Andersons Inc (ANDE) 2009 Q1 法說會逐字稿

Good day ladies and gentlemen. Thank you very much for your patience and welcome to the first quarter 2009 Andersons, Inc. earnings conference call. My name is Bill and I will be your conference coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session at the end of today's conference. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Gary Smith, vice-president of finance and treasurer. Please proceed.

Thank you Bill. Thank you for joining us this morning for the first 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, competitive conditions, conditions in the company's industries, both in the United States and internationally, and additional factors are described in the Company's publicly found documents, including its 34 Act filings and the prospectuses prepared in connection with the company's offerings.

It also contains financial information of which at the date of this call the company's independent auditors have not completed the review. Although the Company believes the assumptions upon which the financial information in its forward-looking statements are based--are true, they can give no assurance that these assumptions will prove to be true.

Before Mike begins talking about our results of operations, I want to advise you that we have implemented FAS 160 effective January 1, 2009, which relates to the presentation of non-controlling interests, formerly classified as minority interests, in the consolidated financial statements. Under FAS 160, non-controlling interest is now included in the income statement captioned net income -- net income attributable to The Andersons -- and earnings per share are comparable to those previously reported as net income. In addition, in the equity section of the balance sheet non-controlling interest is now presented as a component of shareholder equity. As we refer to net income during this conference call we will be referring to net income attributable to The Andersons as defined by FAS 160.

Mike Anderson, President and CEO and I will be available for questions after the call. Mike?

Thank you Gary. Good morning everyone. AS noted in our press release, we generated net income of $5 million or $0.27 per diluted share on revenues of $697 million. In 2008 we reported net income of $7.8 million or $0.42 per diluted share on $713 million revenue.

Before we understand the total company's results for the quarter, we'll look at each of the five business groups. The Grain and Ethanol Group had an operating income of $5.7 million in the first quarter versus $2.2 million a year ago. It should be noted that the prior year included a $1.3 million non-recurring development fee income.

Grain business had record results this quarter. The grain business benefited from significantly higher space income that resulted primarily from sizable basis gains and reduced interest charges. In contrast, last year our grain business suffered a basis loss of just over $11 million during the same period.

The ethanol business lost less than $1 million this quarter as results from all three ethanol limited liability companies declined significantly from the prior year. With all three ethanol plants operating for the entire quarter this year, the income is up slightly. In the prior year the ethanol business benefited from margins being locked in before the decline in the ethanol market.

First quarter results from the group's investment in Lansing Trade Group was significantly lower than last year due to Lansing having declined in its trading business. The cyclical nature of the commodity trading business, coupled with the economic decline, has impacted Lansing results this quarter. Although revenues are not necessarily a good indicator of performance within the Grain and Ethanol Group, total revenues were $481 million, which is consistent with the prior year's revenues of $499 million.

This quarter includes $206 million of grain and ethanol sales made by the group in accordance with the origination and marketing agreements between the Company and its ethanol joint ventures. This is $20 million more than what was reported for these sales in the prior year.

As it relates to our grain business, I want to mention that corn planting progress in our region and the US is behind the five-year average. Though it's possible to make up a lot of this in a short period of time if weather cooperates, as of now it's behind.

The Rail Group has been negatively impacted by the significant decline in North American rail traffic. The group reported an operating income of $900,000 this quarter on revenues of $27 million. Last year the group reported $6.4 million of income on revenues of $35 million.

The first quarter of last year the group realized $2.2 million in gross margin from the sale of some railcars, whereas this year only $300,000 was recognized on similar transactions. Absent this gain from sales deferential, operating income from leasing was still considerably lower due primarily to lower utilization rates. The average utilization rate, which is percentage of the fleet in service for the quarter, was 86.8% in comparison to 93.4% for the same period last year.

Gross profit from the leasing business was also impacted by decreasing lease rates and per diem income, increased maintenance expense and the increase in storage expense associated with lower utilization rates. The group now has over 23,700 cars and locomotives, which is 2% more than its year earlier total.

Gross profit of the railcar repair and manufacturing business has declined significantly in the first quarter due to reduced sales resulting from the overall economic decline. The impact of this decline, coupled with the fact that a significant portion of the US fleet was idle during the first quarter suggest that further decline in the group's utilization rates and corresponding financial results is possible in 2009. Downturns in the leasing market, however, also tend to provide us with car acquisition opportunities that could pay dividends in the future.

Plant Nutrient Group reported operating income of $2 million on revenues of $112 million during this quarter. In the same three month period in 2008, the group reported $7.5 million operating profit on $105 million of revenue.

