Andersons Inc (ANDE) 2008 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the fourth quarter 2008 Andersons earnings conference call. My name is Francine, and I'll 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. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. Would now like to turn the presentation over to your host for today's call. Mr. Gary Smith. Please proceed, sir.

Thank you Francine. Good morning everyone, and thank you for joining us for the 2008 fourth quarter and year end conference call. As you know, certain information that will be discussed today constitute 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 and conditions in the company's industries, both the United States and internationally and additional factors that are described in the company's publicly filed documents including 34 act filings and the prospectuses prepared in connection with the company's offerings. It also contains financial information of which, as of the date 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, it is no assurance that these assumptions prove to be. We are recording this, and you can access it on the website. Mike Anderson, President and CEO and I will be available for questions during the call. Let me turn it over to Mike.

Thanks, Gary. Good morning, everyone. As we announced yesterday in the press release, our full year net income is $32.9 million for the year or $1.79 per diluted share on revenues of $3.5 billion. This year's results were heavily influenced by significant lower cost to market inventory and contract adjustments made within our plant nutrient group, which was a pretax total of $97.2 million. Last year, the company reported net income of $68.8 million or $3.75 per diluted share on revenues of $2.4 billion. These prior rear results included $7.7.million in net after tax one time gains or $0.42 per diluted share. Although our full year earnings could be viewed as respectable versus history since they are our third best, this is overshadowed by the fact that I am deeply disappointed in our fourth quarter results. I feel we could have done a better job of managing our fertilizer inventory balances and future purchases contracts. The fourth quarter net loss was $33.4 million or $1.85 per diluted share on revenues of $770 million. This quarter included $84.1 million before tax of the aforementioned plant nutrient group adjustments. This compares to the same three month period last year in which the company reported net income of $23.5 million or $1.28 for diluted share on revenues of $785 million. As required by accounting standards, we will continue monitor the fertilizing markets and could adjust the value of our year end inventory if significant price appreciation or depreciation occurs prior to the filing of our 10K at the end of February.

Due to the recent stabilization of the fertilizer market, I believe we have accounted for the inventory and possibly all of the inventory adjustments. To fully understand the total company results, let's take a look at each of the five business groups. Starting with the grain and ethanol group. It had operating income of $11.9 million in the fourth quarter versus $30.1 million a year ago. Income from the grain business increased significantly this quarter over the prior year. But this was not the case with our equity investments. The grain business benefited from increases in both space and fee income. Conversely, income from the ethanol business declined $10.9 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 liability companies. The fourth quarter loss from the group's investment in Lansing Trade Group was $5.5 million which was a $14.6 million decrease in profit from the prior year. During the quarter, Lansing Trade Group has respectable gross profit from operations over the recording of significant reserves due to counter party exposure lead them to record these loss. With these reserves recorded, I believe that Lansing Trade Group is adequately reserved at the end of the year. Total fourth quarter revenues for the group were $565 million. This includes $209 million of grain and ethanol sales made by the group in accordance with origination and marketing agreements between the company in its ethanol ventures in which it receives a fee. In the fourth quarter of 2007, the group's total revenues were $548 million and included $89 million in ethanol joint venture sales. The grain and ethanol groups, operating income was $43.6 million in 2008 which compares to $65.9 million in 2007. It should be noted, however that there were $6.9 million more in one time development fees and insurance claims included in last year's results.

Through the first nine months, the grain business' performance was lagging due to increased expenses related to the high prices of grain and basis deterioration that had been experienced earlier in the year. The business unit, however, ended the year with $21.8 million in operating income, which represents record results from operations when the $2.8 million business interruption gain from 2007 is not considered. For the year, the grain business had significantly improved gross profit from grain sales and higher space and fee income. These, however, were offset by higher expenses, primarily interest and bad debt reserves. Adversely, income from the ethanol business was $13.2 million in 2008 in comparison to $27.7 million in the prior year. The primary causes of this income decline were the combined performance of the company investment in three ethanol limited liability companies during the second half of the year and a $4.1 million reduction in development fee income. The percentage of ethanol margin per gallon locked in was not as high in the second half of the year. The equity income for Lansing Trade Group also declined by $6.5 million in 2008 as they ended the year with our share of the income being $8.8 million. As I already mentioned, this was due to significant counter party reserves being recorded during the fourth quarter. Total group revenues for the year were $2.4 billion in comparison to $1.5 billion last year. The current year revenue includes $866 million of grain and ethanol sales made in accordance with origination and marketing agreements, which is $458 million more than was reported the prior year. Total revenues for the group have increased this year to do a considerable increase in both the value and price of grain sold and due to an increase in the gallons of ethanol sold. As I mentioned previously, 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.

