Andersons Inc (ANDE) 2009 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the second quarter Andersons Inc. earnings conference call. My name is Anita and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the call. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Gary Smith, Vice-President of Finance and Treasurer. Please proceed.

Thank you, Anita. Good morning everyone and thanks for joining us this morning. 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 and conditions in the company's industries, both in the United States and internationally, and additional factors that are described in the Company's publicly filed documents, including its 34 Act filings and the prospectuses prepared in connection with the company's offerings.

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

Before I turn the mike over to Mr. Mike Anderson, I want to note two things. First, we have implemented FAS 160 this year, which relates to the presentation of non-controlling interests, formerly classified as minority interests, in the consolidated financial statements. Under FAS 160, non-controlling interests are now included in the income statement under the caption net income. Net income attributable to The Andersons and earnings per share are comparable to the previously reported 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.

And secondly, I would like to introduce Assistant Treasurer, Nick Conrad, who will be participating in the call today. As most of you know I would be retiring at the end of October, I have truly enjoyed working with each of you both in person and by conference call over the past fifteen years. Specifically, I have enjoyed your insight, challenges and most of all, your written analysis of this wonderful company.

Nick has been my very capable and field assistant for the past twenty-five years. I am very pleased that he's been selected to take this position when I leave. As you get to know him, I know you will find him very talented, cooperative and stimulating person to work with.

Mike, let me turn it over to you.

Thank you, Gary. Good morning everyone. As noted in our press release, we generated net income of $15.9 million or $0.87 per diluted share on revenues of $811 million. In 2008, we reported record net income of $45.6 million or $2.48 per diluted share on $1.1 billion of revenue.

Through the first six months our total net income stands at $20.9 million or $1.14 per diluted share. In 2008, we reported record first half net income of $53.4 million or $2.90 per diluted share.

It's important to remember that the earnings from the prior year included unprecedented margins in our Plant Nutrient Group that accounted for nearly two thirds of the income. Total revenues of $1.5 billion for the first half of the year are down $300 million from last year. The main cause of this revenue decline is lower grain and plant nutrient prices.

To fully understand the total company results for the quarter, let's take a look at each of the five business groups. Grain and Ethanol Group had an operating income of $8.9 million in the second quarter versus a record $20 million a year ago.

The grain business had its third highest second quarter performance, as it benefited from good space income, which resulted primarily from the sizable basis gains and reduced interest charges. The ethanol business was profitable during the second quarter as the performance of the company's equity investments in three ethanol limited liability companies has recently improved.

When compared to the prior year, however, income from the ethanol business was down considerably this quarter, as last year the business benefited from margins being locked in before the decline in the ethanol market. The second quarter results from the group's investment in Lansing Trade Group at just above break-even, was also significant lower than last year, due primarily due to declines in some of its trading business.

Total second quarter revenues for the group were $500 million. This includes $188 million of grain and ethanol sales made by the group in accordance with origination and marketing agreements between the company and its ethanol joint ventures for which it receives a fee.

In the second quarter of 2008, the group's total revenues was $696 million and included $226 million in ethanol joint venture sales. While revenues for the group are lower, due to substantially lower commodity prices, such amounts do not serve as good predictors of income or economic performance for the group as it is a commodity based business.

The grain and ethanol group's operating income through the first six months of 2009 was $14.7 million in comparison to $22.2 million in the prior year.

The grain business is significantly ahead of the prior year performance, as last year they had large space income losses in the first quarter of the year.

The decreased year-to-date results are attributable to the performance of our equity investments ,the ethanol LLCs and Lansing Trade Group. The ethanol business results have been significantly impacted by the decline in the ethanol market, but we are pleased that they have returned to profitability.

Lansing Trade Group results are just below break-even year-to-date. Lansing has had reasonable results this year in their core traditional areas of grain trading and facilities. Other results in the proprietary trading business and within the new trading business they entered at the end of last year have been disappointing. Action has been taken by Lansing to exit both trading and inventory positions held in the new line of business, and therefore it's anticipated that they will put this issue behind them in the near future and return to profitability in the second half of the year.

