Andersons Inc (ANDE) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the 2009 Q4 and year-end Andersons, Inc. earnings conference call. My name is Keith and I will be your Operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Nick Conrad, Vice President Finance and Treasurer. Please proceed, sir.

Good morning, everyone, and thank you for joining us on Andersons, Inc. 2009 fourth quarter and year-end 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 forward-looking statements, as a result of many factors, including general economic conditions, weather and competitive conditions, conditions in the Company's industries both in the US 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 that the assumptions upon which the financial information and its forward-looking statements are based are reasonable, it can give no assurance that these assumptions will prove to be.

This conference call is being recorded and can be accessed on our web site. Before Mike details our results, I want to remind you that we implemented FAS 160 in 2009 , which relates to the presentation of noncontrolling interest, formerly classified as minority interest in the consolidated financial statements. Under FAS 160, noncontrolling interest is now included in the income statement 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, noncontrolling interest is now presented as a component of stockholders 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, Chairman and Chief Executive Officer, and I will be available for questions at the end of the call.

Thanks, Nick. Good morning, everyone. As we announced yesterday in the press release, our fourth quarter net income was $16.2 million or $0.88 per diluted shares on revenues of $916 million. This compares to the same three month period last year in which the Company reported a net loss of $33.4 million, or $1.84 per diluted share, on revenues of $770 million. The fourth quarter last year included $84.1 million before tax, of Plant Nutrient Group inventory adjustments.

Revenues for the quarter were up primarily due to an increase in the number of grain bushels sold. Our 2009 net income was $38.4 million for the year or $2.08 per diluted share on revenues of $3 billion. Last year the Company reported net income of $32.9 million, or $1.79 per diluted share on revenues of $3.5 billion. The vast majority of the revenue decrease for the full year was caused by the decrease in the average price per bushel of grain sold and the significant decrease in the lower price per ton for fertilizer products.

To fully understand the total Company's results, let's take a look at each of the five business groups. Starting with the Grain & Ethanol Group. This group had operating income of $27.8 million in the fourth quarter versus $11.9 million a year ago. Income from the equity investments, Lansing Trade Group, and the three ethanol limited liability companies, increased significantly this quarter over the prior year. This was partially offset by lower quarterly results for the grain business. Net space income was lower during the quarter, primarily due to the late harvest. However, this was partially offset by the nice blending opportunities that the wet harvest presented. The turnaround in ethanol margins led the ethanol business to record its highest quarterly operating income during the fourth quarter. Also, Lansing Trade Group had a good quarter. Total fourth quarter revenues for the group were $722 million. This includes $236 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 fourth quarter of 2008, the group's total revenues were $565 million and included $22 million in ethanol joint venture sales.

The Grain & Ethanol Group's operating income was $51.4 million in 2009 , which compares to $43.6 million in the prior year. The grain business had a record year. The 2009 ethanol business results exceeded the prior year by $4 million due to the recovery of the ethanol industry and resulting increased good margins. Full year income from the investment in Lansing Trade Group was lower than 2008, as a good fourth quarter was not enough to offset a modest loss incurred in the first half of the year. Total 2009 revenues for the group were $2.2 billion in comparison to the $2.4 billion reported in 2008. The results include $806 million of grain and ethanol sales, which is comparable to the $866 million that was reported the prior year.

The Rail Group continues to be impacted by the significant decline in North American rail traffic. During the fourth quarter, the group generated revenues of $21 million and lost $1.5 million. In the same period of 2008, total revenues were $28 million, and operating income amounted to $3.3 million. Gross profit from leasing was down considerably, primarily due to lower utilization rates and a corresponding increase in storage expense from idle cars. In fact, storage expense was up over $1.2 million during the quarter. The average utilization rate for the quarter, which is the percentage of the fleet in service, was 70.8%, which was down significantly from the 91.9% we experienced last year at the same time. The Rail Group had an operating loss of $1 million this year on revenues of $93 million. Last year the group reported $19.8 million of income on revenues of $134 million.

