Andersons Inc (ANDE) 2008 Q3 法說會逐字稿

good day ladies and gentlemen and welcome to the third quarter Anderson Incorporated earnings conference call. My name is Marcia and I'll be your coordinator for today's call.

At this time all participants are in a listen-only mode. We will conduct a question and answer session toward the end of this 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, vice president, finance and treasury. Please proceed, sir.

Thank you, Marcia and good morning everyone. Thanks for joining us on the 2008 third quarter 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 industry, both United States and internationally, and additional factors that are described in the Company's publicly filed documents including (technical difficulty) filings and the prospectuses prepared in connection with the Company's filings.

Mike Anderson and I will be available for questions after the call. Let me turn it over to him.

Thanks Gary and good morning everyone. As noted in our press release, we generated record third quarter net income of $12.8 million or $0.70 per diluted share on revenues of $906 million. 2007 we reported net income of $10.6 million or $0.58 per diluted share on $554 million of revenue.

Despite the record results, we had additional upside opportunities we could have achieved but didn't. For the first nine months our total net income stands at $66.3 million or $3.60 per diluted share. 2007 we reported net income of $45.3 million or $2.48 per diluted share.

Total revenues of $2.7 billion for the first nine months of the year are up $1.1 billion 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.

I'll start with the Grain and Ethanol Group. It had an operating income of $9.4 million in the third quarter versus $13.7 million a year ago. Income from the grain business increased over the prior year but this was not the case with our equity investments.

Grain business continued to benefit from its significantly improved margins on grain sales and from an increase in basis income. Early in the year we had significant basis deterioration but year-to-date basis income is now just below last year. The Grain business however continues to be impacted by higher costs, interest costs, which increased $2.8 million in comparison to the prior period due to higher grain prices.

Income from Ethanol business declined $8.8 million during the most recent quarter to a loss of $2 million. This was primarily due to the combined performance of the Company's investment in the three ethanol limited liability companies. Also the distiller's dry grain market, DDGs, did not keep pace with the rising corn market and this counted for approximately $1.2 million of reduced performance within the Ethanol business. I am able to report however that the DDG market returned to prior levels in the fourth quarter as the price of corn decreased.

The Albion facility explosion that occurred at the end of the second quarter also impacted this quarter's Ethanol business results. Our share of the impact is estimated to be about $1 million. The business interruption claim related to this event will likely not settle until 2009.

The total third quarter operating loss from our ethanol equity investments was $3.2 million. However when the minority investors share of TAEI is included, this becomes an operating loss of only $1.5 million.

The third quarter income from the group's investment in Lansing Trade Group was $2.6 million, which is $1 million lower than last year.

Total third quarter revenues for the Group were $651 million. This includes $245 million of grain and ethanol sales made by the Group in accordance with its origination and marketing agreements between the Company and the ethanol joint ventures for which it receives a fee.

The third quarter of 2007, the Group's total revenues were $383 million and included $167 million in ethanol joint venture sales. When revenues for the Group are higher, such amounts do not serve as a good predictor of income or economic performance for the Group as it is a commodity based business.

Before I move on to the year-to-date results for the Grain and Ethanol Group, I want to point out the impact of all the commodity markets have had on our income. As I previously pointed out, rising grain prices lead to much higher costs in the way of increased interest expense, bad debt expense, contract value adjustments within our Grain division. Rising corn prices can also have a significant impact on the Ethanol business as it is the primary input for ethanol.

These considerations led us and our equity partners to take purposeful positions to limit our risk on the rising price of corn. During the third quarter the price of corn declined significantly and these hedge positions led to an operating loss of approximately $8 million within the Company and an additional $1.6 million for our share of Lansing Trade Group for a total impact of $9.6 million.

Year-to-date, however, the impact of these cumulative long hedges has been a gain of $1.3 million, mostly attributable to Lansing Trade Group.

Overall I'm satisfied with the full year impact given the unbelievable volatility that's been seen in the market place this year. Even though I am disappointed that in the third quarter we gave back virtually all we earned in the first half of the year.

The Grain and Ethanol Group's operating income through the first nine months was $31.7 million in 2008 which compares to the $35.9 million in 2007. When you consider however that there were $6.9 million more in one-time development fees and insurance claims paid last year, operating income from continuing operations has actually increased $2.7 million.

The year-to-date results are largely driven by the performance of Lansing Trade Group and the Ethanol business. Grain business's performance has lightened for the year due to higher expenses related to high prices of grain experienced during the year, most significant of which is interest costs that were $11.5 million higher than last year.