Total revenues for the grain and ethanol group through June were $1 billion in comparison to $1.2 billion reported in 2008. The first half results include $395 million of grain and ethanol sales, which is comparable to the $412 million that was reported in the prior year.

Last week, the grain and ethanol group announced that it added an additional 4 million bushels of capacity within its grain business, which increased total capacity to more than 101 million bushels. This capacity was added through the signing of agreements with Mason Elevator Company Inc. and Woodbury Grain LLC. The group will merchandise the grain of both facilities and conduct grain originations at the Woodbury facility.

Additional capacity expansion work is also underway at two of the group's existing facilities. This will add an additional 1.5 million bushels capacity in the next few months.

I also want to mention that at this time, crop condition reports show that 68% of the corn and 67% of the bean crop are good or excellent, both of which are ahead over the prior year by 2 and 5 percentage points respectively. As long as weather continues to cooperate, this means we could have a good harvest season.

The Rail group has been impacted by significant decline in North American rail traffic. The group reported an operating income of $600,000 this quarter whereas last year, the group reported $4.9 million of income in the second quarter.

The group recognized $800,000 in gross margin from the sale of railcars and related leases during the quarter, whereas last year, the group realized $1.1 million on similar transactions.

Operating income from leasing was down considerably, primarily due to lower utilization rates. The average utilization rate, which is the percentage of the fleet in service for the quarter, was 80.6% in comparison to 93.3% for the same period last year. Further, as of June 30th, the utilization rate had declined to slightly below 80%. Gross profit from the leasing business was also impacted by decreasing lease rates, decreasing per diem income, increased maintenance expense per car and increase in storage expense related with lower utilization rates.

The group has over 23,800 cars and locomotives, which is comparable to the prior year total. The gross profit of the railcar repair and manufacturing business continued to be down significantly in the second quarter due to reduced activity resulting from the overall economic decline.

Revenues of $24 million for this quarter were down significantly from the $43 million reported for the same period in 2008, due mainly to a $14 million reduction in car sales.

Through the first six months, the Rail group had revenues of $51 million and operating income of $1.5 million. In the same period of 2008, total revenues were $78 million, an operating income amounted to $11.3 million.

Part of this income decrease was due to gains on sales of railcars being $2.2 million higher during the first half of 2008. The remaining year-to-year decrease in the first six months is due to the same reasons I previously mentioned in regards to the second quarter.

The impact of the economic decline coupled with the fact that a significant portion of the US fleet has remained idle during the year, suggests a tough year ahead for the rail group. Although we would like to see better results, we are pleased that we continue to show a profit in this group during these times. Further downturns in the leasing market tend to provide us with car acquisition opportunities that could pay dividends for the future.

Plant Nutrient Group reported operating income of $10.3 million on revenues of $198 million this quarter. In the same three-month period of 2008, the group reported a record $47.4 million operating profit on $274 million of revenue. The earnings in the prior year were unprecedented and were due to significantly increased margins that resulted from the quickly escalating basic nutrient prices during the same period.

Margins were down considerably this quarter in comparison to last year, due to the de-escalating prices of basic nutrients.

Sales volume was also down this quarter, slightly in total and about 19% when sales from acquisitions made last year are not considered. This decrease was due to retailers reducing their nutrient inventory holdings and to the lowering of basic nutrient application rates, including potash, potassium, and to a lesser degree, nitrogen. The group, however, did not report any further lower of cost or market adjustments in the second quarter. We believe the lower cost of market issues behind a group as we have moved through our above market inventory positions.

This year, the Plant Nutrient group has earned $12.4 million through the first six months on $309 million of revenues. Last year, the group generated likely unrepeatable operating income of $54.9 million on $379 million of revenues. This year-to-year differential is caused by the same items I mentioned earlier in regards to the second quarter performance.

As we announced last week, the Plant Nutrient Group acquired Hartung Brothers Inc. fertilizer division on August 1st. This acquisition will be accretive to 2010 earnings, and represents a strategic expansion of the group's footprint in the Western corn belt with the product line and customer base matching existing markets. Additionally, the operating results from the two acquisitions we made last year continued to either meet or exceed our earnings expectations.

