDE) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Andersons, Inc. second quarter earnings conference call. My name is Chanel, and I will be your coordinator for today.

At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. If at any time during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Gary Smith, Vice President of Finance and Treasurer. Please proceed.

Thank you, Chanel, and good morning, everyone, and thanks for joining us on the second quarter 2008 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 a prospectus as prepared 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 complete review. Although the Company believes the assumptions upon which the financial information and its forward-looking statements are based are reasonable, it can give no assurance that these assumptions will prove to be.

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

Thanks, Gary, and good morning, everyone. As we noted in our press release, we generated record net income of $46.6 million or $2.48 per diluted share on revenues of $1.1 billion. 2007, we reported net income of $25.5 million, or $1.40 per diluted share on $634 million of revenues.

I'm very pleased with our outstanding performance, especially with both the plant nutrient and grain and ethanol groups establishing new second quarter earnings records. For the first six month, our total net income stands at a record $53.4 million, or $2.91 per diluted share. In 2007, we reported first half net income of $34.7 million, or $1.90 per share.

Total revenues of $1.8 billion for the first half of the year are up $800 million from last year. This revenue growth has come from several sources, including higher grain and plant nutrient prices, and ethanol sales made on behalf of our joint ventures.

To fully understand the total Company results for the quarter, we'll take a look at each of our five business groups. The grain and ethanol group established a new second quarter earnings record with an operating income of $20 million. This was significantly more than its year earlier result of $12 million. In fact, the income from all the business units -- that's grain, ethanol and Lansing Trade Group increased over the prior year.

The grain business benefitted from significantly improved margin on grain sales. The grain business, however, continues to be impacted by rising costs associated with higher grain prices.

First interest expense increased over $5.6 million in comparison to last year. Also, adjustments were made to the fair values of contracts to account for the increased risk of default associated with rising grain prices. Income from the ethanol joint ventures also grew during the most recent quarter.

For the first time, all three ethanol plants were in operation during the entire quarter. This compares to last year, when only Albion and the Clymers facilities were operating. As a result, 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 from originating corn for the ethanol plants and for marketing the distillers' dried grains.

Further second quarter income for the group's investment in Lansing Trade Group was $5.1 million higher this year. Total second quarter revenues for the group were $696 million. This includes $226 million of grain and ethanol sales made by the group in accordance with the origination and marketing agreements between the Company and its ethanol joint ventures, for which it receives a fee.

The second quarter of 2007, the group's total revenues were $324 million and included $111 million in ethanol joint venture sales. While revenues for the group are higher, such amounts do not serve as good predictors of income or economic performance for the group, as it is a commodity-based business. The grain and ethanol group's operating income for the first six months was $22.2 million in both 2008 and 2007.

The year-to-date results are attributable to the performance of our equity investments -- Lansing Trade Group and the ethanol LLCs. The grain business's performance, though improved for the second quarter, is lagging for the year due to significantly reduced space income that we experienced in the first quarter.

Total revenues through June were $1.2 billion in comparison to $568 million in 2007. The first half results include $412 million of grain and ethanol sales, which is $260 million more than was reported in the prior year.

Other factors that have influenced the higher revenue are increases in bushels sold, significant increases in the average prices of grain sold, and more than doubling of ethanol gallons sold.

At the time of this writing, crop condition reports show that 66% of the corn crop and 63% of the bean crop are good to excellent. Additionally, we're now expecting the corn crop for the year to be about 12.1 billion bushels and the bean crop almost three billion bushels. These bushel estimates exceed our thinking during the first quarter, when the country was experiencing excessive rain in certain regions.

In July, the grain and ethanol group made an additional capital investment in Lansing Trade Group, which increased the Company's non-diluted ownership percentage to 49.9%. We continue to be quite pleased with this strategic partnership.

The rail group had operating income of $4.9 million this quarter on revenues of $43 million. Last year, the group reported $6.9 million of income on revenues of $42 million. The group recognized $1.1 million in gross margin from the sale of rail cars and related leases during the quarter. However, last year the group recognized similar gains of $4.1 million. These gains were from non-recourse sales and lease financings and not from outright selling of rail cars.

Absent gains from sales, gross profit from leasing was 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.

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 23,840 cars and locomotives, which is 5% more than its year earlier total.