Total revenues through September were $1.8 billion in comparison to $950 million in 2007. The first nine months results include $657 million of Grain and Ethanol sales made in accordance with origination and marketing agreements, which is $339 million more than was reported last year.

Sales of grain other than to ethanol entities also resulted in higher revenue due to increases in bushels sold and significant increases in the average price of grain sold.

During the third quarter the Company completed the purchase of a grain storage facility in Reading, Michigan, also finalized leasing agreements for two additional grain storage facilities in Canton, Illinois and Jonesville, Michigan. In total these transactions added 7.6 million more bushels of storage capacity within the group.

Rail Group had an operating income of $5.2 million this quarter on revenues of $28 million. Last year the Group reported $5.8 million of income on revenues of $34 million. The Group recognized $700,000 in gross margin from the sale of rail cars and related leases during the quarter. However, last year similar gains of $2.8 million were recognized.

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 current value of our asset base yields wider re-let spreads.

Gross profit from leasing business was also higher due to a higher utilization rate and growth in the size of the fleet. The Group now has 24,007 cars and locomotives, which is 6% more than its year earlier total. Also, the average utilization rate, which is the percentage of the fleet, and service for the quarter was 93.2% in comparison to 92.5% last year.

Maintenance cost per car actually decreased during the quarter after rising in the second quarter. Gross profit of the Rail Car business grew during the third quarter as a sixth rail car shop was opened in April in Anaconda, Montana, and a seventh shop was added in September in Ogden, Utah.

Through the first nine months, the Rail Group has generated revenues of $106 million and operating income of $16.5 million. For the same period in 2007, total revenues were $102 million and operating income amounted to $15.7 million. This year to year increase and the first nine month's operating income is due mainly to increased gross margin in the leasing business for the same reasons I previously mentioned.

The results of the Manufacturing Business also improved year to year. I am pleased with the Rail Group's results year-to-date as they are $800,000 ahead of the prior year in spite of gains from car sales being down $3.8 million compared to last year. This demonstrates that our strategy of buying cars in our target market segment is working well.

That being said, with the current slow down in the general economy, resulting in a decrease in car loans and improved velocity of the railroads, we could see utilization rate drop. Down turns in the leasing market however also tend to provide us with car acquisition opportunities that could pay dividends in the future.

The Plant Nutrient Group had an operating income of $7.2 million on revenues of $162 million. Typically the third quarter is a loss or near break even quarter for the Group. The same three-month period of 2007 the Group reported an $800,000 operating profit on $77 million of revenue.

The current quarter earnings were impacted both positively and negatively by fluctuating fertilizer prices. During the quarter significant margin increases were recognized on sales made due to the inventory appreciation. Certain inventory values however declined sharply late in the third quarter and into the fourth quarter, resulting in $13.1 million in adjustments for purchase commitments and inventory that was valued above the current market.

Sales volume during the quarter was slightly above the prior year. Although experiencing some realtime price volatility as a result of slowing demand and increasing supply, the Plant Nutrient Group has earned a record $62 million through the first nine months on $541 million of revenues. Last year the Group generated operating income of $18.4 million on $326 million of revenues. Through September, the Group's revenues are up 66% and operating income is up $43.8 million.

For the remainder of the year we anticipate some continued price decreases in the world fertilizer markets that will lead to margin decreases and additional inventory adjustments in the fourth quarter. The market is in the process of getting grain input costs and output prices recalibrated.

Managing the volatility is challenging however agricultural fundamental remain strong as world demand for protein continues to grow.

The integration of the recently acquired six Douglass Fertilizer locations and the three Pelleted Lime facilities has been going very well.

The Turf and Specialty Group incurred an operating loss of $500,000 for this quarter on $23 million in revenue. Last year the Group reported a $1.6 million loss on $18 million of revenue. Turf products tonnage was up slightly from the prior 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 Contec DG.

The dispersible granule product line is continuing to perform well and the Group continues to see products such as these as a growth area.

Through the first nine months of 2008 the Group's operating income was $3.4 million on $99 million in revenue versus last year's operating income, is up $2.5 million and revenues are up $14 million.

I feel I should mention that the price decreases, especially on nitrogen, being seen in our Plant Nutrient Group will not have a noticeable impact on the Turf and Specialty Group as the Group primarily purchases nitrogen as it is needed, which mitigates the risk of inventory devaluation.