The Turf & Specialty Group had a record second quarter. The group achieved operating income of $3 million on $40 million of revenue. Last year, the group reported $1.9 million of income on $36 million of revenue in the second quarter.

Turf products tonnage was up over 20% from year-to-year. Gross profit per ton decreased due to a product mix that included a higher percentage of consumer and industrial products they have lower margins than our professional products.

Through the first half of 2009, the groups operating income was a record $6.1 million on $84 million of revenues. Versus last year, operating income is up $2.3 million and revenues are up $9 million.

The group continues to experience positive results from its focus on proprietary products, and from expanding both its product lines and customer base. It was just over a year ago that this unit along with several partners was awarded a $5 million grant by the State of Ohio for research and development. This grant is proceeding well and is being utilized to further develop technologically advanced and proprietary products. Therefore, we are expecting the Turf & Specialty Group to continue the annual earnings growth that they have demonstrated the last few years.

However, we would expect this group to have a loss in the second half of this year as this is traditional based on the seasonality of the business.

The Retail Group had an operating income of $2.9 million in the second quarter, which compares to $3.4 million last year. Total revenues of $49 million for the second quarter were approximately 6% below the $53 million of revenue for the same period in 2008.

This sales decline is primarily due to the overall decline in consumer spending. The Group's year-to-date operating income is $200,000 in comparison to break-even results through the first six months of 2008, as the Group has worked hard to contain expenses as revenues have declined.

Retail businesses total revenues of $83 million through the first six months were $3.3 million less than last year. Both the Group's margins and customer accounts have improved slightly this year. Unfortunately, these have been offset by a decline in the average sale per customer as the customer -- consumer has reduced their discretionary spending.

Now, I will turn the floor over to Nick Conrad for his treasurer's comments.

Thanks Mike, and thank you, Gary, for your kind comments.

In regard to taxes, the company's second quarter 2009 effective tax rate was 37%, unchanged from 2008 second quarter. We are projecting our 2009 tax rate to be 36%.

For the 2009 second quarter, the company's interest expense totaled more than $5 million, down $3 million from the 2008 second quarter. Year-to-date interest expense was $11 million, down $7 million compared to 2008.

Our short-term average interest rate for the second quarter was down 1% versus year ago levels, and through the first six months, our short-term average interest rate was down 2%. The company's average short-term borrowings as compared to 2008 were down approximately $400 million for both the quarter, and 2009 year-to-date. We ended the second quarter with no short-term bank debt outstanding.

EBITDA, earnings before interest taxes, depreciation and amortization, for the second quarter 2009 was $39 million versus $88 million for the same period of 2008. Year-to-date, EBITDA totaled $60 million, a decrease of $56 million from the same period last year.

The second quarter's pre-tax earnings included approximately $1 million in equity and earnings of affiliates versus $8 million in the same period last year. Year-to-date equity and earnings of affiliates was a loss of $3 million down $19 million from June 30, 2008. The EBITDA has been adjusted for the non-controlling interest.

Turning to the balance sheet, current assets decreased to $647 million by the end of the second quarter, from a year earlier balance of $1.3 billion. Majority of this decrease was in inventory and commodity derivative assets. Current inventories totaled $205 million at the end of the second quarter versus $407 million for the same period last year. Grain and ethanol inventories were down $123 million and Plant Nutrient inventories were down $78 million.

Commodity derivative assets current ended the second quarter at $49 million down $445 million from the same period in 2008.

Since the 2008 second quarter, trade receivables have decreased $56 million. Grain and Ethanol receivables were down $8 million, Plant and Nutrient down $31 million, Rail receivables down $16 million and Turf & Specialty down $1 million.

The decrease in receivables has been driven by lower commodity prices, margin deposits end of the second quarter down $41 million from last year.

The company's cash and cash equivalents increased $146 million compared to the same period last year, ending the second quarter at $180 million. Net working capital at the end of the second quarter was $337 million, an increase of $30 million from the 2008 second quarter.

Total assets at the end of June 30, 2009 were $1.1 billion, a decrease of $656 million from the year earlier second quarter balance of $1.8 billion. Other assets ended the second quarter at $155 million, down $86 million versus the 2008 second quarter.