The group increased its locomotive ownership during the quarter from 81 to 120 locos. Also, the average utilization rate, which is the percentage of the fleet in service for the quarter, was 93.2$ in comparison to 92% last year.

Maintenance costs per car increased during the quarter. Unfortunately, the decreasing maintenance costs seen in the first quarter did not hold. The gross profit of the rail car repair business grew during the second quarter as the fifth repair shop was added in the second half of 2007 and a sixth repair shop was added in April of this year.

For the first six months, the rail group generated revenues of $78 million and operating income of $11.3 million. The same period in 2007, total revenues were $68 million and operating income amounted to $9.9 million. This year-to-year increase in the first six months' operating income is due to increased gross margin in the leasing business for the same reasons I previously mentioned. The results of the manufacturing business have also notably improved year-over-year.

The plant nutrient group had its sixth consecutive record quarter and this quarter far surpassed any prior record, with an operating income of $47.4 million on revenues of $274 million. The second quarter is typically strong for the group, but these earnings are unprecedented. In the same three-month period in 2007, the group reported a $17.1 million operating profit on $183 million of revenue.

These exceptional earnings resulted from significant margin increases, resulting primarily from inventory value appreciation stemming from our significant tons of storage space and unprecedented escalation in basic nutrient prices.

This escalation of plant nutrient prices, lower corn acres, increased season buying at the end of 2007 has actually led to a reduced sales volume when compared to last year.

This year, the plant nutrient group has earned a record $54.9 million through the first six months on $379 million of revenue. Last year, the group generated operating income of $17.5 million on $249 million of revenue.

Through June, the group's revenues are up 52% and operating income is up $37.4 million. I also want to note that there is risk that inventory price appreciation, which is continued into July on one or more of our products, could reverse in the future.

As was just announced on Tuesday, the plant nutrient group purchased three pelleted line facilities in Ohio, Illinois and Nebraska. These new locations establish the group as the largest pelleted line manufacturer in North America, and further broaden its geographic territory. I also want to mention that the integration of Douglas Fertilizer that was acquired at the end of April is going well and has already proven to be accretive to this year's earnings.

The turf and specialty group had operating income of $1.9 million this quarter on $36 million of revenue. Last year, the group reported $700,000 of income on $30 million of revenue.

Turf products tonnage was up slightly from year-to-year. Gross profit per ton was up considerably, in spite of record high raw material prices, due to a larger percentage of sales coming from proprietary products such as contact EG. The new dispersible granule products plant has been performing well and is exceeding production expectations.

Through the first half of 2008 the group's operating income was $3.9 million on $76 million of revenue. Versus last year, operating income is up $1.4 million and revenues are up $9 million.

This unit, along with several partners, was recently awarded a $5 million grant by the state of Ohio for research and development expenses. This grant will be utilized to further develop technologically advanced and proprietary products.

The retail group had a good second quarter. The group earned an operating income of $3.4 million, which compares to $3.6 million for the same period last year. Total revenues of $53 million for the second quarter were approximately 4% below the $55 million in revenue reported for the same period in 2007.

The sales decline is primarily due to the overall decline in consumer spending. However, due to a cost-cutting initiative that was implemented by the group this quarter, the bottom line results were much improved from the first quarter.

The group's total revenues of $86 million for the first six months were down $2.4 million from last year. The year-to-date operating income is break-even in comparison to $1.3 million earned through the first six months of 2007 due to the difficult first quarter the retail business experienced.

Year-to-date margins for the group have also been reduced due to competitive sales pressure. We have mentioned in the past that the Sylvania food market has not met our performance expectations. Although this is still true, there has been a notable improvement in the average weekly sales at the Sylvania location over the last four months.

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

Thanks, Mike.

Taxes for the second quarter, the effective rate was 37% -- that's up 2% from the second quarter in 2007. The tax benefits related to the 2007 charitable contribution of the Chicago Board of Trade shares is a primary reason for the increased rate between 2007 and 2008. We're projecting a four-year tax rate of 37% for the whole year.

You'll note that our allowance for doubtful accounts appears as a separate line item on the income statement. We added approximately $.9 million -- just shy of $1 million, and $2.6 million to the reserve for the second quarter and year-to-date respectively. With commodity prices increasing, we feel that there's a higher risk of loss from our grain and ethanol and plant nutrient groups, and so they've been adjusted accordingly.