Overall, margins were down this quarter in comparison to last year. A favorable product mix and the recognition of high gross profit on deferred sales and prepay contracts from 2008 had a positive impact on margins. The group, however, recorded a $2 million lower cost-to-market adjustment on nitrogen and phosphate products in the first quarter, which had a negative impact on margins.

Group volume increased due to the addition of eight nutrient and lime facilities acquired subsequent to the first quarter of 2008. Excluding the newly acquired businesses, volume was down approximately 15%, due primarily to the destocking of the agricultural retailer inventory and weather-related spring field work delays. Reduced demand as a result of the delay in spring field work will likely result in further nitrogen and phosphate inventory adjustments.

Also the group continues to carry wholesale and retail sales contracts in deferred sales into the second quarter that have good imbedded margins, which will help buffer the impact of any possible write-downs as happened in the first quarter.

As we announced earlier this week, the Plant Nutrient Group has entered into a definitive agreement to acquire Hartung Brothers Inc. Fertilizer Division on July 31. We expect these six additional facilities to allow our Plant Nutrient Group to grow its value-added product offerings, expand its wholesale customer base and broaden its geographic territory. Five of the six locations are in Wisconsin and one location is in southeastern Minnesota. Operating results from the two acquisitions we made last year were again additive to earnings this quarter and have continued to meet or exceed expectations.

The Turf & Specialty Group achieved operating income $3.1 million this quarter on $45 million of revenue. Last year the group reported $2 million of income on $40 million of revenue. Turf products tonnage was up 13% from year to year. Gross profit per ton was also up slightly due to product mix, and we have not experienced any lower cost-to-market adjustments.

As you recall, the group's performance in 2008 was greatly improved over 2007 due to its focus on proprietary products such as Contact EG. In 2009, the group is also growing the consumer and industrial lawn business by expanding their product lines customer base. Therefore we're expecting Turf & Specialty to continue the earnings growth trend they've demonstrated in the last few years.

As is typical for the first quarter, the Retail Group incurred an operating loss. Loss of $2.7 million, however, was a 20% improvement over the $3.4 million loss for the same period last year. Total revenues remain flat at $34 million for both 2008 and 2009. Customer counts for the year increased slightly. However this was offset by a slight decline in the average sale per customer.

The group continues to be impacted by the weakness in the overall economy. However, successful pricing and marketing strategies led to gross profit increases by more than 3% during this quarter. The group also continued to manage expenses and reduce inventory levels during the quarter.

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

Thank you Mike.

Taxes, the first quarter of 2009 effective tax rate was 36%. That's down 1% from the first quarter of 2008 but up 3% when you compare it to 2008's full year tax rate. The increase is mostly due to the tax benefits related to the 2008 state income tax credits resulting from the 2006 construction of an ethanol facility. We're projecting right now our 2009 full year tax rate to be 37%.

Our allowance for doubtful accounts, which appears on a separate line item on the income statement this quarter was -- we took a charge of $191,000. That's down $1.5 million from the same period last year. The allowance for doubtful accounts was higher in 2008 due to the significant inventory price volatility experienced in grain and ethanol and the Plant Nutrient Group. However, since prices have settled down and declined, we have counter party risk.

As of March 31 the company's total interest expense was $6 million, down more than $3 million for the same period last year. Short-term interest expense for the first quarter was down more than $6 million while long-term interest was up approximately $3 million. Compared to the first quarter in 2008, our short-term average interest rates for the quarter were down more than 3% and average short-term borrowings for the quarter was down approximately $0.5 million. We ended the quarter with about $25 million in short-term bank financing, which is a pretty significant drop.

EBITDA for the quarter was $21.3 million versus $28.4 million for the same period in 2008. When you look on our website, you'll see that EBITDA has been adjusted for the non-controlling interest.

In 2009 the first quarter pre-tax income included a loss of approximately $4 million in equity earnings or losses of affiliates versus earnings of approximately $9 million in the first quarter of 2009.

As of March 31, the current assets totaled $735 million, a $447 million decrease from our year earlier balance of $1.2 million [sic]. Commodity derivative assets and inventories were down $225 million and $177 million respectively when compared to the first quarter in 2008.

In addition, trade receivables have decreased more than $21 million. That was driven by Plant Nutrient and Rail mostly the major contributors. Also our margin deposits declined by $54 million in the first quarter. Most of the inventory decline was in the Grain and Ethanol Group, which dropped about $174 million.

The Company ended the quarter with 60 million bushels of grain in our facilities, and that's down approximately 1 million bushels from the year earlier number. Our net working capital at the end of the quarter was $326 million, an increase of $51 million from the first quarter in 2008.