Commodity derivate assets, non-current, were down $83 million as of June 30. Plant, property and equipment along with railcar assets leased to others increased by $34 million.

Depreciation totaled $16 million at the end of the second quarter. Total capital spending including investment in affiliates for the 2009 second quarter was $7 million versus $35 million for the same period of 2008 excluding railcars.

Railcar purchases and sales were $12 million and $5 million respectively during the second quarter. Railcar purchases and sales in the same quarter of 2008 were $55 million and $41 million respectively.

Our long-term debt totals $315 million, $29 million non-recourse and $286 million recourse, a net decrease of $15 million from 2008 second quarter ending level. Our long-term funded debt-to-equity is 0.7 to 1 exclusive of non-recourse debt.

The company's average 2009 interest rate for all long-term debt was about 6%. As of June 30th, 2009 the company's total equity was $384 million, down $24 million from 2008 second quarter. On July 22nd, we paid our third quarter 2009 dividend of $0.0875 per share.

Back to you Mike.

Thank you Nick. Before we take the questions, I would like to cover a few points. Although we would have liked better results for this quarter, it's important to remember that last year's second quarter results included truly unprecedented margins in our Plant Nutrient group. We are pleased with the results of our grain and ethanol business. The grain business' performance was strong and our ethanol business returned to profitability, which is an accomplishment in the current ethanol environment.

Conversely, we were disappointed with the Lansing Trade Group results of this year. And as you may recall, the Plant Nutrient Group undertook significant inventory write-downs in the last half of 2008. Those steps were necessary and appropriate in scale, and we believe the lower of cost to market issues are behind us and the group has returned to a solid financial performance.

The Turf & Specialty Groups had an earnings record as the value added product and expanded product line strategy they have pursued continues to be successful. The economic decline has had an impact on our Rail Group and to a lesser extent on our Retail Group.

I believe these results continue to demonstrate that our purposeful diversification allows us to remain a strong and profitable company even when some businesses are underperforming. That being said, we are continuing to grow our business. First we acquired Hartung Brothers Inc. Fertilizer Division last week, and we expect these additional wholesale fertilizer locations to allow our Plant Nutrient Group to continue its growth initiative which has proven successful so far, as the two major acquisitions from last year continue to perform at or above expectations.

Second, as I mentioned earlier, we've added 4 million bushels of grain storage capacity last week and in the process of building another 1.5 million bushels of storage capacity at two of our facilities. [Going] through the $5 million Ohio brand, we are continuing to expand our proprietary product lines in Turf & Specialty. Further, we are looking for potential rail business acquisition opportunities, during this depressed rail market. As I've mentioned before, we intend to continue to grow as we've been for several years now, albeit with appropriate caution, given the current economic times.

This concludes my prepared remarks. Gary, Nick and I will be now be happy to answer any questions you may have. So Anita, we'll turn it back to you.

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

Hi, Good morning.

Good morning.

Could we start with the grain storage business? If you just look at grain storage income for the first half of this year versus last year, is it comparable or slightly higher than last year's level?

When you say storage of course, and I'll use the phrase space income just because technically storage would be grains on deposit, we earn a storage fee from whoever deposits them. We don't have titled -- space income would include storage income and delayed price and basis gains and losses net of interest.

Exactly.

Through the first half, if you recall last year, Farha, we had a really horror first quarter of 2008, we had sizable loss primarily in wheat, and first quarter of this year we were positive. In the second quarter, we were actually, in space income, we were above last year's second quarter. So in total, we are way above in our grain businesses results and the space income area of 2009 versus 2008.

I'll add just a little color commentary that wasn't covered in your question, but one of the other significant gross profit areas of grain is what we call put-through area, which includes both margin and blending, and on the margin front, we returned to a normal margin for bushels. We did have slightly lower volume of sales. Last year, we had really unusually good margins heavily impacted by the volatility in prices that we were able to extract really good margins than -- we've moved back to what I'll call more traditional results.

And in total through the first two quarters, relative to your question, we are way up. Last year, because there's a forward element to this, last year we said, eventually the wheat loss that we had in the first quarter would come back by the end of the year and in fact it did, with most of it coming back in the second half. Well, we don't have the drop this year. So we don't expect to come back in the second half of this year because there's nothing to come back.