Interest expense for the 2008 second quarter totaled about $9 million, up more than $4 million from the same period last year. Year-to-date interest expense was $18 million, up $8 million compared to 2007.

Our short-term average interest rates for both the second quarter and year-to-date were down approximately 2% compared to 2007. However, the average short-term borrowings as compared to 2007 were up approximately $300 million for both the current quarter as well as year-to-date.

Increased grain prices have caused us to borrow at these record levels. Short-term borrowings at the end of the second quarter were $432 million, however, grain and oil seed prices have dropped somewhat since the end of the second quarter. Our outstanding short-term loan balance is down to $185 million as of last night, so there's been significant decline in that balance.

EBITDA for the second quarter of 2008 was $88 million versus $50 million in 2007. Year-to-date EBITDA totaled $116 million -- an increase of $41 million from the same period last year.

The second quarter's pre-tax income includes $7.8 million in earnings with affiliates. The year-to-date earnings from affiliates total $16.4 million.

Current assets have been increased to $1.3 million by the end of the second quarter from the year earlier balance of $488 million. The majority of this increase was an inventory and commodity-derivative assets. We have discussed commodity-derivative assets and liability accounts at length during past conference calls, so I'll not repeat those comments unless you have questions in the Q&A.

Since 2007's second quarter our trade receivables have increased more than $56 million. Grain and ethanol receivables were up $26 million and plant nutrient receivables were up $13 million. Both of the groups experienced increased selling prices, which caused the outstanding receivables to be up.

The rail group accounts were up about $12 million and turf and specialty was up about $5 million. The higher commodity prices also increased the margin deposits by $52 million over the same period a year ago.

Inventories were $407 million at the end of the second quarter, up $191 million from the second quarter last year, compared to the 2007 second quarter levels. The highest increased came from grain and ethanol and plant nutrients, which were up about $106 million and $84 million, respectively. Again, this is mainly due to the higher inventory values.

At the end of June 2008, the total grain bushels in store were 40 million -- 40 million bushels -- down approximately 4 million bushels from our year earlier position. Networking capital at the end of June was $307 million, an increase of $151 million from last year's second quarter.

Total assets at the second quarter were $1.8 billion, an increase of $887 million over last year. Along with the increase in working capital, investments in and advances to affiliates added about $40 million in property plant equipment along with rail car assets leased to others added another $17 million.

Actually the end of 2008, second quarter depreciation totaled $14 million. The total capital spending, including investments and affiliates at the end of June, was $90 million versus $83 million for the same period in 2007. Rail car purchases and sales were $53 million and $41 million respectively during the second quarter. Those same numbers in 2007 were $31 million and $36 million, respectively.

Our long-term debt stands at $329 million, an increase of $178 million from last year's second quarter, and you may recall in the securities filing we used $195 million in senior unsecured notes during the first quarter 2008, thus increasing our working capital substantially.

As of June 30th, the total equity stands at $408 million; that includes a minority interest, and that's up $90 million from a year earlier. And on June 22nd, we paid our second quarter dividend of $0.085 -- that was an increase of 10% from our April payment.

Mike, back to you.

Thank you, Gary, and before I take questions, a few more points.

First I want to take this opportunity to thank the entire team that has made our current performance possible. During the first quarter, both plant nutrient and rail groups set new operating income records and during this quarter the same was accomplished by grain and ethanol and plant nutrient.

I want to extend special thanks to our plant nutrient team, whose results have been phenomenal. The team has worked diligently to serve our customers and optimize their inventory position while simultaneously exploring multiple growth opportunities and integrating Douglas Fertilizer into its business. And just this week, we completed another acquisition of the three pelleted line facilities, which I mentioned earlier.

We've been deliberately growing various business units for several years, and we intend to continue doing so. Just since the beginning of this year, we've increased our investment in Lansing Trade Group twice, opened a third ethanol plant, added another rail car repair shop, and purchased both Douglas Fertilizer and the pelleted line facilities.

I continue to be excited about our future prospects. I'm obviously extremely pleased with the outstanding earnings growth we've achieved so far this year, especially when you consider that the prior year results included non-recurring gains for the quarter and half-year of $5.1 million and $12.1 million, respectively.

Based on these results, last week we revised our projected full year outlook to $5 to $5.40 per diluted share. Previous guidance was $4.40 to $4.80.