During the fourth quarter, the rail group generated revenues of $28 million and operating income of $3.3 million. Same period of 2007, total revenues were also $28 million and operating income amounted to $3.8 million. The average utilization rate for the full year, which is the percentage of the fleet and service, was 92.7 %, which was consistent with the 92.6 % we experienced last year. Due to the decline in the rail car shipping industry, however, a decline in the utilization rate was seen in the fourth quarter as the average dropped to 91.1 %. The majority of this decline occurred in December as double digit declines were seen in rail traffic in North America. This reduced traffic has continued into 2009. Maintenance cost per car increased slightly in the quarter after declining in the third quarter, and this is something the group continues to monitor closely. The rail group had an operating income of $19.8 million this year on revenues of $134 million. Last year, the group reported $19.5 million of income on revenues of $130 million. The group recognized $4 million in gross margin from the sale of rail cars and related leases during the year over last year similar gains of $8.1 million were recognized. Therefore, the quality of earnings during 2008 improved significantly. 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 due mainly to the growth and the size of the fleet and the fact that the current value of our asset base yields wider relapse spreads. The group now has approximate 23,800 cars in locomotives which is 5 % more than its year earlier total. Growth includes addition of 43 locomotives, increasing the total to 124.

Both the manufacturing and the rail car repair business experienced significant increases in gross profit during the year due to better margins in our filtration business and outstanding performance at our repair shop in Macon, Georgia. I'm pleased with the rail group results for the year as they are 300,000 ahead of the prior year in spite of gains from car sales being down $4.1 million. Our strategy of buying cars in our target market segment is working well. That being said, the current slowdown in the general economy leading to a decrease in car loads and improved velocity in the railroads, we have seen our utilization drop. This trend will likely continue. Downturns in the leasing market, however, also tend to provide us with car acquisition opportunities that could pay dividends in the future. The (inaudible) group reported an operating loss of $74.5 million during the fourth quarter in comparison to an operating income of $8.7 million in the prior year. This was a direct result of the $84.1 million in inventory and contract adjustments, primarily in the wholesale business taken during the quarter due to a sharp decline in fertilizer prices. First, significant lower cost to market adjustments were made to reduce inventory to the current market value. Additionally, losses were recognized on future purchase commitments that require us to buy the inventory above the current market price. Fourth quarter revenues for the group of $112 million in comparison to $140 million reported last year. During the quarter, sales declined sharply, which resulted in volume being down 50 % in comparison to the prior year. This volume drop was due primarily to the result of destocking of the retail dealer pipeline and delay in restocking due to nutrient price deflation. This volume decline had a significant impact on the dollar amount of our inventory adjustment as a it lead us to have much higher inventory levels at the end of the year than we otherwise would have.

Plant nutrient group ended the year with an operating loss of $12.3 million. In 2007, the group reported operating income of $27.1 million. Earlier in the year, the group benefited from high margins on sales which resulted from steep increases in fertilizer prices. Then, later in the year, the group experienced the effects of the sharp decline in fertilizer prices, specifically within the nitrogen and phosphate markets. Unfortunately, the impact of those price declines upon the inventory levels at the time more than off set our previously earned income. Therefore, for the full year, the group reported $97.2 million in inventory and contract adjustments. Again, primarily in the wholesale business. Operating results of the two acquisitions this year in our farm center business, however, matched or exceeded our expectations. Revenues for 2008 and 2007 were $653 million and $466 million, respectively. Revenues were up significantly this year due to the increased pricing in the fertilizer market earlier in the year, even though volume for the year was down close to 20%. As I mentioned earlier, I'm disappointed in how the plant nutrient group ended the year. We are taking a hard look at the risk management processes in this group and fully intend to make improvements that will make and prevent similar events in the future. That being said, based on what we are now seeing in the fertilizer market, I believe the worst is behind us, and in 2009, the group will return to profitability. I'll also add, I earlier said volume was down about 20%, it was actually 18 %.

During the fourth quarter, the Turf and Specialty Group had an operating loss of $1.1 million in comparison to an operating loss of $800,000 in the prior year. Typical for the group to incur a loss in the fourth quarter due to seasonality of its lawn business. This year's fourth quarter rules were also impacted by a corn cob inventory fire at the Delphi, Indiana facility at the end of the year, which lead to increased expenses. Total revenues were $20 million for the quarter compared to $19 million in 2007. For the full year, the Turf and Specialty Group's operating income was $2.3 million on $119 million of revenue versus last year, revenues were up about $15 million, and operating income was up $2.2 million. The 2008 results are attributable to the group's successful focus on value added proprietary products. Turf products tonnage was up slightly from the prior year. Gross profit per ton was up considerably in spite of high raw material costs due to a large percentage of sales coming from product such as Contact PG. The disbursable granual product line has continues to perform well and the group continues to see products such as these as a growth area.