Total assets at quarter end were $1.2 billion, a decrease of $480 million from the year earlier first quarter balance of $1.7 billion.

In addition to the decrease in current assets, our other assets were down about $56 million. Long-term commodity derivative assets were down $49 million, and while property, plant and equipment along with railcar assets leased to others increased by $23 million.

During this first quarter we generated a total of $8 million of depreciation. Our total capital spending investment in affiliates for the first quarter was $3 million. That includes investment affiliates, which was not significant during the first quarter of this year. And that's compared to $24 million in the same period last year. This is all excluding railcars. Railcar purchases and sales were $6 million and $2 million respectively during this quarter and a year ago those same two numbers were $28 million and $2 million respectively.

Long-term debt totals $317 million, a decrease of $13 million from last year's year-end balance, and our long-term debt to equity ratio is about .75 to 1, and that's exclusive of the non-recourse debt, so well within the ranges we find acceptable. The total--the Company's 2009 average interest rate on all long-term debt is about 6%, and we ended with $370 million in equity. That's up $4 million.

We continue to enjoy good support from our bankers. We just completed the renegotiation of a three-year syndicated line of credit with 15 banks. These new lines of credit total $575 million. This is down from our previous lines of credit. However we think it's adequate to satisfy our funding needs for the near future. Mike?

Thanks. Before we take questions, I've got a few more points. Considering the state of the economy and some of the specific challenges we've been dealing with, I feel okay about our overall performance this quarter. Our Grain and Ethanol Group had mixed results, with record performance in the grain business being offset by the results of the ethanol business and Lansing Trade Group. Plant Nutrient Group was profitable in a quarter that historically has often been a loss quarter. However they were again affected by lower cost-to-market adjustments. The Turf & Specialty Group is performing well, as the value-added and proprietary products strategy they have pursued continues to be successful.

The economic decline, however, has had an impact on our Rail Group and to a lesser extent on our Retail Group. It is at times like these that I am thankful for the diversity of our business units. This was no accident. We purposely diversified over the years, and this strategy has positioned us to remain a strong and profitable company during uncertain economic times.

As noted in the press release, and after much consideration, we have decided to discontinue our practice of giving earnings guidance at this time. I'm sure many of you are still wondering what does 2009 hold for The Andersons?

Within the Grain and Ethanol Group I expect to continue to see mixed results as the grain division should continue to prosper, although the ethanol division will most likely continue to be impacted by the economics of the ethanol industry. I see our Rail Group continuing to be impacted by the slowdown in the rail shipment industry and overall economy. I expect our Plant Nutrient Group to provide a respectable return this year after the loss they incurred in the prior year. I believe that our Turf & Specialty Group's proprietary and standard product line strategy should lead to continued growth and earnings from the group. And lastly, I believe that our Retail Group will continue to be impacted by the economic downturn.

As we announced earlier this week, we intend to acquire Hartung Brothers Inc. Fertilizer Division this summer. I expect these six additional wholesale fertilizer locations to allow our Plant Nutrient Group to continue their growth initiative, which has proven successful so far.

As I've mentioned before, we intend to continue growing as we have been for several years now, albeit with appropriate caution given the current times. We'll continue to explore additional opportunities in our growth pipeline.

With that we'll open up to questions and answers, so Bill, we'll turn it back to you.

Thank you very much sir. (Operator instructions) Our first question comes from the line of Farha Aslam of Stephens Inc. Please proceed.

Hi. Good morning.

Good morning Farha.

Some color around your ethanol business? It's really performing far above our expectations. Could you give us some color on any contracts that you might have locked in?

Yes, we did have some contracts locked in ahead, but not -- which was beneficial -- but it was not a substantial percentage, and virtually none in one of the locations.

I would say we've experienced reasonably good operating results in the plants themselves, productivity and throughput. And we're trying to, over a two week period sometimes the margins are quite ugly, and sometimes they get close to break-even, and when they do we're willing to try to lock them in and so our expectations with the capacity we have in the ethanol industry this year are that it's been very hard to achieve positive margins. So if we get to levels that we think are acceptable, albeit at a loss, we're willing to lock those particular ones in. But we did have a little bit locked in ahead of two of our facilities, which was a benefit. And as I mentioned, we now with everything up and running all three of the plants we have a slightly better fee income structure. But all things being equal, we're pleased with a very small loss in that division.

Great. And so when you look at the Greenville plant, right now it's still up and running. If you had to look at the cash flow, how bad would the ethanol market need to get for you to consider closing that Greenville facility?

Well, it would have to get to a negative margin, there's no question. So it has to be below our fixed operating costs, so that we couldn't satisfy the debt obligations. But we're not there.