The Retail Group did a good job of controlling costs in the third quarter, which historically is not a profitable quarter. The Group kept the operating loss to $200,000 which compares to a loss of $600,000 in the same period last year. Total revenues of $41 million for the third quarter were approximately 3% of $42 million in revenue reported in 2007.

The sales decline is primarily due to the weak economic conditions that have led to an overall decline in consumer spending. Margins for the quarter, however, were up 1.2% in comparison to the prior year.

The Group's total revenues of $127 million in the first nine months was down $3.6 million from last year. Year-to-date operating loss of $200,000 is $900,000 less than the results through the first nine months of 2007 due to the difficult first quarter the Retail business experienced.

As a result of the margin improvement seen this quarter, year-to-date margins for the Group are now comparable to the prior year.

Now I'll turn the floor over to Gary for the treasury comments.

Thank you, Mike. The Company's third quarter year-to-date effective tax rate for 2008 was 36%, unchanged from 2007. We are projecting that to be our full year tax rate for all of 2008.

Interest expense for the 2008 third quarter totaled $7.5 million, up more than $3 million in the same period last year. Year-to-date interest expense was $25 million, an increase of approximately $12 million compared to 2007. $7 million in short term and $5 million in long term debt was really the factor.

Our short term average interest rates for both the third quarter and the September 30 year-to-date were down approximately 2% compared to 2007. Average short term borrowings as compared to 2007 were up for both the third quarter and year-to-date by $112 million and $247 million respectively. Short term borrowings at the end of the third quarter were down to $44 million versus $163 million in 2007. This is significantly different than what you saw in June of 2008, which was a balance of $432 million.

The Company's short term lines of credit were totally paid off in early October and for the balance of the month we were investing yesterday and we still had excess cash investments of $8 million. When you review our 10Q statements of cash flow from operating activities, you'll notice a substantial improvement between the second and third quarters of 2008.

Earnings before interest and taxes for the third quarter of 2008 were $35 million versus $28 million in 2007. Year-to-date the EBITDA totaled $151 million, an increase of $48 million from the same period last year.

The 2008 third quarter pretax earnings include the loss of approximately $600,000 in the equity earnings of affiliates. Year-to-date equity earnings of affiliates totaled $16 million, down more than $1 million from 2007.

Turning to the balance sheet, our current assets ended 2008 third quarter at $842 million, a $201 million increase from the year earlier balance of $642 million. The majority of this increase was in three line items-accounts and notes receivable, net margin deposits and inventories. They were up $57 million, $29 million and $75 million respectively.

Commodity driven assets current were up $5 million from the same period last year and it ended the quarter at $113 million. However, commodity driven assets current was down $381 million from the second quarter of 2008, a pretty substantial difference.

Since the 2007 third quarter Trade receivables have increased $57 million. Grain and Ethanol receivables were up $15 million and Plant Nutrient receivables were up $39 million. All of this is a result of increasing sales prices--selling prices.

Margin deposits net ended the quarter up almost $29 million over the same period last year.

Inventories were $382 million at the end of the third quarter, up $75 million from last year's third quarter ending balance, compared to the 2007 third quarter levels. The largest increases came from Plant Nutrient with inventories up about $129 million and this of course is due to the higher raw material price.

Grain and Ethanol inventories were up--I'm sorry, were down $55 million, less bushels owned compared to 2007 and changes in the commodity prices were the--were affecting it.

At the end of September 2008 the Company's total grain inventories were 40 million bushels, down 6 million bushels from the year earlier position.

Net working capital ended September 2008 at $347 million, an increase of $191 million from the third quarter last year. Total assets at the end of the third quarter were $1.3 billion, an increase of $294 million over the third quarter 2007, but a decrease from the June 2008 peak of $1.75 billion.

Along with the increase in working capital, investments and advances to our affiliates added $54 million. Property, Plant and Equipment along with Railcar assets leased to others added $50 million as well.

At the end of 2007 third quarter depreciation totaled $22 million. Total capital spending including investment and affiliates at the end of September was $69 million versus $53 million for the same period in 2007. And this excludes Rail Cars, which I'll give you separate here. Railcar purchases and sales were $82 million and $54 million respectively during--for the first nine months of 2008. Railcar purchases and sales in the same period last year were $45 million and $16 million respectively.

Our long term debt totals $339 million, an increase of $194 million from last year's third quarter balance. Our long term funded debt to equity is 0.8 to 1.0. And the average third quarter 2008 interest rate for all long term debt was about 5.9%.