The group recognized $1.7 million in gross margin from the sale of rail cars and related leases during the year. However, last year, similar gains of $4 million were recognized. Gross profit from leasing was down considerably for the year for the same reasons as the quarter. Lower utilization, and higher storage expense. For the full year, storage expense was up just over $3 million. The average utilization rate for the year was 78.1%, which compares to a 92.5% rate in 2008. The group ended the year with a utilization rate of 70.5%. The group has seen a significant decrease in maintenance cost per car recently, but it is too soon to tell if this is a long term trend. The group now has approximately 23,800 cars and locomotives which is consistent with its year earlier total. There have been some car acquisitions during the year, but they have been offset by a similar number of car disposals, as the group is continuing to manage both the buying and selling side of its business. Both the manufacturing and rail care repair repair businesses experienced significant decreases in gross profit during the year, as sales were down more than 30%. 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 that things could remain tough for the Rail Group for awhile. On a positive note, downturns in the leasing market tend to provide us with car acquisition opportunities that could and should pay dividends in the future.

The Plant Nutrient Group reported an operating income of $1.7 million during the fourth quarter, in comparison to an operating loss of $74.5 million in the prior year. Remember, the prior year result was due to the recording of $84.1 million in inventory and contract adjustments, due to the sharp decline in nutrient prices. Fourth quarter revenues for the group were $111 million, which is comparable to the $112 million reported last year. The volume sold was up significantly, however, but this was offset by a lower average selling price. The volume increase was caused by dealers beginning to restock their inventory, and application rates returning to more normal levels. Field work, however, was delayed due to the late harvest and wet field conditions. The Plant Nutrient Group ended the year with an operating income of $11.3 million. In 2008, the group reported an operating loss of $12.3 million, as a result of the $97.2 million in inventory and contract adjustments recorded last year. Revenues for 2009 and 2008 were $491 million and $653 million, respectively. Revenues were down in total this year, even though there was a modest volume increase due to the decreased pricing in the fertilizer market. The integration of the Hartung Brothers, Inc. fertilizer division, which was acquired on August 1, 2009, was successfully completed by the end of the year.

During the fourth quarter the Turf & Specialty Group had an operating loss of $1.1 million, which was the same as the prior year. It is typical for the group to incur a loss in the fourth quarter due to the seasonality of the lawn business. Total revenues of $19 million for the quarter compared to $20 million in 2008. For the full year, Turf and Specialty Group's operating income was a record $4.7 million on $125 million of revenue. Versus last year revenues were up about6 $6 million and operating income was up $2.4 million. The 2009 results are attributable to the group's continued focus on value added, proprietary products and expanded product lines. Turf Product's tonnage was up almost 20% for the year, however gross profit per ton decreased primarily as a result of product mix. The cob business had higher earnings in 2009.

The Retail Group had an operating loss of $700,000 in the fourth quarter. This was partially due to the inventory liquidation associated with the closing of the Lima, Ohio store before it was closed. In the comparable period last year, the group's operating income was $1 million. Total revenues of $42 million for the fourth quarter were approximately 9% below the $46 million reported for the same period in 2008. Revenues were down as the group continues to be impacted by weak conditions that have led to an overall decline in consumer spending. The holiday season was especially affected. Additionally, about a third of the sales decrease during the fourth quarter was due to the closing of the Lima store that I mentioned previously. The group's full year operating loss was $2.8 million in comparison to an income of $800,000 in 2008. This year-to-year income differential was impacted significantly by the costs associated with the closing of the Lima store and weakening sales volume. The retail group's revenues of $162 million for the year were 6% below 2008 total of $173 million. On a positive note, gross profit margins ended the year consistent with the prior year when the Lima inventory liquidation impact is not considered.

I will turn over to the floor to Nick for his Treasurer's

Thanks, Mike. The Company's 2009 effective tax was approximately 36%, up 3% from the 2008 year end. This increase is primarily attributable to state income taxes. During 2008 the Company recognized the benefits of certain nonrecurring state income tax credits related to its interest in an ethanol partnership. The Company also recorded an overall increase in 2009 state income taxes as compared to 2008 state income taxes before state income tax credits. We are projecting our 2010 tax rate to be at 36.5%.