Not there yet? And so for the foreseeable future you anticipate that facility to continue to operate?

Yes.

Okay. And then when you look at your Plant Nutrient in the quarter, what was the total volume? You've given us ex- acquisitions. What would be that number including acquisitions?

I'm sorry. The question was what was the total volume increase given including the acquisitions?

Yes.

It's interesting. Without acquisitions it was down 15%; with acquisitions it was up 15%. That same percentage, just one up, one down.

And then if you look at the acquisition you've just made, and which will close in July, how much on an annual basis will that add to your volume?

What we reported was $60 million in revenue last year and 145,000 tons of capacity. And so you can compare that to, you can look at the sales dollars and from a capacity perspective we have approximately 750,000 in capacity today with our other facilities. So that's the comparison you'll have to work with. After we close the transaction, my sense is there will be more information available through the 10-Q's.

Okay. And my final question is on rail lease rates. Could you just give us some color around those lease rates? How much--what percentage they're up and down? And what a standard railcar is going for today?

Yes. You used the word standard, and that's rough because there is no standard rate. But I would say this. Versus the last high cycle we had in 2005, 2006, we're down about 25% in lease rates and the trend would suggest to us that there's maybe another 5% or so drop coming.

But it just really does depend on the specific car type that we're talking about. So I'm talking about maybe a typical grain covered hopper. We're down maybe $15 a car year-over-year in kind of average rate of those cars being leased. And our mix as you know includes a mix of full-service leases and those that are not full-service so we're clearly down year-over-year, and it's trending a little bit lower.

The asset values of our fleet are also going down, so I would say for us not that lease rates aren't important, they're terribly important, but the major driver of the drop in income is utilization much more so than lease rates.

Okay. Thank you very much for your comments.

Thanks Farha.

Thank you very much. Ladies and gentlemen, your next question comes from the line of Heather Jones of BB&T Capital Markets. Please proceed.

Good morning.

Good morning, Heather.

Just a follow-up real quick on the rail question and your commentary in the release about utilizations could go lower. I believe you, and I may have missed this, but I believe you said you thought lease rates could go 5% lower? How was lower to you think utilization rates could go?

We spent a lot of time trying to model that, so we kind of have a range. It's very believable to me that we could get to the 80% level. Now that assumes that we continue to see railcar loadings down week to week anywhere 15% to 20% of all types. And I would expect that to continue for awhile.

What we don't know is just at what point in time will we stop getting more returns than we're putting back out on lease, which is in essence the driver of the utilization. But the trend suggests that we'll continue to drop in utilization. I can build a more pessimistic scenario than that too. So--

I'm sure you could.

So that does not suggest that that's exactly what we're predicting, and I'm not going to give kind of a range of the scenarios, but it's reasonable for me to see that in the near future we could drop below the 80% level.

So does this per diem represent roughly 10% of your rail assets?

The per diem? It's a little less than that. It's approximately that. It's about 8% to 9%.

Okay. So I would assume there's meaningful weakness there and then of the remainder, roughly 20% comes up for renewal every year. And it sounds as if you're also having a fair amount of those not get renewed as well?

Yes, that's correct.

Okay.

I want to add that we obviously we think the utilization going down. It's obvious that what you said is right on the money. But we are able -- have been able this quarter -- to get some cars placed that are not renewals and we're seeing inquiries in the second quarter, albeit not at the pace that cars are being returned. So it's not as if there's nothing happening out there.

So do you get a feel that things are worsening, or do they seem to be not improving but you're sort of bumping along the bottom?

Somebody used the phrase, and I don't know if it's comforting or not. The rate of decline is decreasing.

Okay. That actually is good news.

So it is, in that respect.

Statistics would say it is still declining.

It is still declining. We would expect that for a while. I would note that in the first quarter, our shop business was down quite a bit, in fact more than we thought it would be. We are seeing uptick in that area right now. In the mix of our income it's a small piece of the mix, but it's nice to see an uptick in that area going on right now starting this month.

Okay. Now moving on to other segments. Going to your ethanol business, first on the Greenville plant, is that still running at less efficient rates as your Albion and Clymers plants?

Slightly.

So you have closed that gap some?

Yes.

Okay. And given that you only lost $1 million in the quarter, given the corn prices, ethanol prices, etc., is it fair to assume that a lot of the loss from the plant was offset with those risk activities you do through TAEI?

No, I think we are working really hard on any given day to look at is this a day to lock in margins? Some of the risk activities that we've done before when we had some markets that were really trending in the direction would put us long some form or have us use some derivative strategies. We're not doing anything really too aggressive to try and offset basic margins. For the most part we are working hard to lock in margins when we can, although we will still do a little bit of that, and it's helping to some extent.