As of September 30, our total equity was $419 million, up $91 million from last year.

As is the case with most companies with a defined benefit pension plan, our portfolio has lost ground like everyone else invested in the capital markets. As a result we're taking steps to increase our contributions during these difficult economic times.

On October 22 we paid our fourth quarter 2008 dividend at $0.085. Fortunately we continue to receive good support from our banks. Considering the economic conditions, in mid-October when we renewed our temporary flex line at $161 million and that will remain in place until April of 2009. We currently have syndicated lines of credit of $816 million.

Mike?

Thanks, Gary. Before we take questions, a few more points. Despite the turn of events in the fertilizer market, I'm pleased with the earnings growth we have achieved so far especially when you consider that the prior year results included non-recurring gains that were $10.6 million more in pretax income than what has been recorded this year.

Current guidance of 350--$3.50 to $4.00 per diluted share was significantly influenced by the sharp--recent sharp decline in global fertilizer prices and the impact it has had on inventory valuation and will have on margins within our Plant Nutrient Group.

In both the first and second quarter I mentioned that at some point in the future there is a risk that the inventory price appreciation we had seen could reverse on one or more of our products. Admittedly we did not expect for the change in inventory pricing to occur so quickly, otherwise we would not have owned so much inventory.

Current guidance is also partially attributable to the economics in the ethanol industry, which have continued to worsen. It's also important to remember that with the diversity of our business units, there are numerous factors that could impact the full year results. Examples of which are further changes in plant nutrient prices and grain prices, the timing of the sale of railcars and the performance of our equity investments, which include the ethanol production plants and Lansing Trade Group.

As the year progresses, we will continue to revisit our earnings forecast and if warranted we will update our guidance at that time.

I would however like to put our guidance into perspective. Last year we had record earnings of $3.75 per diluted share, which was a 71% increase over the previous record established in 2006 of $2.19 per diluted share, which itself was a 30% increase over the prior year record. At our current range, we still intend to have a great year and possibly another record.

I'd like to reiterate--to (inaudible) by reiterating that the Company is committed to positive sustainable growth. We've been deliberately growing various business units for several years and will continue to do so. Just since the beginning of the year we have increased our investment in Lansing Trade Group twice, increased our grain storage capacity by 7.6 million bushels, increased our rail fleet by 6%, added two more railcar shops and purchased six Douglass Fertilizer sites and three Pelleted Line facilities.

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

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Heather Jones from BB&T Capital Markets. Please proceed.

Hey guys, this is Brett speaking on behalf of Heather. How are you doing?

Good.

It didn't sound like Heather, Brett.

I wanted to delve back into Rail real quick. Mike, you had talked about the down turning economy affecting the business and possible acquisitions arising there. And I was wondering if you could kind of go through some of the trends you're seeing in your own operations thus far in the quarter and your expectations for the business going forward there?

I just want to make sure I understand. That was a broader Company comment, not a Rail question, is that correct?

Right.

(Inaudible) about Rail.

That's right. That's about Rail.

Okay. Well, we do see for some period of time carloads of all types of--for some period of time, over a year, almost every month, not every month, but almost every month, the total carloads get reported. They've been hauled on rail lines and they've continued to go down, I think clearly reflecting the economic slow down. And as you take cars off the rail lines, generally rail--the rail lines get more efficient so the cars turn a little faster.

We've been blessed up till this time and a report of our utilization rate is actually increased in the third quarter versus a quarter a year ago. So we would suspect with the fact that we still are dealing with what I'll call the final phase of new car buildings coming back--coming into the market and leases unwinding and general slow down, that it will be a little more challenged to keep the utilization rate at the level we have it.

Now, so that's kind of as we look forward on the base business. But typically it's at that point in time that we're given, historically, the opportunity to step in and acquire cars and our place is in the used car space, so we would expect this to create some opportunities where we can acquire some more cars and grow the fleet, to take advantage of a cycle that goes up.

And we have most of our railcars are in long term leases-three, five, seven year leases, so in any given year, I'm just going to say on the average usually no more than 20% of our fleet is coming off lease and a good chunk of those will be re-let right away, but also we expect to have cars returned to us and just in this environment maybe a little bit harder to place.

Gary, do you want to add any color commentary to that?

Well the re-let rates have been coming down but remember, the basis in our cars are over and so as a result we--our spreads are pretty much maintained or improved.