As to interest, for the fourth quarter of 2009 the Company's interest expense was approximately $5 million, down $1 million from the same period in 2008. Interest expense for the full year totaled $21 million, a reduction of approximately $11 million compared to 2008, all of which is from reduced short term interest expense. Our short term average interest rate for the full year was about 3%, down 0.6% from 2008. The Company's average short term borrowings for 2009 were $17 million, down $259 million compared to 2008. We had no short term debt outstanding during the fourth quarter. We were in fact investigating during the quarter. The average short-term investments for fourth quarter were $104 million versus $15 million in the fourth quarter of 2008. For the year, the Company's average short term investments were $64 million versus $13 million in 2008. Interest expense on borrowings were down in 2009 versus 2008 in large part because of reductions in grain and fertilizer prices.

Turning to earnings before interest, taxes, depreciation and amortization, EBITDA for the fourth quarter 2009 was $41 million versus a loss of $41 million for the same period in 2008. For the full year 2009 , EBIDTA was our second best ever at $117 million, an increase of $7 million from last year. The 2009 fourth quarter's pre-tax earnings includes $15 million in equity and earnings with affiliates. This is an increase of $27 million from 2008's fourth quarter loss of $12 million. For the full year 2009 , earnings of affiliates totaled more than $17 million, up $13 million from 2008. EBIDTA has been adjusted for the noncontrolling interest.

Now for the balance sheet. At December 31, the current assets totaled $787 million, a $69 million net decrease from the year-earlier balance of $856 million. Since the 2008 year end, cash and cash equivalents have increased $64 million to a December 31, 2009 balance of $146 million. Trade receivables totaled $137 million at year end, up $11 million from 2008. Grain & Ethanol and Plant Nutrient receivables were up $2 million and $13 million, respectively. Turf & Specialty receivables were down about $1 million. Rail receivables ended the year down about $3 million. Retail receivables were about unchanged from 2008 levels. Margin to process at year-end were $27 million, an increase of $14 million from year ago levels. Commodity derivative assets current and prepaid expenses and other current assets were down $61 million and $66 million, respectively.

The Company's inventories decreased, $29 million compared to 2008, ending 2009 at $408 million. Plant Nutrient receivables were down $64 million. Turf & Specialty, down $6 million. Retail down $4 million. And Rail inventories were down about $1 million. Grain & Ethanol inventories were up $46 million at year end. Net working capital at the end of the year was $308 million, a decrease of $23 million from 2008. Total assets at December 31, 2009 were $1.3 billion, about unchanged from the 2008 year-end level. Along with the decrease in working capital, investments in and advancements to our affiliates, Lansing Trade Group in Ethanol increased more than $16 million. And other assets and notes receivable, net, added $13 million.

Property plant and equipment, along with rail car assets leased to others, increased by $16 million. Depreciation and amortization totaled $36 million for 2009. Total capital spending including purchases of investments through 2009 was $48 million versus $81 million for 2008, excluding rail cars. Rail car purchases and sales were $25 million and $8 million, respectively, for the year. Rail car purchases and sales in 2008 were $98 million and $68 million, respectively.

Our long term debt totals $308 million, $19 million non-recourse and $289 million recourse. A net decrease of $26 million from 2008's ending level of $334 million. Our long term funded debt to equity is 0.71 to 1 exclusive of non-recourse debt. Long term debt to net worth including all long term funded debt is 0.76 to 1. The Company's 2009 average interest rate for all long term debt was 0.59%. At December 31, 2009 the Company's total equity was $406 million, an increase of $41 million from 2008 year end. On January 25th, we paid our first quarter 2010 dividend of $0.0875 per share.

Finally, I would like to add that we continue to enjoy good support from our bankers. We currently have a syndicated line of credit of $575 million available.

Mike, back

Thanks, Nick. Before I give my concluding remarks, I have two corrections I need to give you. I stated that the fourth quarter 2008 rail utilization was 91.9%. It should be 91.1%. Also, Nick had indicated that Plant Nutrient receivables were down by $64 million, but that was at the time we were talking about inventories, and it should be Plant Nutrient inventories are down $64 million. Sorry about that.