Of course, our revised guidance was strongly impacted by the unprecedented performance within our plant nutrient group. Therefore, I feel I should mention that although our margins continue to be strong as we move into the second half based on inventory we own or have contracted to purchase, we do not believe that these margins are sustainable over the long long term.

Also, remember that with the diversity of our business units, there are numerous factors that could impact the full year results, both good and bad, examples of which are plant nutrient prices, grain prices, the timing of the sale of rail cars, performance of our equity investments, which include ethanol production and Lansing Trade Group, and as the year progresses we will again revisit our earnings forecast and if warranted we will update our guidance at that time.

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

(Operator instructions.)

And your first question comes from the line of Heather Jones of BB&T Capital Markets.

Good morning.

Morning.

Good morning, Heather.

Excellent quarter.

Yes.

You should be very pleased. I have several questions. First one that --

You do?

I know, I'm normally so quiet. On the debt side, I was curious -- the reduction in the short-term level, was all of that pay down, or was some of that classified as long-term?

No, that was all pay down.

Okay. And then Lansing, do you have any plans to increase your -- you're so close to 50%; what are your plans with regards to taking that to over a majority share position?

First I should say of course anything can change in the future from what we say today, but our intent is not to go over 50%, and it's not an issue of consolidation or not -- we disclose a lot of the information anyways. One of the strategies with Lansing long-term was with the high confidence and the capability of that company and its management to run their own company, and we both benefit from working together, but it is not our intent to go over 50% at this time.

Okay. Then as far as your ethanol fees more than doubling for the quarter, was that all due to Greenville or in the past, you've mentioned that you had additional clients signed, but didn't announce them until their plants opened. So was all of that Greenville or have you had some new clients brought online?

I don't think we've had any new clients that have come on, but we have had -- obviously we've got Greenville coming on, but Clymers came in in the second quarter of '07, so we didn't have a full quarter in that particular location, either. So the fees from the ethanol DDG, we do have another agreement, but that was in place before.

Okay. What about the new customers? How likely is it that they're going to open a plant or plants, and if it is likely, what's some timing of when those fees would start coming on?

Oh, right now we don't have specific customers that would be opening plants. We're talking to some folks. We do have one supply agreement with another company but it's constructed a little bit differently than the ones that we have already.

We're still looking at opportunities, Heather, but there's nothing significant out there right now.

Okay. Now, given the break in corn prices and natural gas prices of late, have y'all begun to take on any coverage as far as for your ethanol production side for '09?

No, we typically have a hedging philosophy that looks at the related values of corn ethanol and natural gas, and as you've pointed out, corn and natural gas have come down significantly.

Interesting, despite the fact that oil's come down, we didn't expect ethanol, frankly, to break as much as it has here this month. So the ability to lock in just pure margin ahead really has hasn't improved. It varies day to day, week to week, but despite the big break you would have thought that we would have gotten a better ability to kind of lock in a margin, or as what we call the crunch. So we've actually not done that.

The spot margins stay positive, generally, for the most part, but the deferred margins don't. So to the extent that you want to do something ahead, you'd be in a position where you would need to take a position in one or two of the commodities, not all of them.

And then, of course, you're betting on the fact that your judgment on that commodity is right, and at this point in time we've elected to stay for the most part on the sidelines.

We have had corn positions on the long side coming through the first half of the year and into this quarter. We have a basic desire to be a little more long than not, even if it goes down, just because of what you talked about and because as a company, we're generally a short hedger and there's an offsetting impact of that.

But ethanol is still substantially below unleaded, and I think part of that is we're still experiencing month to month an increase in ethanol capacity as the build-out is not finished. So there's that supply of ethanol coming into the market. We'll see what happens as we get towards the end of this year and into early next year when that build-out basically stops and the blend side of the ethanol business is able to absorb the capacity a little better.

That was a long-winded answer that we really aren't experiencing the ability to lock in good margins forward.

So basically -- because we've seen that, too, that spot margins have improved, but you're saying on a significantly deferred basis, they really haven't.

Well, they've improved -- they were really, really ugly before, and now they're just negative. And I don't mean to be flippant; that's an improvement.

Yes. Wonder if you can speak to wheat basis? There's been a little improvement but not dramatically so, and we're hearing that there may actually be some regulatory action taken, or it's being debated, to sort of force convergence, including forced cash settlement of futures, etcetera. And I was just wondering if you could speak to that.