That's helpful guys. I appreciate the color there. The other thing I want to talk about, when we look at your ethanol production investments and looking at it for Q3 here, we're assuming that Albion and Clymers made money, so is there anything unusual during this quarter (technical difficulty) Greenville losing more on a cash basis. Can you kind of take us through the performance there?

And actually Clymers did make money and actually Albion just was below break even. One of the reasons was we had a, it was a relatively minor explosion right at the end of the second quarter and we were out of production three to four weeks, and so almost one-third of the quarter. And we paid a little price for that and ended up slightly below break even.

So the bulk of the loss is in Greenville and if you look at the line on the statements on the financial statement--

Equity and Earnings of Affiliates.

Equity and Earnings of Affiliates, Gary, why don't you take him through kind of the breakdown of that and then you can get back into the TAME number.

You'll get all the granularity in this number and the 10Q but there's the three ethanol plants and Lansing Trade Group in there as well as another small entity that we're invested in. But when you look at the Greenville number, it's showing gross with its 50% of the loss would be reported in that line. However, we have a separate entity that's consolidated with our income and balance sheet, our financial statements and it's showing a minority interest for another outside investor.

And so you have to consider that two-thirds of that shows up in The Anderson statements on a net income basis, on a pretax income basis, and one-third flows into the minority interest and you'll see a decline quarter-over-quarter for their share of that loss.

Gary, I'm--what else is in that minority interest line?

It's virtually all that investment that we just--so if you add any called TAEI that owns 50% of TAME and that TAEI is two-thirds us and one-third [McSuie] and in essence that's at this point in time you can assume virtually all of that line relates to that investment.

I do want to add, we did just start up Greenville and we talked before about the fact that we did not have the ability to get forward contracts on in crunched, in essence the crunch on, at profitable levels and we've been more in the spot market, which is the negative margins.

I would say our--through the startup, we're now multiple months into it, we're getting about a 5% less yield of ethanol per bushel corned in that facility than we are in our other two and we're working on trying to get that up to the other two. But in essence, that yield is for the same amount of corn that we put through. If we can get up to the same yield, we get 5% more gallons and 5% more gallons at current market price of $1.70, in the vicinity of $8 million, then you've got net-off effect that you have less distilled dry grain but we would say that would be a $6 million item for the entity, $5 million, $6 million.

And we're working on a number of other things in that particular facility but we're not operating as efficiently as our other two and we've got higher costs. It was built later, it was built with some higher costs than the other two, but we've got to continue to focus on getting it more productive and more efficient.

And what's the main hamper on that yield?

If we knew exactly what it was, we probably would have (technical difficulty). I think that's what we're focusing on.

Okay. And then just a real quick last question. I'll jump into queue. I appreciate you guys answering my questions. When we look at the core grain handling business, year-to-date we're estimating that it's lost around $3 million when you adjust for the ethanol fees, production and Lansing. And then we're comparing that to roughly $1 million in earnings for the first three quarters of '07 and $8 million in earnings for the first three quarters of '06.

I think you pretty much answered my question in your prepared remarks but have you pretty much gotten back that hit that you saw earlier on basis this year? And what do you anticipate as far as next year's performance for core grain?

We've gotten back most of that hit. I'm not going to get into breaking up the numbers that we don't break out but your numbers are--I think we've done better than you suggested in the base grain business.

Okay.

Even after you've done some [netting] but we've got the bulk of it back and we see an improved basis appreciation especially when we even see the end of the third quarter. So we've had the [bear] this year and we talked about it in the call a little bit ago (technical difficulty) substantial amount of additional interest costs, I'd say higher than normal interest costs and we've had some [fair] value adjustments on grain with the risk of contract default.

So in a highly volatile market, I can look back and say here we made good decisions, here we made bad, but generally I'm reasonably pleased with what's occurred now as we've gotten through the third quarter and what's come back in income and feel good about that position and in our recent acquisitions of additional space.

All right, well thank you much, guys.

Thank you.

And your next question comes from the line of Farha Aslam from Stephens Incorporated. Please proceed.

Good morning.

Good morning Farha.

Good morning.

Just starting off with Plant Nutrients, could you share with us how your purchased contracts are structured for Plant Nutrients?

We have--I'll talk about two things. One is inventory and one is forward contracts. And in inventory we'll generally own our own inventory or we'll have inventory here held for someone else, which they'll market. And on forward contracts, there's times when we make forward projections and have a sense of the volume that we're going to be supplied by each supplier that is not always priced. And then we have the ability to make price commitments.