A few closing comments before we go to Q&A. I'm proud of a number of things this year. Both our Grain division and our Turf & Specialty Group had record earnings. Also, our ethanol division reported its best ever quarter at the end of 2009 , demonstrating a significant turnaround in that business, and in the industry. I am also pleased that our Plant Nutrient Group returned to profitability following the loss incurred in 2008. Clearly our full year earnings were heavily influenced by the results within our agriculture business units.

Our 2009 rail results, however, were seriously impacted by the weak economy. Our Retail Group, which had some competitive challenges already, was also further impacted by the weak consumer demand in 2009. My opinion on the economic conditions like we are currently experiencing confirm that our strategy of purposeful diversification is successful. It allows us to remain a strong company, even when external factors are significantly impacting one or more of our groups.

I am sure many of you are wondering what 2010 holds. First, I expect our Grain & Ethanol Group to continue to do well, including an expected improvement in income earned from our investment in Lansing Trade Group. We have already been able to presell at profitable levels a significant portion of ethanol for the first half of 2010, and a minimal amount for the second half of the year. However, we would not expect the ethanol margins to continue at the robust levels we experienced in the fourth quarter.

I see our Rail Group continuing to be impacted by the slowdown in the rail industry. However it is possible that we are at or near the bottom of this down cycle. I believe that our Plant Nutrient Group will have an improved level of profitability due to farmers returning to more normal application rates, and an expectation that corn acres will increase modestly and the fact that we will begin to reap the benefits of our recent acquisitions. Further, I believe that Turf & Specialty group's proprietary product, expanded product line strategy, will likely lead to continued growth.

In closing, it is a relief to us that much of the volatility we experienced over the last roughly year-and-a-half in a number of our businesses has stabilized, and I am truly excited about the opportunities we currently have before us. That includes my prepared remarks.

Nick and I will now be happy to answer any questions you may have, so Keith we will turn it back to

Certainly. (Operator Instructions) The first question comes from the line of Farha Aslam of Stephens, Inc. Please proceed.

Hi, good morning. Congratulations on a great quarter. Quick question on the Grain Group. Sales in that group were up substantially, and you said because of more bushels handled. Could you just give us some color around how many more and what were the reasons behind the increased grain?

I think we said bushels sold We define bushels handled as the blend of what's received and what's shipped. What we had is a situation coming into last year. We are up roughly 20%, but two dynamics. Last year, if you recall, in a good chunk of our drawing area, we were suffering the impact of some very poor weather and some reduced yields, and reduced inbound volume. We were full going into the last year, but we just, frankly, had less volume. This year we were jammed full coming into the year and the quarter. And as you recall, this harvest was delayed, and we talked a little bit about this in the third quarter conference call. Soybeans, which normally kick in in September, for the most part didn't really kick in until October. So we had virtually all of our soybean handle and ship occurred in the fourth quarter, with virtually none of it in the third quarter. And the corn harvest, though late, was still complete around Thanksgiving to some time shortly after that. In fact, we had quite good yields in our drawing area despite the fact that we had challenges of late planting and we had quite a bit of moisture in the crop and some toxins in the crop. We are in the vicinity of 20% up in what we were able to sell.

And, so, in terms of basis, you had said that basis was challenging in the third quarter. Did that come back to you in the fourth quarter, and how is it looking in the first quarter?

It came back. I would say we've got three commodities, wheat, corn, and soybeans. In wheat, we continued with nice space income, basis and storage. Beans, interesting enough, we have had this dynamic for a number of years where we feel the best thing is to basically put the beans through and experience margin. But even with that, sometimes, depending on where typically we are selling short, beans ahead just for logistics, and you take the risk the basis will go up or go down on you. This year the basis accelerated into harvest, so we actually didn't have that great a space income basis situation in beans. We made a little money, but not as much as last year. That has no impact on 2010, but we did have nice margin structure in soybeans and really nice blending income because to have the wetness.