Okay. So ---

We would expect it in the second half.

-- when you look at your put-through income, in the second half, if you look at your put-through income, do you expect it to be comparable to last year or year-over-year or down?

Yes, did you ask that relative to the second half?

Yes. Second half outlook year-over-year?

Well the harvest is looking reasonably good, and let's assume we have a good harvest in our area. Especially good across US in looking better in our area than it did a year ago in the eastern part, which would be Ohio, Michigan, Eastern Indiana, not may be quite as good as you get into Illinois and may be comparable Indiana, but, so we would expect a decent volume here and we would expect the margins that we would have going through in the harvest time to be reasonably comparable, and we would expect to fill up a decent basic levels and we've gotten through the wheat harvest and that's been going good, we would expect appreciation there.

Corn we are expecting that, soybeans, there is a lot demand for soybeans. So, the way things are setting up we won't put many soybeans into our space for this fall unless something switches. So, we would expect a decent second half, but we won't have that wonderful come back in space income that we were able to benefit from last year.

Okay.

It's really a reversal of the last in the first quarter of 2008.

All right, and then when you look at Lansing Trade Groups, you had said they exited the businesses that they were finding challenging in the first half. Do you think even just the grain, grain volatility, etc., what should we expect them to earn maybe quarter or year in year out?

Yes. No, I will not answer that, with near the specificity that you'd like to have I am trying to forecast, well we are not the first given the guidance and that was a very specific question.

But we would expect to return to reasonable profitability, the core business at Lansing did has done well in the first half, its core historic grain trading [green] ingredients, facilities businesses that we've expanded. So, we would expect to get back on track but, we know that in a trading business that we are going to have volatility that comes back.

I want to clarify, I believe there were some problems in a couple areas of which I would say is one of them we are exiting, but -- and the other ones we are cutting back significantly, putting it into what I will call much more manageable situation. So we are looking --- this company and this Lansing Trade Group has performed extremely well, we would expect that into the future and they would say we've had some disappointments and hiccups in the last nine months that were getting behind us.

Okay. And then moving on to ethanol, if you look at kind of profitability of your ethanol plants, are they currently making roughly $0.05 per gallon or $0.10 per gallon, how should we think about profitability on a per gallon basis of the various facilities?

Yes, each one of those are independent LLC, and I am not going to give you, I am not going to try and run through each individual one. I would say in total, they are making a couple of cents of a gallon through the second -- through to the second quarter, which is nice. This quarter has started out reasonably well, but it's still just -- but within the last week margins have shrunk back a little in the nearby.

So, it's still a challenge business that we are pleased that we are on the plus side of the equation not pleased certainly in regards to total return on assets. Lot of our focus besides just on the margin, the gross margin side of the relationship of ethanol corn DDG, is we are putting a lot of effort into the operational efficiency and productivity to be able to squeeze out those last couple of pennies.

Okay.

There is nothing in my opinion in the next six to nine months that looks exceedingly wonderful or bleak within the ethanol, and yet with two commodities the brand ethanol corn they have been linked, if they would decouple in any direction, of course we would view it as a recipient of a good decoupling or the opposite of it if it goes the other way.

Okay. So that's implying that you don't have much forward sales from those --

Yes, we don't have much, we've locked in some going ahead, but the benefit that we have over the last couple of years of forward sales lock in, an exceedingly good margins, we have very little of that left.

Okay. And my final question and then I will pass it on is, could you discuss railcar lease for eight, what percentage terms or how much they are down and your outlook for lease rates?

Yes. I am going to let Nick, Nick one of the things he does in his role, he works closely with our Rail Group and I've got some perspective, I may would add color commentary after I ask him to address the lease rate question, but Nick I will let you take the first stab at that.

First, I want to echo Mike's comments that, we are pleased with the first half results for Rail in a challenging environment to still be profitable, so I want to begin with that. We would say on a continuing basis, but, we are not quite sure where the economy is going to go, it continues to move through the south and you would expect to see continued kind of struggle there. But the direction of lease rates along with the direction and utilization have both been down versus last year. And I would say of the two, if you were to think about classic volume rate variance analysis, more of the impact, net results has come from the declining utilization than declining the lease rate.