In this situation that we've just gone through, while projecting our anticipated fall and early winter usage, and given where prices were and concerns about available--availability of inventory, and the fact that at the time we had inventory and forward purchases priced below the market, the apparent market, or real market that existed say in early August, we owned a substantial--well we owned a fair amount of that. It was turned out obviously as prices have plummeted and when that's occurred, demand is really shut down.

So, but in essence we own inventory and we have--often have fixed price forward contracts.

So are you required to buy a certain amount every month and price it every month or do you have flexibility in that?

We have flexibility other than the fact that the reality is that fertilizer is not a just-in-time product. So we have--at any point in time we don't have to take product if we haven't committed to it. And so we could say we don't want it and we could take the risk that later on when we need it, we'd be able to get it. But our experiences show that we'd better be in a position to take advantage of the space we have and more often than not we've had inventory escalation.

But we're not forced in the sense, Farha, of someone saying, 'Okay, here it is. You guys take it at this price.'

Okay.

It's our decision. We pulled the trigger and now we have some hindsight that says we pulled the trigger out too much, too early.

And that $13 million, that is the mark down as of September 30 and then pricing declined again in October and we'll take additional hits in the fourth quarter? How much is that factoring in?

The $13 million is--I mean, you're right. It's as of October 30 or September 30 except the fertilizer market is not near as transparent and is a corn futures market and it doesn't trade as much. So in determining what the total amount of that revaluation should be on forward purchases and inventory, we have the reality of knowing what prices were doing through the month of October. And so that was factored into our decision.

And obviously we still had a good quarter compared to history, and if you look at where we're at year-to-date as a company and you look at what we're projecting within our guidance range for the fourth quarter, obviously suggests a poor fourth quarter for us and a substantial amount of that effect is we expect additional inventory devaluation and margin compression in that particular business.

And now we're into early November, we think we have a pretty good handle on that. On the other hand, it's--we'll have to see what develops between now and then.

And if you had to take a look at your holdings generally, are you a third, a third, a third for [gas], nitrogen and potash in your--?

I can't--I honestly don't know the answer to that at this point in time.

That's approximately what we sell, Farha, but that may not necessarily be what we are holding.

And of the three right now, we've had nitrogen and phosphate, or the commodities (technical difficulty) broadly, but within nitrogen, ureas gone down more than ammonia has as an example but nitrogen and phosphates is the one that's shown the most depreciation and potash has not shown much in the way of depreciation.

Any thoughts on potash prices and do you think that once the strike in Canada is resolved, you're going to see potash prices decline? Is that factored in at all into your thoughts?

We've taken a look at each of the commodities and within the commodities, all of our products. And dissected it and used our best estimates at this time as we factored in our guidance for the year. And I'm not going to--I'm going to avoid your question of a specific price per [classification] on potash, although I would say that it's not--it's fundamentals are a little different in the sense that it's a little less in supply. There's more supply constraints. There's still the existing strikes in a few mines, so it probably--our view is there's a little less risk there, substantial price (technical difficulty). It appears to be holding up.

And one of the things that happened, I mentioned in the conference call, this is true, demand for protein based food continues to be strong. We've not--we've switched the fertilizer front from being real supply concern, almost a concern I can't get the product, at least the nitrogen and phosphate. There's reasonable supply today and a reasonable pipeline. The same is not necessarily the case in potash. And as farmers delay their decisions on utilization now, that just puts a higher likelihood that when we get to the spring that they're going to need more.

Okay. And then when you look at your ethanol business, your plants currently, you were saying albeit aside from the issues, production issues and Greenville are profitable, if you had to go and run those plants without the hedges you have, do you think they would be profitable today?

No.

No. And kind of as you look out, are you still completely largely unhedged on your ethanol production for next year?

Correct. We're virtually--we are--if you get out into next year, we have very, very little on so the spot market I'd say no. The spot market has been lately, it's really interesting with oil prices plummeting as much as they have, ethanol, which was trading $0.60 to $0.80 below wholesale unleaded, now trading $0.30 above wholesale unleaded.

So ethanol obviously does not fall on as much as grain but we've added all this capacity, and in general, this is a generalization, just in the spot market, without taking a position on either being long corn or short ethanol, spot market margins has tended to be in the break even to loss situation for some extended period of time and that's where we are right now and I think we have to work through this current capacity buildup that we had before--and there's been, you've seen a little fallout in the ethanol industry here, fallout in the sense of some Chapter 11s, which have production still going on, but also some holding of some projects and some close downs, so the capacity, volume side, got to get reconciled and back in line with what the demand is I think before we get back into the profitable side, which we believe will happen.