Yes. Historically there's been some arbitrage income there, and in the 10Q you'll be able to pick that out.

Yes, it was a big help last year.

Yes, in the first quarter last year in the Q it was around $5 million help. And it's very close to break-even this year. So it's much more -- it's much less trying to enhance by taking positions in the market, than it is on a day where all of a sudden we can get a margin that we feel is worthy of going and taking albeit at a loss, we'll jump on it.

Okay. And what's your view on that business for the rest of the year? Do you believe--do you anticipate may be still, sort of like the rail issue? Sort of still negative, not good, but better than Q1?

You know I'm not going to necessarily say better than Q1. I would say last six months of last year we were in a position in margins in spot and forward that made us feel more like rail right now. And we've moved to the point where margins in the spot are albeit negative, are a little better.

But the reality is we have more capacity, we have substantial capacity still idle in the US. We have some capacity, new capacity that is coming on. Some of that idle capacity will be coming back on, as a result of new owners and firing up plants. And although the margin structure for the blenders today absolutely supports blending ethanol, the limit of 10% ethanol, that we hope changes sometime in the next six to nine to 12 months, and the mandate where it is suggest that we will continue to have volume of supply that is greater than demand, which will continue to put pressure on margin.

What we don't know is exactly what oil does in that mix to either help or hurt ethanol margins, and we don't know what corn will do in that mix to either help or hurt margins. But we're pretty pleased with the performance we had in ethanol.

We're not going to sit here and suggest that that will necessarily improve in the next nine months. We're going to work hard to try to limit the loss to as low a number as we can, and maybe with a little bit of luck it'll bounce up a little. But we can also develop a scenario for whatever reason oil turns a little south, blending economics aren't as good and/or we have a problem with the corn and that margin structure can get impaired.

And we move down to where demand is--demand today is above the mandate. If you move to a point because of the economics on the blending side that are not all that, as friendly as they are right now, then you can push demand back down to the mandate level and then you're into more negative margins for those of us in the ethanol space.

It's a very dicey situation as we see it playing out through the end of this year and frankly as we look into early 2010. If we look further out, assuming that we have the mandate in place, and if you look at capacity coming on, we feel that we see a future that has us getting back into the black in this business.

I have two more questions. One on Plant Nutrient. That was a surprisingly good quarter. Just wondering, I know you mentioned, your commentary said normal margins for the rest of the year as compared to '08. But going to these deferred sales contracts that benefited the quarter, the prepay contracts, how many more of those to you have left to realize during '09?

Well the vast majority of that was put on in summer, early fall or last year and would have been for the crop year that we're in which ends June 30 this year. So we realized a chunk of those in the first quarter and we'll have more in the second quarter.

And I'm not going to disclose the exact amount, but obviously if we had--I would say we had several elements in our gross profit mix this year. The $2.9 million mark-to-market loss obviously was a negative being buffered by, in that quarter more gains, healthy margins as a result of this deferred business. And then we had some spot business that we were able to put through, plus we had good margins in our specialty industrial business and the new southern region and the lime business we acquired were all positive.

Frankly when we got through February, our view was it was very little likelihood we would have any additional write-downs even though we still own the inventory, and that was based on our outlook at the time. But this planting delay, with what's in the pipeline still, the combination of those has caused some additional pressures on price, which we think will likely continue here for a little bit. So as we did our end of the release, we were sitting in a timeframe I can't remember the exact quote. But we thought that we took the bulk of the write-down, I think we said something to the effect that we believed we had taken all or maybe substantially all of it and at least until now it's panning out that way. And the write-downs are only in certain nitrogen products and phosphate products. They're not in a number of our other products.

And finally on the grain business. You had a pretty easy comp, but even with that said, it was still a really good quarter. Your comparisons aren't as easy going forward, but still how we're looking at the basis spreads, it looks like you still could have -- it could be a good business for you the rest of the year. But I was just wanting to get your take on the outlook as far as the space income?

I had a feeling that question was coming and if you recall this time a year ago the opposite question. And we were trying, in fact, we said we believed all the basis loss that we took would come back. The bulk of that was wheat, and in fact we ended up having a really good full-year space income year.

This year we're having a record first quarter and the major driver, not the only driver, but the major driver is space income. That's something where timing is a big deal, and the space income comes from a combination of what basis does, does it go up or does it go down, what the grain spreads are and what we're able to lock in forward and the storage income that we have in place.