Yes. I think that's fair, and one factor there is an element of its great to get a carve out earning lease income, but maintenance costs continue to escalate, so if you can't cover maintenance costs, there is not a lot of reason that you might as well just park the car. So, we've seen a decrease but I think Nick hit it well, the biggest impact is utilization.

Okay. Thank you very much for your comments.

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

Thanks for taking my questions. Good morning gentlemen.

Good morning Mike.

Morning.

My first question is on the Plant Nutrient side, I was wondering if you could give your outlook on what you think we will see in terms of fertilizer volumes as we come up against much easier comparisons, and now that pricing had come down.

Yes, that is a great and anticipated question, and it's one that we spend a fair amount of time on. And I will give you as much granularity I can understanding that this has got to play itself out and we have -- it appears as if we bottomed in nitrogen and phosphate.

Let me just start with that. Potash was later on its move in decreasing the prices in some recent significant price drops will be added to an encouraging consumption.

We also know that especially for potash and phosphate that there were reduced application rates this year that varied by piece of land and by farmer, but they were substantial and so there was a little bit of I would say, of taking out the savings in the soil out of the bank. So, we would expect from an agronomic perspective that we are sitting in a situation where there is a desire to put back nutrient into more traditional levels on to the ground.

And from a price perspective, given we are -- let's use corn prices right now, and where nutrient prices are, especially phosphate and nitrogen; I'll come to potash in the second. We would expect the current pricing to encourage more traditional levels, buoyed by the belief, what I would say is a belief that there is not a high expectation that those two nutrient prices will drop.

Potash I am just personally little less clear on. The soil needs it, the price has not indicated that it's bottomed yet, it may have, I mean, macro needs for potash are certainly there. But it's just we got to wait a little while for the story plays itself out.

When it comes to this fall, we would expect a decent fall and a more traditional fall based on everything I have said so far, the one caveat this crop, which is looking good, is late. And the growing degree days is late because a good chunk of it got planted late, and it is late because growing degree days have been down substantially.

So there is -- we have to play out when the crop is harvested, what the weather is like in the fall, but if it's not this fall, next spring. So I really, really feel, oh I'll add one more thing, the inventory pipeline, at least as far as we can tell is owned by wholesalers and retailers, has been reduced in de-stocked, so that amount of pipelined inventory has found its way into the market and isn't sitting there overhanging the market as it were. And I am not in a position to speak to the producers' inventories because I just don't know. So, that goes reasonably well at this point in time too.

So it really feels like after unbelievable 18 to 24 months that we're back to as much as you can use the word normalcy, back to normalcy with ground that needs nutrients and pricing that supports application rates for the most part.

Okay. That's a very thorough review there. Just so I am clear that looking at say the fourth quarter where I believe your unit volumes were down 50%, should we expect a double-digit rebound in volumes against that background?

That's a great point. And I would tend to say that if we have decent weather, I mean, I am going to add two caveats. Decent weather in the fall that means we are in a position to get the harvest off and have the ground in a position to take the nutrients would be one. And two, if we don't have a material change in either grain prices or fertilizer prices that would get us back into volatility uncertainty or caution, then I would expect moving back in that direction.

Whether it's exactly double or it's somewhat less net or somewhat more net, I am not sure. Second quarter, we were almost flat year-over-year in total volume, which was kind of a surprise, but if you looked at -- if you eliminate the impact of acquisitions we were down about 20%, which is a volume come back from the 50% drop in the fourth quarter.

So, I think we are back towards what we have been used to and that's a good starting point, I mean, it's a good starting point of a number to use that will be -- then be impacted by at least the variables that I mentioned.

Okay. That's very helpful. On the grain and ethanol side just, I guess, to sum up the previous questions, it sounds like ethanol is in better shape than it was a couple of months ago.

Yes.

Lansing is expected to turn profitable.

Yes.

The harvest looks good. So should we expect second half earnings contribution from grain and ethanol to exceed that of first half earnings contribution?