Corn was delayed. For the quarter, we were down gross profit in the vicinity of $12 million to $13 million. Two-thirds of that is corn, one-third is beans. We are early into the first quarter, but if you were monitoring external basis levels at the Gulf of Mexico, you would have seen basis improvement from January 1 up until today, and we have had some benefit of that early in the quarter. We're getting a decent start to the year on the corn space income.

Then when you look at ethanol, it was extremely profitable in the quarter. You had mentioned that you don't expect it to remain at historic highs of '04 levels, but could you tell us where you have contracted out and how those levels compare to those you experienced in the fourth quarter, and your outlook for the full year on ethanol?

First, let me talk about '09 a little. We had a substantial amount contracted ahead into the fourth quarter, but not near all of it. And, some of the way that we contract ahead, we will contract the relationship of, we'll ultimately price it based on the relationship between where a couple of different external markets are. We had some, not only did we have some favorable base margins on the stuff we didn't contract ahead, but even some of the stuff we did contract ahead, we got what I'll call this unusual kick in the relationship between the contract against which we had it sold and the ultimate pricing mechanism. As we look forward into the year, the year that we are in, we are roughly half way through this quarter, we have a little over 60% of the rest of the quarter sold ahead, and a little, I would say in the vicinity of 40% plus or minus for the second quarter. Very little sold beyond that. We have been willing to lock in margins that on the average were below what we experienced in the fourth quarter, simply because we have substantially more ethanol production coming back into the market. There is enough variability in the ultimate productivity of the plants, the yields of the plants, the final pricing of what we have sold ahead, that I am pretty reluctant to give any more granularity than that, other than to say we wouldn't expect as good a margin as we experienced in the fourth quarter, which was, frankly, a great quarter in ethanol.

But, still, at profitable levels?

We are locking stuff in ahead. The margin structure allows for profitability at the present time, but, of course, as we look at what we don't have locked in, it is like where does the margin structure go from here? Now, on the plus side, the blend margin, for those buying ethanol, continues to be pretty healthy, so that encourages continuing to keep ethanol in the blend. I would expect E85, which is not a major component of what is consumed, though, to be additive as opposed to detractive. We are really hopeful sometime this year we will see an increase allowed from the EPA to go from E10 to either E12 or E15, which would be a little bit of a boost. But, to the extent that we don't have it locked in, we are subject to the opportunity improved margins on a forward basis or the opposite if it goes the other way.

Right. A couple of quick questions on Rail, then I'll pass it on. Your average rail lease rate in the quarter, year-over-year or sequentially, how is it running?

It is running a little lower. They are scrambling for the piece of paper here to show me. But, I believe it is in the vicinity of -- hang on just a second. Ask your other question, Farha, while they are scrambling. I know we have it, I don't want to give you an inaccurate answer.

Then your storage costs for rail, do you think they'd keep in the fourth quarter, or do you expect them to go up substantially from fourth quarter levels?

I believe that they will go down from fourth quarter levels. Let me take that comment, and I am sure someone would have asked the question around -- let me go back to the other one. Lease rates from the highs of several years ago are down 25%, call it 10% from a year-and-a-half ago. We would expect, with what is out there, that we would see a modest erosion in rates, but not significantly from here, simply because you get to a point where you are better off parking the car.

I will get back to your storage comment because it really ties into utilization. Our average utilization for the quarter and where we ended the year are pretty close, and it's down from the whole year. The fact that the average for the last quarter ended about where the last month was. What we see in the market suggests to us that we may have bottomed. Now, I can build an argument why we can be at 3%, 4%, 5% lower utilization rates, and if we did have that, that item by the fact it is lower utilization would suggest more we have to store. But I will come back to a factor that's under our control that we're doing right now.