And as you noted we had a really good first quarter. We're friendly to our grain business. But it's not the opposite of last year but we think we've front-end loaded some income as a result of just how the market moved relative to space income. So we're not -- as we look out for the rest of the year we're not expecting the last three quarters of this year to do but they did last year. All things being equal we think we ought to be able to equal or modestly exceed last year's total number.

Okay.

There's an awful lot of planning that has to take place and some weather we have to go through. It's probably our standard disclaimer about this time every year.

No, understood. Okay, thank you again.

Thank you much ma'am. (Operator instructions) Our next question comes from the line of Michael Cox with Piper Jaffray. Please proceed.

Thank you very much and congratulations in the quarter guys.

Thanks, Michael.

In terms of your outlook on the Plant Nutrient side, I'd be curious what your thoughts are on volumes, excluding the acquisitions as you look to the balance of the year? Is down 15% where you think you'll be as you look at the full year?

Well, there's two things in that. There's the crop year which ends June 30 really, this season. And everything that's going on suggests that that trend will likely continue. If we had a really good weather here in April and May I think I'd be sitting here -- but one, we probably wouldn't have the mark-to-market issue we had -- and we'd be sitting here feeling that we would gain back on some volume. So I think it's reasonable to assume through the second quarter we're going to have volume that is lower than the prior year.

Now let's get to the last half of the year. If you recall, starting about August, volume just shut off. Our fourth quarter and the end of the third quarter last year was unbelievably poor volume, and we know why. Prices had dropped like--were still high and were starting to drop so we would expect that in the second half of the year that we'd expect volume to be better than last year.

So if you look over a full year, there's the possibility we could gain back in the second half what we lose in the first half, but right now, with the delay in the crop progress that I'd say even volume would be the best we would do, but we should do much better in the second half this year than a year ago on volume.

Well, margin too, given the mark-to-market issues we had last year.

Sure. That's helpful. And in terms of the inventory adjustment you're looking at potentially here in the second quarter, could you size that up relative to the $2.9 million that you took in Q1?

Yes. Originally when we were writing the draft of this about a week or so ago we were saying that maybe we could have an increase and now just a little more delays in the weather and what's going on the market suggested it's likely. I really will struggle to size that up for you but I would say I feel right now like we did at the end of the year. But we believe that we've taken the bulk of the write-downs. And I would say it only would be in phosphate and possibly nitrogen and we have continued I would say the continued deferred stuff we sold last year that we locked in margin on. As we ship that we'll take margin this year.

So I'm sitting here expecting that the net of our margin will be a positive experience, knowing that we're dealing with a situation where the pricing in the market could cause us to have a different feeling. But all I can say is I'm expecting us to return to a more normal profitability situation overall. We've got some good things going on in the margin side and then this overhang of this inventory position we're working through that I would hope and expect would not be that significant and that what we've experienced so far this year might be in the zone of what we'll experience, but I can't say that with any certainty right now.

Okay that's helpful. So I'm clear on this, it sounds like perhaps the deferred sale and presale and if we were to match that up against the inventory adjustments that that's approximately a wash? Is that fair to assume?

In the first quarter the margin experience was more of a net gain and that relationship that you said, and I would hope and expect the same this quarter, with more certainty on the deferred sale margin we'll have, not as much certainty on the other.

But I want to add in that we do a substantial amount of specialty fertilizer business, industrial business which should be healthy margins and as I indicate, our southern region and the new lime business have been advantages to us in the first quarter. And the timing of their seasons would also suggest that this second quarter will be a good quarters for them also.

Okay and on the acquisition of the Hartung Brothers Fertilizer Group, could you talk a little bit about their inventory position and the comfort level you have with making an acquisition in these types of conditions?

Yes I will. The closing on that is the end of July. And we would expect all of the inventory that they will have had that would've been exposed maybe to potentially higher and higher levels to work through. They do a substantially more back-to-back and prepay business, so they did not have near the relative exposure in this. But we would look at as being a non-issue and one of the reasons why the closing date is when it is at a time when inventory levels are quite low.

Okay, that's helpful. And then my last question is on the Lansing Trading Group, and I was wondering if you could maybe provide a little more color of what the either income contribution or loss was Q1 from Lansing specifically and then what your thoughts are on that contribution for the balance of the year?

Yes. We had, it was a very modest loss, which the negative stuff, the call at the end of the year, our first quarter call we had some mark-to-market issues on a number of things that made for a very poor fourth quarter. There was a little carry over from one element of inventory that they have that created a negative. Then our, we'll call it our proprietary trading futures, trading, derivative trading, we had a modest loss that's cyclical and seasonal. That was a drag.