I am not going to get into that specific forecast, I'll leave that to you guys. I will say that when you look at the grain in particular and you look into last year, just remember how much we gained back, there was a problem in the first half. But I understand what you are trying to drive for, but I am just not going to add any more specificity.

Okay. That's fair. My last question is on the cash and the balance sheet, this is the highest level that we've seen in some time, and I am curious as to how you prioritize use of cash and maybe your cashable expectations to the balance of the year.

Mike, I will let Nick answer that and we figured that question was coming from somebody.

Well, first of all it's great to be in a position where we have cash and cash equivalents at the end of the half of a $180 million. Remember, that we are a seasonal business since that our normal working capital consumption peaks in the March and April period and again in the October and November period and we tend to wind out our inventory positions and receivable positions in the June, July period and the May period.

And so I think part of that is just a cyclical kind of a result. We expect to be obviously handling grain in the fall and going to a normal pattern as Mike has described. So I think you will see a use of that cash as that's just to support our working capital each going forward.

We are pleased to have that kind of strength in our balance sheet right now, and so on an immediate basis our goal is just to preserve it and continue to be good stewards.

Okay. Thank you very much.

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

Good morning.

Good morning, Heather.

Gary, we are going to miss you a lot and the all the good luck and have a good time in your retirement, and Nick I'm looking forward to working with you.

Thank you.

I have a few questions. One, I was wondering what impact the storage fee for wheat moving up, I think it went from $0.05 to $0.08 a bushel effective July 1st. I maybe wrong on those numbers, but I believe it went out July 1st. I was wondering if you still are holding a meaningful amount of wheat and secondly, if there is going to be a corresponding increase in your expenses or would or should your profitability on storing wheat move up?

We are intending unless sudden changes in the market continue to hold a significant amount of wheat, based on the fact that its ability earn a return on spaces, the best of the commodities that we have. And to your second question is, we would expect that the increase in storage rate, it really got showing up -- for those who are unfamiliar, shows up in the public storage rate for wheat to just deliver at fulfillment of a short position in the Chicago Board of Trade (inaudible -- audio gap) wheat and which tends to find itself either reflected in the actual storage charge or in a carry you can earn from the market if you are in carrying charge situation.

We would expect that to increase our profitability.

Okay. And some of the proposals coming out of the FTC of adding 15 delivery points as far as Chicago Wheat goes. Do you have any initial read on what you expect that impact to be for your business?

A lot of this drive is that there has been a back drop, the relationship of cash basis values of wheat primarily in the areas close to delivery have been substantially below futures prices, for the most part, for several years which creates a concern about how well the contract functions and one of its objective is, which is an objective to have a result of a convergence between the cash price and the futures prices at the time delivery period.

S the object is to potentially add more weight from those who could be short the futures and be able to deliver and this just kicked in on July 1.

And I personally I believe one of the intended impacts will in fact occur, which is more wheat will be held off the market and delivered against futures contracts, which adds some weight to the long futures trader who for some reason wants to own wheat -- futures wheat well above cash prices.

And we are seeing a little bit of an impact, and maybe it's not all just related to that, but basis values have come up just a bit, which in the near term is positive for the wheat we owned. In the long term to the extent that we move towards greater convergence, we have the embedded basis appreciation that he'll eventually get on the wheat we own.

And then ultimately, if you get to a more traditional situation, we might be paying basis values for wheat that are much closer to futures price, and then you will have the impact of that over time. But wheat traditionally has been even back when there is convergence, has been a good commodity for us and I would expect that to continue.

But, so I think that's having an impact right now Heather, a positive impact, I don't want to overstate it. And I think the CFTC in the Chicago Board Deal Exchange and the trade will continue to look at and adjust as it feels as is necessary to help assure that we have futures contract that has integrity with the cash markets.

Okay. On these two agreements you just signed about a week or so ago, is there anything about the -- and this is for the 4 million bushels grain storage capacity. Is there anything about those agreements? I mean, should your merchandising activity and all there have similar profitability to your other abilities, or is there anything different in these agreements?