But I could also build just as good a case that we could go 3%, 4%, 5% higher. We have rail traffic up just a little bit. We are seeing demand in some car types now. The phone calls are picking up a little more. But the extended car type is for lumber for the housing industry, and we are seeing no interest. But one of the things we are doing, as you know, we have a used rail car strategy and have had for some time. We've had a sizable uptick primarily driven by Chinese demand in the value of scrap steel. So we are in the process with roughly 30% of our fleet parts 7,000 cars, we feel it is prudent to look through our fleet to determine what part of that fleet would we be best served by scrapping. Right now we've identified, I will call it somewhere between 800 and 1,500 rail cars that we are literally have already started the process of scrapping. That, by itself, is a utilization pop and a storage reliever. So, to sum, that is why I feel pretty confident in saying that at least as we get into the second quarter, because it takes a little while to get the cars and scrap them, I'd expect the storage rate to come down, and by year end hopefully, if we have a little uptick in utilization from car usage, and then you add the scrapping, we will get a little more uptick, that we will have a pretty good dent in that storage expense.

Great, thank you very much.

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

Good morning.

Hi Heather -- no space income questions.

Great quarter. I wanted to go back to Farha's first question on the revenue side. I went back, and this is the biggest revenue number by a pretty significant amount that I have ever seen in 4Q for grain & Ethanol. I understand that your bins were full going into the quarter, et cetera. I was wondering, did this point to point trading that you are trying to do, did that really pick up steam during the quarter and contribute? I am just trying to get a better sense.

It is additive. I don't have the data with me, so I could be wrong on what I am going to say, but I believe I am on the right track with this. I mentioned before that the soybean harvest pushed out of the third quarter, the first part of the soybean harvest pushed out of the third quarter into the fourth. Of course, with bean dollar value per bushel being substantially higher that corn, every bushel of beans we sell is quite a significant revenue impacter. So we concentrated the harvest in three months as opposed to four months. So we didn't bridge a quarter. We go back to the third quarter, we talked about the delay and the impact and what not.

Yes, point to point is helping, but, I am not going to say it is immaterial, but it is not the major driver. The major driver is the volume impact, and the average price, interesting enough. Price had already dropped in the fourth quarter of last year, so average price of all commodities, were up about 8%. We are sitting here today, actually corn is down a little from a year ago, but beans are up a little. We had no economic incentive to store or hold beans this year, so, it is primarily a volume driver. Your point, Heather, that you made, when you are jammed full, that means whatever comes in has to go out. We were also blessed as far as volume goes, and we can't count on this every year, but there was strong soybean demand, including demand by vessel out of the Great Lakes. So we had one of our better lineups of vessels that we were able to sell in and it expanded our drawing area for our Maumee, Toledo market. So that created, I'd say, an extra boost for the beans. Again, literally, they all fell into the fourth quarter, with nothing of any significance being in the third quarter.

Okay. Also, are you holding a significant piece of wheat at this point? It seems like basis, it is still wide but it still seems like it's narrowed some, pretty significantly narrowed. Just wondering if you are benefiting from that.

There's no question about that. The market has been telling you by the width of the wheat spreads and by the level of the basis, that the best income return on space would be from storing wheat. The basis has improved substantially versus a year ago or from the summer. For some years we've talked about the fact there has been a lack of convergence between cash wheat, with cash wheat being substantially below the futures, and the basis improved to where it is not exactly converged but it's getting quite a bit closer. So we absolutely are continuing to store substantial amounts of wheat at this point in time. Wheat acres are down this year, I would say probably primarily from the signal of wet weather, as opposed to price, but the fact is, we have a huge carryout of soft red wheat so I would expect space income to stay strong on wheat for the foreseeable future.

Okay. Moving on to grain. Looking to 2010. You had a pretty good performance in the core grain business for 2009. But looking at 2010, you're having big carryout of corn, a late harvest there, and then the likelihood of more corn acreage, and then you have the wheat storage you were just referring to. Do you believe that your core grain business could be better as far as earnings, could be better as far as earnings, could be better than 2009 in 2010?

Yes. I will add that, of course, we are not in the planting season yet and we are not in a drought, but you've hit the nail on the head, Heather, on the things that would suggest that it should be good. I want to take that question as a point of just mentioning something that, I believe, has been a significant shift -- not shift, a possible change in trend of yields of grains, especially corn from long term trends the last several years. On the average we have seen some nice uptick in yields, and even in our area where we were hammered to some extend in 2008 because of really dry weather, the yields were surprisingly good how little rain we had. So the element of genetic varieties, of corn seed especially but also beans and wheat, bode well for yield and volume and production, and that supports utilization of fertilizer also.