And one of the things that's occurred over the last couple of years is that nice upticks in income from bio fuel trading, especially with the ability to put stuff on ahead and the margin structure in ethanol, which I described, grew much more in the spot market. There's very little trading now forward and that's true in a lot of the commodities as people are staying a little closer to the vest, so some of the opportunities that we generally had have just not been out there. Some of their traditional business in the grain elevators that they do own have performed reasonably well here.

We would expect to get back into the profitable -- profit side, and right now I would say we're not expecting a banner year. Maybe last year's results would be a reasonable proxy at this point in time. The difference is last year we had an exceedingly good first quarter. Then we had a terrible fourth quarter. So if we play out this way, and again this is a trading business, so each day you're starting fresh, but assuming what I'm saying plays out, then we should have a slightly better third--last three quarters in Lansing this year than last year.

Great. Thank you very much.

Thank you very much sir. Ladies and gentlemen, your next question comes from the line of Charlie Rentschler of Wall Street Access. Please proceed.

Thank you. Good morning.

Good morning, Charlie.

On the short side of the balance sheet there was considerable deleveraging in the first quarter. I wonder if you could talk about, Gary went through some of those numbers pretty quickly, but what was driving that? What were you doing with all that?

Well inventory values were declining, so when the mark-to-market or grain inventory and get our margin deposits back, that's all run through the balance sheet almost immediately. I think in a normal year we have the unknown of grain early in the year and the closer you get to harvest you have everything going. It often becomes a windfall of cash for us.

But in this case it came off of substantially higher values, and as a result you look at it quarter over quarter, it was a significant cash flow increase for us. I don't typically see it quite this radical, but we don't see the kinds of investments that we did last March or a year ago March. So it's not a very positive thing for us and obviously, we're pleased that we had the liquidity all during last year to satisfy the bankers.

So you like the position you're at right now?

Sure do.

Mike, I wondered if you could get into the head of Farmer Brown out there in the corn belt. What do you think is going through his head in terms of looking at planting corn versus beans or vice versa and his thoughts about expenses, in your case of course particularly fertilizers? Do you think he's trying to pull back here and there? What's your thoughts on that?

Really good question. We have pegged corn planting around $84 million, in that range and assuming the weather cooperates I think it's still reasonable to assume it's going to be in that range.

And I would say in some areas of the geography where we are, let's take central Illinois, Central Illinois that is corn country. And specific farmers I've talked out there are very clear that they intend to plant as much corn as before and/or follow whatever rotations they have and that corn, the ability to get additional yields is such that they will not scrimp at all on the nitrogen, but they're very cautious on phosphate and potassium and letting their agronomic work on what's in their soil guide their decision.

As you get into more ground that is maybe not as productive for corn but you don't have near the advantage, say in Northern Ohio, in Michigan, and what not, you'll see more of a willingness, well first of all, there's a bias to keep with rotation. Let's start with that. But there's also a willingness to go to more beans, primarily because of the cost of inputs relative to the output. And they don't necessarily get the boost in yield like they would in east central Illinois. So we're seeing a tendency and willingness to go to a little bit more beans acres.

On the cost side there is no question that the corn price having drifted down to the $4 range, when just a few years ago $3 would have been high, but we didn't have inputs at the levels where they're at. But there is no doubt that we're seeing a continued rejection on the part of a number of farmers in the areas of P and K not so much N. N prices have come down quite a bit, as has phosphate, and they're willing to buy and use the nitrogen that they have before.

So there is -- it was a nice run for a couple years. Income, revenue top-line is going up faster than input costs. Well the opposite is true right now and so there's a tightening of the belt on the expense side.

Thank you for that very interesting appraisal. Last question about Lansing Grain. Are you happy with where you're at or do you think you're going to continue to buy more of that?

Our plan all along was to potentially get up to around the 50%. We're just under that. We're happy with where we are right now.

Okay. Thank you.

Thank you very much sir. And ladies and gentlemen, we do have time for one more question that comes from the line of Ian Horowitz of Soleil Securities. Please proceed.

Good morning guys.

Hi Ian.

Can I go through just a mechanical question on capacity -- volume capacity for Plant Nutrient? For the second quarter on a year-over-year basis capacity mind you, we should be flat, and then when we come into the third quarter due to the Hartung Brothers acquisition than we'll start to see the increase in volume capacity? Is that right?

Yes. August 1. But if the closing goes as projected, which would be July 31, third quarter would have an effect on Hartung coming on.

There's been a modest increase in capacity because of the acquisition of Douglas Fertilizer which happened in the second quarter last year and the lime business we bought, which was third quarter. But there although Douglas our new southern region does substantial volume, but they do not have substantial storage capacity, and the same is true for the lime business so from material prospective it's just as you said Ian and as Gary confirmed.