Cob business had earnings similar to the prior year, despite the cob fire I just mentioned. I feel I should mention that the price decrease on nitrogen seen in the nutrient group did not have a noticeable impact on the Turf and Specialty Group as the group primarily purchases nitrogen in small quantity and as it is needed which mitigates the risk of inventory devaluation. In the retail group, total revenues were $46 million in the fourth quarter which were $4 million less than the same period of 2007. Revenues were down as the group continues to be impacted by weak economic conditions that have lead to an overall decline in consumer spending, but especially affected the holiday selling season. As the group continued to a good job of controlling costs in the fourth quarter, they were able to report an operating profit for the quarter of $1 million despite lower sales. Last year for the same period, the group had an operating loss of $600,000. The prior year results were significantly lower due to the $1.9 million impairment charge on certain retail assets taken during the quarter. The retail group's total revenues of $173 million for the year were 4 % below the 2007 total of $180 million. The group reported operating income of $800,000 for 2008. Last year the group reported income of $100,000. This year-to-year income differential was caused by the same factors mentioned in the fourth quarter, the most notable of which was impairment. On a positive note, gross profit margins ended the year consistent with the prior year. This combined with the cost reduction initiative allowed the group to remain profitable, despite the reduced consumer spending. Now, I'll turn the floor over to Gary for his Treasurer's comments.

Thank you, Mike. The company's 2008 effective tax rate was 33%, down 1.6 % from 2007. This decrease was almost entirely due to a decrease in state and local income taxes with favorable impact on state income tax credits that were realized from the company's interest in its equity -- I'm sorry, interest in its ethanol partnership was 2.4 % benefit net of federal income tax. We are projecting a 2009 tax rate of 37 %. Our allowance for doubtful accounts appears as separate line item on the income statement, and you'll note in 2008, year end, our balance was $8.7 million, up more than $5 million from the 2007 year end with the price volatility that we've experienced in the commodity markets, we feel there is a higher risk of loss in our grain and ethanol and our plant nutrient groups. As a result, we have increased reserve for that exposure. Interest expense for the fourth quarter was $6 million, about unchanged from a year earlier. Interest expense from the full year totaled $31 million, up more than $12 million from least year, both short term and long term interest expenses were higher, $4 million and $8 million, respectively. Our short term average interest rates in the fourth quarter were down more than 3 %. Down to about 2 %, in fact. And for the full year, our average short term interest rate was down more than 2 %. Very positive trends here.

The company's average short term borrowings in 2008 were up by $133 million compared to 2007. During the fourth quarter, our short term lines of credit were totally paid off and the company had invested excess short term cash for a period of time. The short term average borrowings during the quarter were only $3 million compared to $214 million in the fourth quarter of 2007. EBITDA for the fourth quarter was a loss of $41 million and earnings of $47 million a year earlier. Year-to-date EBITDA was $110 million, down more than $40 million from 2007's $151 million record. The 2008 fourth quarter pretax loss includes $12 million, which represents our share in affiliate losses. The 2008 year equity earning and affiliates totaled approximately $4 million down, $28 million from 2007. Net working capital ended 2008 was $331 million, an increase of $153 million or 86 % from the 2007 level. Earlier in the year with our underwriters Wells Fargo and CoBank, we ensured 150 -- $195 million of senior secured term notes which provided us the flexibility to expand our short term lines of credit . Our borrowings peaked at about $650 million during 2008. However, as I said earlier, year end, everything was paid off and we actually had $82 million in cash. That's $59 million more than we had a year earlier.

At December 31, our current assets totaled $856 million, a $49 million decrease from the year earlier balance. In addition to the increased cash, the company's accounts receivable were up $24 million. Grain and ethanol receivables were up almost $20 million. Prepaid expenses were up $49 million. The increase was due in part to increased prepaid taxes which we expect to return to the company very soon. Inventories were $437 million at the end of 2008, down $66 million from the year earlier balance compared to 2007. The largest increase -- the largest change was in grain and ethanol with a decrease of $154 million. This change was driven by lower prices and fewer owned inventory bushels. At the end of 2008, we held 64 million bushels in the store, that's both ownership and stored for other folks. That's up 2 million bushels from the year earlier. Commodity derivative assets current were down 121 million from last year and commodity derivative liabilities short term were down 54 million from last year. Plant nutrient inventories went up $81 million year-over-year. Total assets at the end of the year were $1.3 billion, a decrease of $16 million from last year. This is a significant decrease, however, from our peak mid year of $1.8 billion. So there's been a pretty significant move in our balance sheet over the 12 months.