And that puts--now I said a quick no. We are doing some significant things to work out, figure out how to get more productive, more efficient, take costs out of the energy side of the equation, so I give you a quick, abrupt answer but that really then creates the challenge for us to operate better than we have been.

So if you had to guess on when capacity will catch up with demand, would you put that six months out? 12 months out?

Oh, I'm thinking in terms of 6 and 12 and 18 months, not two and three years, but the thing that I don't really have a good handle on is how fragile or not fragile a number of these entities that are out there today are, what the balance sheet is, what the their credit situation, what hedges they have on or don't have, how they handle risk management. So I don't have a good handle on potential fallout, Farha, and that could be a factor that could actually shorten the time frame before stuff gets in balance.

Okay.

and I guess I don't really have a good handle on what happens with demand for gasoline now with a $2.00 gallon versus $4.00 gallon.

Okay. And my final question is just, is the difficulties in the industry creating opportunities for you to look at plants by grain storage facilities or plants?

Could you repeat that again? I just want to make sure I--

You have the opportunities to pick up some ethanol plants at very, very good prices or have you been buying--looking at grain storage capacity at ethanol plants?

The lease we did Illinois is an elevator attached to an ethanol plant but I would say for the most part on the grain storage side, our opportunities I believe will generally be independent of the ethanol plants but I wouldn't say that completely, so this shakeup will create some opportunities.

On the ethanol side, I would say right now our focus, although we're trying to stay aware and abreast of the next potential buy of capacity, especially with our concept of providing service and risk management, our major focus is operating the plants that we have well right now, operating them better.

Okay. That's fair. Thanks for your answers.

Thank you, Farha.

And our next question comes from the line of Michael Cox from Piper Jaffray. Please proceed.

Good morning. Thanks for taking my questions.

Hi Mike.

My first question is on the Plant Nutrient side. I was hoping you could comment on how long it will take to burn through the inventory position you have in fertilizer and as it gets replaced with lower cost fertilizer?

Great question. We know that the product that we have in here will easily be used into this fertilizer season. But we don't know is how the--how now that prices have come down some and the weather's still good, will demand pick up again this fall. And we're moving a little but it's still slow, and what the early winter/spring season is. But we'll use it up certainly in the season.

What we don't have a good handle on is we know we'll use the inventory. What we don't have a good handle on is where will prices ultimately end up and if they hit a floor, will they bounce back. For example in urea, which has dropped, depending on the market you're in, as much as 50% from its peaks, it appears to have bounced back off the lows.

So I would say knowing that what I'm about to say is a forward statement, and therefore subject to changes in the market, that we feel we've embedded in our guidance for this year the bulk of, the vast majority, hopefully all of the potential [sit] relative to inventory and contracts we have.

Now having said that, I can't be certain of that and then it's possible the stuff that's left from that, it's possible that we don't take as much of this fourth quarter. Stuff could move over into the first quarter.

But I think that we certainly as we get into next year, into the planting season for sure, we're back to what I would call from our perspective into a more normal margin situation and I would not--I think it would be too conservative of me to suggest that we won't have price appreciation opportunities again as we get into that time frame next year.

That's very helpful. And as we look at the volumes here in the fourth quarter, given this extended planting--harvest season, do you anticipate volumes to decline in the fourth quarter?

Yes, overall I think volumes will decline. They've been down so far and we are having wonderful weather, but this has been, with corn prices--now grain prices seem to have hit a, it's a floor or a shelf, but they've bounced up a little bit. Farmers have--this is a generalization--are in a very good cash flow situation. I say generalization because we know there's always situations that are not--where that's not the case.

But with input prices where they are and a set they might go lower, that does not create an incentive to get--it creates an incentive by as little as you can. Now that can backfire on somebody too because we still have good, really good fundamentals in agriculture. We just have to work through what I'll call this supply/demand equilibrium that moved from strong demand, not enough supply to enough supply, not enough demand.

But it will get back in balance and we've seen some recent shutdowns in phosphate capacity both in the US and overseas, so fundamentally we think this fall's going to be lower volume.

Okay. That's helpful and then just from a theoretical standpoint, could you remind us what type of impact if any you would feel from a shift in plantings from corn to say soy or something like that, given the volatility that we've seen in corn prices?