Yes, during -- specifically to wheat, during the second quarter -- well, overall, in the first quarter we had a big basis loss and that wasn't just wheat, it was all grains, and we experienced overall improvement if you take into account corn and beans.

But frankly, through the second -- or in the second quarter, wheat really didn't move. Old crop wheat actually went down a little and new crop wheat went up a little. But as we've come into the wheat harvest, and it often happens, the wheat basis dropped down again, so it's actually lower right at this moment than it was in the second quarter, and we're now still accumulating wheat at these levels.

To your point, there have been some meetings at the Chicago Exchange and in Washington on the ongoing concern that for whatever reason, as you get to the spot futures month or even the deferred ones, the value of cash wheat around the delivery markets, which is Chicago, Toledo, and basically river market, has been and continues to be substantially below futures value.

Now last year, in the fall, there was a brief period of time of convergence. In the spring there was a brief period of time, and there've been a number of proposals that have been put up to possibly modify the contract, and you mentioned one of them.

And at this point in time, I'm not sure where that's going to take us. We've now experienced a big decline in the futures price of corn, wheat, and beans. Wheat still is maintaining a futures price -- I'm going to say, round numbers, $2 to corn, and the cash basis in wheat is way, way under the option, and so it's still, for those of us who've been around for a while, still would say that futures is not adequately reflecting the cash, and that is an issue.

Now it's going to be interesting to see whether the market resolves itself here, because there's been a perspective that one of the reasons it hasn't converged is that there's -- and maybe called an embedded long of hedge funds and commodity index funds. Well, that embedded long has been rewarding for people for some time, but it's not been rewarding too much lately.

So we'll see whether this cures itself on its own or whether something regulatory comes in and we're participating in the discussions, but we'll see what develops.

But for y'all at this point, you have some wheat, I guess you took on, I don't know, early in the year, late last year, that if you haven't sold it is being hurt by this basis spread. But generally, on a regular basis, you're bringing in new wheat inventories that are much cheaper. So this has become -- is it fair to say that this is becoming less of an issue, and given that you can deliver against the contracts, you stand to actually benefit from buying really cheap wheat and then being able to deliver against a much higher-priced contract?

Yes.

Okay.

That's true. Now, there is a down side. Let's just say that in a given location, you're $1.50 under the futures. There's a point where you fill up and then you have to sell the next bushel. Well, if we would go to $2 under the futures rather than go to $1 under, then what we're accumulating could be an issue except that, as you say, in Toledo, where we can deliver and have the ability to deliver, and in which case we get delivery price for that.

But there is a point in time where you still have to buy the next bushel and you don't have the space to deliver it and --

Right.

That's a function of what the market does. My own instinct -- well, we'll see what happens. We believe that ultimately, this thing will tend to work itself out, and like in any contract, ongoing review on how well the contract is functioning is appropriate and if -- with smart people in Washington and Chicago and the trade, and hopefully not overreaction, if adjustments are made, then hopefully we'll have the wisdom to make good ones.

Okay. All right, thank you and congratulations again.

Thanks.

Thanks.

Your next question comes from the line of Farha Aslam of Stephens, Inc.

Hi, good morning.

Good morning, Farha.

Hi, Farha.

Just starting with the interest question, what is your average interest rate on your short-term and your long-term securities right now?

On the long term, it's just shy of 6%.

Okay.

I think I've got the short-term here. Yes, short term is running just shy of 4%.

Okay, thank you.

I'm sorry -- that's for the quarter. Actually, for the year, it's just a tad over 4%.

Okay. And for -- Mike, you'd highlighted 12 states that The Andersons is interested in expanding their presence in. Could you detail what those 12 states are?

No.

Okay. Have to try. And then on the grain business, with the harvest being larger, do you see opportunities to make more space income this year versus last year, trading aside?

Well one, the space income will tend to be earned from July to July in corn and beans from October 1 to September 30th -- there's that cycle.

In corn, I would say our fear a while ago was that with early projections on carry-over taking us below a billion bushels next year, that our space income was going to be threatened. Now with carry-over projections somewhat similar to this year, I would call it a somewhat similar year.

Soybeans, we still have a tight balance table but the basis levels that we have in front of us for new crop soybeans and corn suggests that we're going to be able to accumulate, in the absence of some material change now, accumulate product at really nice levels. And then when we get the appreciation -- what quarter, what year it's in, I'm not sure -- but it should be a good year, Farha.