At the end of 2008, our depreciation totaled $30 million. Excluding rail cars, our total capital spending, including investments and affiliates and acquisitions during 2008, was $81 million versus $59 million the same period a year-ago. Rail car purchases in sales this last year were $89 million and $68 million, respectively, and that's compared to 2007's $56 million and $47 million, respectively. Our long term debt stands at $334 million, an increase of $145 million from last year -- from 2007. Long term funded debt-to-equity ratio is 0.9 to 1 versus 0.53 to 1 a year earlier. Obviously, the increased long term debt was supporting our ability to get into the capital markets to expand our short term lines. So there was some deterioration in our debt-to-equity ratio. At the end of December, we had equity of 600 -- $365 million, up $9 million from the year earlier, and we did repurchase a few share, 77,000 during the fourth quarter. We paid our first quarter dividend in January of $0.085. We continue to get good support from our bankers, and our syndicated lines of credit are in excess of $800 million, which includes a temporary flex line that will remain in place until April 2009, and we are looking forward to renewing these lines later in the year.

Thank you. Before we take your questions, I'll cover a few more points. To conclude on a positive note, I want to reiterate some things I am proud of this year. Bot our grain division and rail group had record earnings from operations, excluding car sales and one time gains. Also, our proprietary product strategy within Turf and Specialty Group is proving to be successful. Further, our income this year was the third highest in the company's history with minimal one time gains being reported. Last year's results included recurring gains offset by some non-recording -- recurring losses that added $10.4 million more to pretax income last year when compared to this year. I'm sure many of you are wondering what does 2009 hold? First and foremost, I expect our plant nutrient group to return to profitability, especially considering the recent stability seen in the fertilizer market. Within the grain and ethanol group, I expect mixed result as the grain division should continue to prosper. However, the ethanol division will most likely continue to be impacted by the economics -- the negative economics of the ethanol industry. I see our rail group continuing to be impacted by the slowdown in the rail shipment industry, which will lead to lower utilization and lease rates. I believe that our Turf and Specialty Group's proprietary product strategy should lead to continued growth for the group, and I believe that our retail group will likely continue to be impacted by economic downturn.

As it relates to the current economic times, we are being prudent in regards to expenses and are looking for ways to reduce and control costs throughout the company even as we look for growth opportunities. In addition, due to the wise and timely decisions we made last year, we are entering 2009 with a strong capital structure and liquidity position. We also intend to continue growing, as we have several years now, albeit with appropriate caution given the current times. In 2008, we increased our income earning investment including increasing our Lansing Trade Group ownership percentage twice. Increasing our grain storage capacity by 7.6 million bushels. Increasing our rail fleet by 5 %, adding two more rail car repair shops and adding six Douglas fertilizer and three pelleted Lime facilities to our plant nutrient group. With that, we'll open it up for question-and-answer. Francine, we'll turn it back to you.

(Operator Instructions) Our first question comes from the line of Farha Aslam. Please proceed.

Good morning.

Good morning.

First of all, just a detailed question on your equity earnings, Mike. In the quarter, you reported an $11.8 million decline and if Lansing was only $5 million to $6 million of it and ethanol was only $2 million, what was the remainder ?

Oh, okay. Gary, you and I were talking about this before. See the minority interest line? The problem -- Gary, do you want to explain this? We did talk about, I said, that you should be the one to explain.What it fundamentally gets down to, the Andersons owns an entity called TAEI or two thirds of an entity called TAEI which owns 50 % of one of our ethanol facilities.

Right.

So, the TAEI income is flowing through our operating statements and had income. And then there's a mino --

In addition to its investment in ethanol.

-- and its addition to its investment in the ethanol where there was a loss. So, you want to --

Yes, so Marathon owns 50 % of this entity. Andersons owns 50% through this TAEI and we also have a minority partner, Mitsui, in that same TAEI. But, they also, as Mike suggested, have some operating performance in there, as well, and that was profitable. Anyhow, that's --

Then there is one other thing. When we look at our total ethanol results, Farha, there is also the issue of the fee income that we receive which ends up being netted to our equity investments. There is several things flowing into that -- the net results from ethanol, and you just can't pick it up off the equity line.

What you are picking up is two lines and trying to reconcile, and because there is operating income flowing in there, that makes it very difficult. I'll be happy to draw you a chart the next time I see you.

Okay, so maybe we'll follow up on that one offline. My second question is about the plant nutrients group. Mike, you noted that you anticipate plant nutrients to be profitable in 2009. But could you provide more color on how you see volumes flowing throughout the year in that group? And kind of what level of profits? I mean, that group's varied from $3 million in pretax income all the way up to $27 million.