Right at this point, and we produced in the range of 85 million to 86 million acres this year, and I've seen projections out for next year. I think the highest I've seen is 90 and I've seen as low as 83, 84. We're feeling kind of flattish year-over-year. When you look at the supply/demand table in corn, we're going to reduce--I'm looking for my latest. Hang on just a second.

Here we go. We're projecting--we carried into this year about 1.6 billion bushels of corn and we're projecting that we're going to carry out between 1 billion and 1.2 billion next year. We have production of 12 billion, usage of 12.5 billion. I don't--maybe usage drops a little because exports may be a little high. Maybe we drop ethanol a little bit.

But the bottom line is we've got to keep producing corn. It's very hard for me to develop a scenario much downside from the acres we had this year. Granted it was all said and done and prices have to--the prices that the farmers get in the spring will have a major impact on that, so obviously if we go lower in corn then we use less nitrogen, and corn is king for our fertilizer business. I'm just not seeing much downside from this past year's acreage.

Okay. That's helpful and then my last question is on the storage capacity on the grain side. Are you seeing additional opportunities to add capacity there given some of the financial constraints that some of these smaller players may be facing right now?

About July 1 I was kind of sitting here saying, 'Oh boy, we're going to get quite a few opportunities,' but with prices now having plummeted, anybody that might have been challenged with working capital in the first half of the year was put back into good, a reasonably good situation.

We have grain--I mean right now wheat prices are $3.00 below what they were a year ago, over $3.00 below. Beans are slightly lower. Corn's pretty flat, so, and in general, I think those are the grain business, although we've had to suffer with the high interest costs. We have--those of us with storage, it's a reasonably good time once you've kind of put that behind you.

So we're going to be on the lookout and there's always companies or owners who have a desire to sell and we're going to be looking for opportunities. But I don't sense much in the way of distressed sale opportunities coming around.

Okay. Sounds good. Thank you very much.

Thanks Mike.

And your next question comes from the line of Joe Gromes from Oppenheimer Company. Please proceed.

Good morning.

Good morning, Joe.

Hi Joe.

Both of my questions have been answered but I have just a couple of quick ones here. On the Railcar assets that have been for sale in the GE, the CIT, any sense further on what's going on in those sales? Are they getting closer to breaking that up or I was wondering if you could give us more detail there.

The word on the street was initially that GATX was going to acquire the GE fleet and that transaction is apparently fallen apart. We would have expected, since we probably are not in a position to acquire a fleet that size--

Right.

--that any fallout from that kind of a transaction in terms of excess that they would have, we would get a shot at going after it. And so until something happens and GE makes a decision about it, I don't think that they're planning on piece-mealing it off but if they do, we're very friendly with them and they've been a good source of inventory for us and we'd be in a position to start buying.

Wachovia is the other big fleet and since they're being acquired by Well's, we're not sure what their long term objectives are. We're very close with Wells and we'd be happy to help them deal with that fleet if they're not interested in retaining it.

And CIT is, from what we can tell, has decided to hang onto their fleet, at least at this point.

Okay. And one other one, kind of on the ethanol side, seeing that the recent news on Verisun and them going bankrupt but still operating their plants, does that put more pressure do you think on the ethanol industry itself or is it going to be more do you think of just the same?

I think if you take--if you were to take a bankrupt facility and write the debt down and write off the equity, then you now have a new basis which is substantially below what the new construction cost was, I think you've got an advantage.

Now, you've got to get the financing and you've got to get it at a reasonable rate and you've got to recapitalize the business. It doesn't necessarily change all the non upfront capital costs dynamics that are going on in the market. And I think as Mike outlined, they're somewhat stressed right now.

Right, right. Okay, thanks.

And I would add on the Verisun, besides Chapter 11, they did announce, I believe it was yesterday, that they--all the construction 110 million gallon plant--

In Minnesota.

--in Minnesota--

Right.

--that was close to complete, that may go through all this and that may get completed but in the meantime, that production's not coming on when it was planned to and I think that's not going to be the only one. Like I say, I don't mean necessarily from Verisun, but I mean within the industry.

Right.

There are no further questions at this time. I'd now like to turn the call back over to management.

Okay, thanks. Thanks for joining us this morning. Our next conference call is scheduled for Friday, February 6. It's 11 A.M. Eastern to review year end results. I hope you'll be able to join us and have a wonderful day.

Thank you.

See you.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Good day.