There's a little difference in that we don't own the asset in this case. So, it's operated by folks who own the asset, and so we don't have some of the cost and gross profit that might go along with the only asset. Where we have the benefit is that we'll be able to take ownership though of the grain in the facilities, and have all the opportunity and risks that comes with that. And our expectation is that the fees that we paid to enter into this in comparison to what we will be able to earn from the market will pretty much mirror those elements of our existing business.

So it's to be additive space income, consistent with the space income that we have with our other facilities based on local supply and demand characteristics in that Michigan market where the facility is located. So, it's really from a modeling perspective, I would say, it's pretty consistent when you are trying to asses what kind of return we ought to get from the space that we control our own.

Have a couple more questions. On the rail side, utilizations steadily moving down, I believe you said maintenance cost moving up. Just wondering, in the back half, I mean, do you believe that you are still going to be able to maintain profitability in that business or?

Yes. That's, we are hovering right around break-even. So it's not like I have much cushion with the following statement. So I can't, I am not going to answer it. Yes, we will be above break-even or no we won't because too tight there, but I will give a little color commentary.

Somewhere and I don't have the exact data, because the exact data is not there right now, but I am going to say, roughly 25% plus or minus of the nation's fleet is likely parked now. And the speed at which we moved from 90-something% utilization that just below 80% was more rapid than we thought as companies we were leasing cars to said hey, I don't need as many.

Now that has taken a heck of a lot of railcars off the lines and rail traffic which has -- which has ranged from down 16% week, this week versus a year ago to 25%. The decline in rail traffic although still around that 20% number is not as bad as it was a few weeks ago.

It just has a feel, what I don't know, is this a shelf or is this the bottom that's forming, but it has a feel that the pace of returns is slowing down, and we know the interest of potentially leasing cars is picking up a tiny bit. So if in fact this turns out to be the beginning of a bottom, then there's a reasonable likelihood that we will be in that break-even range, but each percent of utilization has an impact on us.

So, if all of a sudden next week, oops, returns start picking up and utilization drives down to the low 70s, then it would be hard to maintain around the break-even.

About 20% of our income drop year-to-years in our shops, and we've seen a bit of a pickup there. So I would hope that our second half experience isn't quite as bad as the first half. So I'm cautious, I'm not cautiously optimistic as break-even is not an optimistic statement, but I am cautiously saying it -- that we are hoping expecting the possibility of being in this range through the end of the year, we've been working on reducing costs, and although we haven't found much in the way of opportunity for acquisition, we believe we'll find something.

So I didn't keep, just do your best keeping a track abreast of the weekly rail information and if the percent drop is decreasing, then maybe my cautious feeling of a bottom is actually turned to reality. If we start going back in the 25% and 30% lower rail loadings, then it's probably an indication that things are softening more than I am suggesting right here.

Now there adds up, I know that I've not really gotten too specific, but I hope that helps.

No, it does help. The final question is on the ethanol business. Like Q3, thought started out pretty good or I can't remember what your exact words were, but did Q3 start out better than the $0.02 per gallon of gas?

Yes.

Okay. And secondly, are you locking in any aspect? I mean, given where natural gas is, are you at least locking that in?

Yes, well I take it back. Locking in one leg is something that we were cautious on. Now, specific to natural gas, given where it is in the nearby, it's really enticing to lock that in. The problem is as you get out a couple of months it has tended to be, and I am going to use my grain trading, tended to be at a carry and I can't remember that must be a [contangle] I think that's what the royal word for that is.

But you go out a couple of months and then you got to pay more than your buy, so we are pretty cautious about legging up on that. But we have got a bit in our trading strategy of a long bias on natural gas, of a cautious long bias.

Okay. Okay. Well, thank you very much.

Yes, you are welcome.

There are no further questions in queue. I would now like to turn the call over to Mr. Mike Anderson for closing remarks. Please proceed sir.

Thank you. And Gary Smith, thank you for a career and thank you for the friendship, looking forward to continue that, and best of luck and all the stuff that I know you will be doing, and hopefully you will be catching even more trout as you do some more fly-fishing.

I want to thank you all for joining us this morning. Our next conference call is scheduled for Thursday, November 5th at 11:00 am Eastern Time to review our third quarter results. We hope you are able to join us at that time and have a great day. Thank you.

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