Yes, $27. Obviously, this early I wouldn't want to try and peg where in that range that it would be other than the fact I would expect that to bracket the range. Let's started with volume. We were down 18 % year-over-year, so we are a huge 50 % plus drop in the fourth quarter. The drop was in the second half of the year. I still think the way things are set up right now, we'd expect first half volume to be down year-over-year. What we are hoping is that we are going to get to more normal level of margin. And as we get into the -- at least into the second quarter and third and fourth quarter, we should get back to a little more normal volume. So I can't -- this early in the game, I can't peg the range. I'm making -- in the statement of profitability, I'm making the assumption that we have, in fact, bottomed or come close to bottoming in the market so that we don't have additional writedowns. We are going to need to buy more fertilizer to serve our customers this year. I think the first half, we are bound to see a continuation of a little lower volume. Certainly in the first quarter, that's the case. Once we get into the planting season, I'm hoping volume picks up and then we start a new crop year. So, if we threw out this year from our history, that $3 million was a low water mark for quite some time, and the $27 million was by far and away up high water mark. So, I can't give you anymore specificity at this point in time on that ,other than it looks like we are back on to the positive trend. Gary --

Corn prices have a significant impact on demand, as well. Of course, they have come off. They seem stabilized at this level.

That's a great point. The corn carry over officially is projected 1.7 billion bushels. Feels like demand is a little softer than it is built into the balance tables. We don't have a perfect peg on the size of the crop. If we have 1.7 billion bushel carryover growing to $2 billion in prices which have dropped off in corn, that, to me, doesn't suggest more than 85 million acres, similar to last year. Could be a little lower based on what we see right now. That's not what I would call a bullish/bullish situation, especially with fertilizers in the pipeline. But, if you go back a few years and our base acreage was more in the in the 78 million, 80 million range. So it is not still not insignificant.

Okay. And when you look at your ethanol business, just the ethanol plants themselves, do you anticipate them turning positive in earnings at any quarter in the year?

That's a great question. I'll answer it a couple ways. The first one is going to be kind of a hedge, which is just a relationship of corn and ethanol prices is really, really key to that. Lately, lately, meaning the last nine months or so, they have tended to move in lock step at numbers that would result in a negative margin. So a loss situation. At least, the way things feel right now, we are consuming at a rate of 10 billion, 10.5 billion gallons of ethanol. The capacity that was put in place was in the, I think 12 billion, 13 billion range. We have had shutdowns, we have had bankruptcies. The market, I think, is doing its rational job of reducing the amount of ethanol that's put in play, because we don't need as much right now. The mandate for this year is, I believe, in the range of 10.5 million of total alternatives. That's pretty consistent with what we are producing right now, but I'm not going to go into deep discussion of rims, which are an identification number that goes -- every gallon. But there is between one and two billion gallons worth of the rims that could be used to substitute for ethanol production -- I'm sorry, ethanol consumption. Although, we think that there is a good reason why they won't all be used in 2009, because the mandate goes up next year.

So, all that macro stuff up there and it just feels like, unless something changes, that we still have at least a year to go before we get to a situation where the market really needs more gallons than we are currently producing. Which suggests it stays in a pretty tough situation, potentially a loss situation. Hopefully cash flow positive, but potentially a loss. But then again, we have got to wait to see what unfolds. If the current administration is been alternative fuel friendly, we'll wait and see what happens. If we were able to get today the E 10, maximum we can blend is 10 % in those E 10 blends. I think there is lots of logic why that should be expanded E 11, E 12, E 13, some modest expansion. I don't know if that's going to happen or not. If it does, it's supportive to ethanol consumption and therefore, more margins. If that doesn't occur, then we just have to wait and see if they maintain their posture on the mandates. But I think '09 is going to be a tough year as reflected in the bankruptcies and closures.

Okay, my final question, I'll pass it on. When you look at basis trading opportunities and grain storage, income opportunities, could you share with us your outlook for '09 versus '08?

Yes, first of all, as it turned out, we did gain back every cent and then some that we were down earlier in the year. The increased amount of domestic consumption, primarily driven by ethanol has changed the way grain flows and in our opinion, creates good trading opportunity around that, both for us and then Lansing in a broader geography. We expect that to continue. We have invested significantly in our manpower, our grain originators and our merchants who work with farmers. So we feel pretty good about our ability to capitalize on that. In the pure basis appreciation from space income, with the carryout that we now have, if we assume we have a reasonable crop, which today's a good assumption, I think things look pretty good there, also. So I feel reasonably strong on our base grain trading business from the perspectives of basis and margin and space income. Of course, now we are about to enter the first -- the planting season, and we'll have the first scare on the crop, and then we'll probably have a scare around drought. We have got to manage through all that. But it is setting up as a good start.

Okay. Thank you for your answers.

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

Hey guys, good morning. This is Brett Hundley speaking on behalf of Heather. How are you?

Good, Brett.

It didn't sound like Heather.

No, no. Anyway, thanks for taking my questions. My first one was -- it certainly sounds like you expect fertilizer prices to recover here from current levels and we could agree with you. Due to this perceived floor that we are kind of talking about, the stability in the market, I was just wondering if you could give any comments, in your opinion, kind of when pricing comes back and maybe the magnitude of that pricing?