Okay. And then on your ethanol business, were all three of your plants profitable in the quarter?

No. Albion and Clymers continued, and as you know, we've had that substantially hedged. The Greenville one, and I'm going to try not to overcomplicate this, that is an entity called TAME, which is 50% owned by Marathon and 50% owned by an entity that is made up two-thirds Andersons, one-third Mitsui.

And the way we handle the buying of grain and selling of ethanol, we have to look at each entity to really understand the -- although they're both separate legal entities -- to understand the economic impact of running the ethanol plants.

But to make a long story short, between those two entities, as relates to The Andersons, we had a modest lost between our portion of the TAME business, the Greenville plant itself, and this entity that is Mitsui and The Andersons.

So basically The Andersons and Mitsui were hedged on grain, and the Greenville plant wasn't.

Well, it's not as simple as that because how pricing of corn flows through it, it's -- we're going to have to do a primer on this that it'll probably get bogged down in it, but I would say in general, there's some substance in the fact that Greenville doesn't hedge ahead, but there's also an issue of how we flow the timing of ethanol sales and corn purchases that complicates it.

Okay. Yes, a primer I think would be great.

Yes.

And then finally, on your rail business, could you highlight for us the opportunities from the large portfolios that may potentially be available to you?

You're talking about GE, (inaudible - multiple speakers).

Well, I wish [Rox] was in here right now. My understanding is that GE may have -- and may have -- everything I'm going to say now is a may, and not a certainty.

Okay.

May have -- initially they were intending to market the entire portfolio and hoped to find one buyer. We wouldn't have been of a size that would be able to bid on it. We think they may have not been able to get what they wanted on that and may have pulled that off, and maybe we'll see some stuff come out piecemeal.

I think that's similar with CIT, so we'll -- initially, we weren't going to have much of a shot or a shot because their hope was to find one buyer to buy the whole thing. Gary, I'm not sure where Wachovia --

Well, Wachovia's portfolio is not -- as far as we know, it's not 100% known as being for sale, but it certainly is an asset that they could liquidate if they need to shore up their capital.

So we're hopeful, if it moves into maybe a more traditional piecemeal -- put out several thousand cars. In that case, we would definitely be at the table and we would hope to be able to have a shot at some stuff and win on some acquisitions.

Those three portfolios are multi-billion dollar portfolios, if you look at the asset values. And so for us to step up to that without some financial support would be a stretch.

All right, and my final question is about rail car rates. Could you just highlight what the lease rates are this year versus last year and what your outlook is for lease rates?

Yes, and again, an awful lot depends on specifically what car, but in general, if we look year-over-year, we're relative -- I'm sorry, not year-over-year. If we look through this year, we're relatively flat and we're down a little bit from this year versus a year ago on actual rates per car. However, our margins have improved because as we depreciate the cars and they come off lease and we replace them, we're replacing them with a lower -- in essence, with a lower asset base, so we end up making a wider spread. It's very consistent with our strategy.

And right now, this stuff has always cycled before; I suspect it's going to cycle again. We had build-up, new car manufacturing, and it takes a while for that to get absorbed into the market. Now, for the most part, I would say large base manufacturing has really, really slowed down, so we've got a while before we absorb those in and we do have an economic slowdown.

So I think rates in the near future stay, I think, relatively stable with where they are, maybe a little downward pressure. I don't see a pop in the next 12 months, to tell you the truth. And that's okay. we really like the cycles, because it allows us to manage the portfolio in the cycles.

Okay. And when do you anticipate rail car rates to recover?

I'm going to say myself, just based on looking at cycles before, I'm thinking by 2010, maybe sometime in 2009, again, subject to the general economy we have is not an insignificant item on certain types of things. Lumber being hauled for new homes is down, as an example. So there's that subject to, but we will start -- every year we'll be scrapping cars, because we always do. Use the fleet, and that will help move us towards the next period of time where we're short a little, versus today we're long a little.

Okay. That's very helpful, thank you.

That concludes the Q&A session. I would now like to turn the call back over to Gary Smith.

Well, thank you, but I'll give it back to Mike.

Okay, that's fine. Hey, I want to thank you all for joining us. Our next conference call is scheduled for Wednesday, November 5th, at 11:00 eastern time, to review the third quarter. We hope you're able to join us at that time, and have a great day and appreciate your interest. Thanks.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have an excellent week.