Okay. And then talk about some of your thoughts on M&A in this space. From what we understand there's a lot of wholesale retail operators that are in pretty challenging positions right now. Do you see yourselves continuing to kind of take advantage of this moment, be increasing your capacity?

Yes, that would be our intent. Now that's got to match up with the opportunity and a potential seller or merger candidate, and that, as we know, isn't uncertain until you actually sign the deal.

But we really like the capabilities we have, albeit we didn't manage our risk -- price risk well last year. We feel we cleaned up our shop on that and we look at the current time as a time of opportunity and the recent acquisition we just announced an indication of that. We hope that we'll be able to see more.

And the remainder of the Hartung Brothers is going to stay back with them and they're going to operate their seed business and other retail operations, is that correct?

Yes, seed and their substantial produce business.

And then can we, quick question on grain. When we look at the recent grain stocks report, a significant amount of--there's been a significant change in the amount of grain being held on farm versus downstream. What's your comments on this? How do you feel this? How is this impacting your utilization rates in this business? And then on top of that, if planting progress is continuing to be as you guys said, a challenge, how are you modeling utilization rates in the grain business over the next growing season if we continue to see kind of an underperformance?

Good question. We've seen an expansion with the high prices, first the high prices and carrying charges. Over the last several years, we've seen an increase in the amount of on-farm storage built, and commercial storage has been added during that timeframe also. We've added some ourselves.

The continued--over the last couple of years, the significant amount of consumption that's taking place with new ethanol plants embedded right in the heart of production country suggests that it's logical that more grain flow direct from farms to an ethanol plant as opposed to necessarily going through a terminal warehouse such as ourselves.

But the overall amount of grain we're growing is going up. So we've been blessed with the ability to say full when there's carrying charges which there have been. And we've been blessed with reasonably good volume coming into our traditional facilities, but it's also a direct shipment from farm to other consumption points has afforded us a nice opportunity in what we call direct shipped trading business.

So it's been good for us. We like what we see. One of the reasons so much has been held at farm is basis levels were so cheap that it encouraged the farmer that had space to keep it there. They did what the market signals told them to do.

As we look forward, we talk about our modeling, we do quite a bit of -- extensive modeling around probably more so on the impact of planting on price and we know one of residual impacts on planting is if we have a drawdown in corn stocks, there would be a reduction in the amount of income that we made from what we call space income.

And it's something that we deal, the volatility that we deal with all the time. And so we're sitting here with our scenarios on what we'll call an average case, a better case, a pessimistic case, a worst case and we're running those numbers regularly, both to understand its impact on our income, but probably more importantly to understand the potential impact on short-term lines of credit to support margin calls. And we ran into that dynamic last year as we all know.

So, we cannot control what is or isn't planted. The market is set up to plant substantial acreage. Most years we get it in. I suspect that we will, but I would rather be ahead than behind.

What's the impact of corn and beans switching away from the normal rotation to your grain business?

Well, corn is--first of all right now wheat is a huge contributor to space income and we have substantial wheat. Wheat stocks are up and we would expect that unless something changes materially in the demand for wheat, that which is lodged in our elevators will stay there and provide good income and we'll have the ability to originate more wheat this summer. So it's the dominant piece of our space income right now.

Corn is second by far. Beans are very little. So if we switch over to beans from corn it is a hit both in volume, because you don't produce as much per acre, and it's a hit in space income. I do recall we have had years where our space income has gone as low as zero, or to a modest loss, versus we've had years per bushel were better than what we experienced last year although last year was quite good. So it's a major factor and that switch will also impact Plant Nutrient, because corn takes more nutrients. It's a huge issue to watch in the next, literally next four weeks.

But it doesn't seem like you guys have said you're running these different scenarios, yet it's still too early to tilt in one direction or the other?

Yes, it is, and actually the futures market is an indicator that corn's bounced up just a little bit here, but it's still staying in the $4 to $4.50, less than $4.50 [for decent] corn. You can see it bounce a little over the last couple of weeks as the delay in corn planting occurred. And that will be, the corn market's going to be your barometer of are we starting to get into a trouble situation or not. And so far it's not really indicating that.

Great. Thank you very much.

Okay. I think that was our last question. I want to thank you all for joining us. Next conference call scheduled for Thursday, August 6 at 11:00 to review our second quarter 2009 results. We hope you're able to join us then, and until then have a great day and thanks for being with us. Bye.

Thank you very much sir. Thank you ladies and gentlemen for your participation in today's conference call. This concludes your presentation for today. You may now disconnect. Have a good day.