And you are specifically talking about fertilizer, is that correct?

Yes.

Well, I'd say in nitrogen we have seen -- each type of nitrogen, this is a generalization around nitrogen, not specific to any one type. We have seen a nice bounce from the floor and a reasonable amount of trading, which suggests -- and some buying, some buying on the part of both wholesalers and retailers to some extent. And we are about to get the top dressing season. That feels like it's started. Phosphate, we have seen an uptick in trading. We have seen a little pop off the bottom, say at floor levels, but they are still pretty widespread between Florida interior and farm gate, and I would say the activity is -- although it picked up from nothing, I would describe it as relatively slow. I think -- my perspective is phosphate will be one thing, that will be -- is a real likelihood that we'll shave back the amount that's consumed this year. In the case of potash, that's a different ball game. At the producer level, the prices have not dropped that much, and they are at levels where those folks in the chain and at the end of the chain, farmers, really don't have interest in restocking it. So I don't have a good handle on how that is going to play out, to tell you the truth. In some point in time, all this will get reconciled. It is happening in nitrogen, it is starting to happen in phosphate and it is slow in potash.

That's really helpful. I appreciate it. Also looking at rail. You kind of talked a little bit about your outlook for rail, the economic weakness that's been continuing there and you spoke about utilization rates. Kind of, if I understand correctly, just continuing to slide a little bit. I'm just curious if you could put a little bit more color to that? Do you think utilization rates are in danger of falling substantially more? Or just continuing to slide somewhat?

Yes, well, that's really a great question. I don't have the exact number of months, but I'm going to say for 12 to 18 months prior to December of last year, I would say on the average, rail -- when weekly rail traffic was announced, it tended -- it seemed to basically be 1% or 2% lower than the other year. Maybe a month or two it was up, but it was in that range. In December, it was 17 % lower. In January, it's been in double digits lower also. So, we are right in the midst of a real big shift from modestly lower to largely lower, and as you take more cars off the road, that means the railroads can service those that are on the road that much better. The worst utilization that we have ever had, and this was real early in our history when we just didn't have as big a fleet, was around 80 %. Maybe 79 % or thing like that. We roughly have average outstanding lease term in the close to three year range, maybe a little less than that. In any given year, we might have 20% to 25 % leases coming due. Some of them are per diem leases and whatnot. So we -- fortunately, the vast majority of our fleet is insulated this year because we won't have anything coming due. And in fact, stuff that does come due is not all going to park.

That's all a backdrop for the short answer, which is we would expect utilization -- as long as we see these kind of reductions, we expect that to negatively impact our utilization and we would see it drift lower. Our job -- as cars get parked, and our job is to work like heck to get them in place. I think it is going to be a pull in the belt time in this business. I want to make sure I mention that our strategy has been used cars diversifying the types of cars in the industries and it has been to be a reasonably patient buyer on assets that when you buy them, even though they are used, it might be 25 years old, to have another 25 to 35 years of life. So, we have said before these conference calls, on the one hand, you get excited about good earnings from lease income when you can lease high, but it probably means for us we won't buy many. Now, we are on the other side of the cycle, which is you get a little down because you don't have as much income, but it usually becomes the opportunity to reload a little on cars. So lease utilization will likely trend lower. That will have the impact on the amount of cars that we don't have placed. I would expect lease rates to stay low this year. That's not as big a concern to us that we get in place, because as things come off lease and we have written down the asset, we have got more basis in it, we can generally handle -- often handle a lower lease rate and still have a reasonable spread. Freight is often been a good leading indicator of the economy of this nation, and it sure has been and is right now. Does that help?

Yes, that actually helps me think about that better. I appreciate it. My last question and then I'll jump back in. Kind of a two part question on Lansing. You mentioned they were adequately -- you believed they were adequately reserved at the end of the year. Do you think this is just a one-time event, or do you expect further writedowns here? And then B, are these reserves based on events that have happened the interim, or are they based on anticipation of default so that these would eventually reverse and positively be a benefit to you down the line?

Good question.

Mainly events that have occurred that they -- issues that they are working on. So, that's where the exposure has been. You never know if you have taken a big enough reserve or if you have overtaken enough reserve. I think you take your most educated assessment of it, and I think that's the position they have taken. I think they have taken this thing very seriously, but they are going after the accounts they believe they can get. What's happening in the bio fuels industry, as we referred to earlier, there is people there that are struggling. When we are selling grain into those particular entities and they begin to struggle and you have contracts on and position, that's where you get pinched. So that's where some of the situation that they are struggling with. But we think that they have taken the right amount of reserves and their CPAs do, as well. So, we'll make sure we work hard to get it taken care of.

Okay. I understand. Well thanks for your time, guys.

Thank you.

Next question comes from the line of Michael Cox with Piper Jaffray. Please proceed.

Good morning. Thank you for taking my questions.

Good morning, Mike.

My first question is on the plant nutrient side. It seems from what we have been hearing is a bit of a disconnect between wholesale pricing and then pricing to the farmer because of inventory levels within the channel. I believe you guys would see, really, the whole gamut of that. I'm curious if you have seen the same? What your thoughts are on channel wide inventory levels and the possibility of further price declines to the farmer to really spur that demand as we get closer to the planting season?

That's a great point because right at the farm gate -- I don't see as much of an issue as nitrogen generally. It has kind f resolved itself. In phosphates, it is less so and it depends on the type of phosphates. And the potash, we haven't resolved this totally, and I think there is going to be very conservative buying. So we don't have near the spread from origin source manufacturing nitrogen to the farm gate as we do in the other two. My belief is that both in phosphates and potash -- let's take phosphates first, because I think there is more in the pipeline generally that those of us in our position, or at the farm center, you own inventory. You have toy the reality of dealing with a market that's crashed. You take some writedowns, but at the same time, you'll try to work through that inventory as best you can. In our wholesale point in the chain, I think most of that's been dealt with and reconciled. On the retail side, it feels somewhat similar, even though there is a fairly wide price between, say central Florida and a farm gate situation. But, we'll see. I think the bottom line of it is here in the spring, there is probably going to be the sharp pencil and the farmer's going to say, I'm going to put down a little less P&K, or a lot less. So, there is maybe a little risk in some, at the farm gate deterioration, but on the phosphate and potash, like I say, I don't know how that's -- any sense of how that's going to play out.

Okay.

A lot of production has been taken out. The producers are holding strong in their positions. The farmer's are holding strong on their positions.

Okay, that's helpful. And looking bigger picture, I know that you have elected to move away from giving formal earnings guidance. But I was hoping maybe you could help us piece some of this together because it seems that on the plant nutrient side, expecting to swing back to a profit, the commentary around rail seems a little cautious. Ethanol losses on your equity ownerships seems likely to continue, at least if the situation doesn't change materially. So adding all this together, it seems like maybe the biggest delta is on the plant nutrient side swinging back to a profit. So should we expect earnings both in 2009 or is it still very difficult to make that claim?

Let me comment on the guidance first. We haven't made an absolute decision. We typically have done that at the end of the first quarter. My Q&A with you and the other analysts have been, who is doing, who are the companies that are actually issuing guidance and who are not and why? What specifically could we do to shore up our communications with the market if we decide not to? But, the jury's out whether or not we give guidance. As I say, it's always been at the end of the first quarter, so.

Okay, okay. I guess absent that, anything in terms of preliminary thoughts on how the different components will add up as you consolidate them together and relative to the '08 performance?

How the different components -- restate your question to me.

Well, given that directionally it seems that certain components are expected to show improvement in '09 whereas others are not. Maybe just give a sense of order of magnitude as to will the positive outweigh the negatives and lead to growth in '09? Is that the current thinking?

I can't specifically say one way or another. I mean, if you look at the core grain business, it looks great. If we have a big carryover, that should be great for space and for our merchandising income. Ethanol, I think we've talked about pretty clearly that the margins are flat, negative and that could be a 12,18 to 24 month period before it turns around. Lansing, we think that they'll get back on track, and so -- we are 50 % holder of that particular entity. So, that's a good position to be in. They have a lot of new, creative ideas and are always coming up with something unique. We have already talked about plant nutrient. Hopefully, be back above the average of the last four or five years. If you drop out the three and drop out the 27 and start looking at the averages we have experienced, obviously, you know we have invested heavily with Douglas, mineral processing and some other features that should provide value. Those entities are performing fine. Rail, with slowdown coming, I would expect to see a bit of a drop off in profit, if we have a significant lower utilization rate. So, does that --

That's very helpful. Thank you very much.

Okay.

(Operator Instructions) Our next question comes from the line of Joseph Gomes of Oppenheimer. Please proceed.

Good morning.

Hi.

I want to go back on the fertilizers for a second. You guys mentioned that you were at this point in time with the big carry out in corn, maybe corn acres are a little bit softer than they were last year and given that, would that not suggest that maybe the nitrogen volumes in prices will be soft going forward this year?

I think there is a possibility we could be flat with last year to a little down. It is still a sizable uptick in acreage if we went back a few years. I do believe the pipeline is not -- still has inventory in it. I don't think we are unique on that. But I can only speak from our own situation, which is we need to buy more fertilizer to service the acres that are going to be planted. Now, so you've got -- and I have got to believe others do, too. So you have got that dynamic being there from buying. You have the acreage dynamic, which I'll say is somewhat -- I'm just going to say neutral right now.

Okay.

And the pipeline dynamic, which -- it hard -- it feels like there is probably a little more in the pipeline right now than this time a year ago. But last year we had the escalation going on. It is hard to really understand that. And I would say that there is still a world dynamic out here, although the world is in a -- I'll generalize and say recession, we still need to keep plant in ground, and nutrients are key to production. So we have got to see how that all plays out. So, I'm not trying to present a bullish picture of fertilizer prices. I'm just trying to paint more of a picture of there is reason for us to feel that we, at least in the near term, have set a bottom in at least two of the three main nutrients. We'll find out how that plays out.

Okay, and on the ethanol business, given that you are seeing -- you're talking about maybe a year, two years of flat to possibly even negative performance, are you guys and are your partners still committed to this industry? And if you are committed to it, would the fact that there is so many distressed assets out there be of interest to you?

I was wondering when the second half of the question came, but I like the first half, too. We have two wonderful major partners and some wonderful minor partners. The major ones being Misui and Marathon. They play in a world energy market, and feel really good about the partnership and our mutual support of each other and commitment. And commitment, of course, doesn't necessarily mean forever, but the commitment to this industry. On the second part of the question, we went back about 12 months ago or so and a similar question came up from our perspective was we could see some bad things maybe coming on the horizon, but there were not bankruptcies and there was -- I'm going to just say a sense that if it was a well producing ethanol plant, you might get a discount to new production costs, but it wasn't going to be a deep discount. Now, we have -- Verizon, just announced that along with Bioenergy site that they acquired, that they are going to take those to auction and we see others going in that direction. I'm not going to -- I can't even possibly predict what they might trade at. But given what's going on, we feel it is a logical time that we now look and look with some seriousness of potential opportunity within all that. And from a strategy perspective, our strategy would be somewhat similar. We'd want to do it with partners and not want to do it alone. But, I can't -- now having said that -- have no clue what these plants are going to go for --

Right

-- and have a sense of what we might have some interest at, but whether that interest is enough to acquire anything is a whole other ball game.

Okay. And kind of an add on to that. You guys ended the quarter with a fair amount of cash on the balance sheet. Assuming nothing happens on the ethanol side and given the current stock price, do you guys see your own stock as a potential investment at this point?

Well, we did purchase 77,000 shares at the end of last year in the fourth quarter. So, we are authorized, from time to time, we'll consider that. But, that's not something that -- we are not sitting here ready to take a bunch off the market, let's put it that way. Our objective is to remain with a strong balance sheet. I think we are in a time where the credit markets are so weak that excess cash is something everybody needs. And frankly, we are in an industry that has a lot of volatility and we have to have a good, strong balance sheet to get the bank lines we need to support the margin calls and inventory and the receivable investments we make to run our regular operating businesses.

Okay, great. Thanks .

Yes.

Next question comes from the line of Farha Aslam of Stephens, Inc. Please proceed.

Thank you for taking the follow up. Your rail car numbers were down in the fourth quarter versus the third quarter. Mike, did you sell rail cars in the fourth quarter?

Let me get -- I've got that somewhere here. In the fourth quarter of this year, we had a very, very small amount, basically nothing. Last year we had about a $250,000 in them. Last year, we had a really strong finish in our manufacturing business. Frankly, our based rail leasing, Farha, I think if you get at it it was flat year-over-year. The change was in car sales and our manufacturing business. Is that where you are going?

Yes. And then as a follow on to that rail business, what's your appetite for new rail cars? And what are the opportunities in terms of M&A you are seeing in the market right now?

New rail cars?

No used, I think --

Our appetite, I would say is reasonably strong for used rail cars. We have a process that we go through on what's offered and just have to go through the process that we have, and if it fits the bill, we are interested. We would expect to be able to buy cars in this cycle. But it all depends at what value and what lease streams and our view of residuals and our view of credit worthiness along the way. So we have an appetite. We would expect, or hopeful that we'll have more shops this year. It is not a promise, but we'll look for some opportunity there. It is possible in a circumstance like this that there might be, as opposed to just buying some fleets of rail cars, it is possible that we -- something might develop where we might have a shot at something that would be more M&A like. But I'll call that, it depends. This business we are committed to. We know the utilization and lease rate challenges we have going in this year. We also know it creates opportunity. So we are look forward to being able to capitalize on those opportunities

Alright, thank you very much.

Thank you.

Ladies and gentlemen, that concludes the Q&A portion of the presentation. I would now like to turn the call over to Mr. Gary Smith.

Thanks for joining us. Mike, you have a few comments?

Yes, thanks for joining us. Next conference call Thursday May 7 at 11:00 for our first quarter results. Hope you can join us at that time, and have a great day. See you!

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.