And you mentioned higher corn acres. The signals are that we could be up to 87 million, 88 million, 89 million corn acres this year. Some folks have us a little above that even. You add those things together and that is quite good for our base grain business, for space and volume and point to point. It is really good for Lansing with the way it trades the physicals. It is supportive to our position in the nutrient business. And all things being equal, better yield and more supply is a component that should help ethanol margins. It is just simply there are some other driving factors like ethanol policy, demand for oil and what not, and its impact, but that all bodes well for us at the present time. And then you have the asterisk that there are always impacts that come from yield that can also hurt you, too.

Right. The quality issues, we have been reading some stuff that talks about farmers, as they get closer to weather warming up, that they may be rushing corn to the market, just concerned that warmer weather would bring a lot of these quality issues even more to the fore. I am wondering what you are seeing there and your comfort level with how you priced the corn you've gotten so far, as far as potential quality issues.

Let's talk about the first part of that. In a sizable part of the corn belt, I mean a very significant part, the late harvest and in some places like central Illinois, late harvest after a very late planting, has resulted in a crop that was much wetter than normal and one that required substantially more drying, sometimes passing the corn through twice and sometimes even three times which creates an impact of tending to crack the corn and the cracked corn creates fines. You put it in a bin, and that concentrate it's hard to pull air through. It is much more suspectable to various types of damage, which likely would suggest that if there were normal holding of grain, to try to hold it into the summer for the peak basis appreciation, that it could increase the risk that we have -- we, I meant the industry -- has more damage than normal. We are encouraging our farm customers, our country elevator customers and ourselves to be monitoring the bins in which they are storing primarily corn -- this is not really a wheat issue -- to be extra vigilant. And we would expect that we will see a higher flow of grain to the market earlier than normal.

We have seen a little bit of that so far. If that plays out, it could be a little pressure on basis in the first part of this year that we are in, and then there is the potential on the back end, if in fact more has moved, that it could create some more opportunity on the back end. That is one scenario that can be built, but we were starting the year from an extremely low basis point, which has been positive for us so far this year. And the damage I talk about, the potential damage for someone in our position is both a potential risk and a potential opportunity. The risk being that we create our own damage and we impair the value of the inventory. The opportunity is that we maintain good quality and we're in a position to be able to take in off-grade grain and have blending opportunity from that. All in all, I would call it a net positive as we look forward into the first six to nine months of this year.

My final question is there has been a lot of concern, fertilizer companies reporting numbers and pricing outlook being a little weaker than some had expected on some of the fertilizers. My impression has been that your inventories are fairly lean, and that as long as volumes are stronger in 2010, those should be a good year for plant nutrients. I wanted to get your take on that.

We have started to build some inventories, especially in nitrogen and phosphate. Now with the latest moves down in potash, we are taking a serious look at that. If you look at the relationship of nutrient prices to corn right now, and you can take beans even a little more favorable than a year ago, it is setting up to a situation we would expect producers to be using nutrients. We would expect, we had a little delay in field work in the fall. There was not a great appetite for anyone to get long ahead unless you could lock in some grain prices. But right now the pipeline is starting to fill up again and needs to. We are real close to getting into the field. Granted, price could always turn over, but it feels now with the last moves we had, it feels more buoyant than down, to tell you the truth. We are expecting a good season.

Okay, good. Thank you and congratulations again.

Your next question comes from the line of Alex Potter with Piper Jaffray. Please proceed.

Just a follow-up here on fertilizer. I was wondering what volumes were year-over-year, if you can disclose that in the quarter, and what your volume expectations are for 2010?

In the fourth quarter, last year, I will give you the statistic, we were up about 75%. But 75% up on hardly anything is not a lot. But it is definitely an uptick. The whole year-over-year, through the first part of the year, we frankly, in 2009 , we have really depressed volumes. We did thankfully see a nice uptick in the fourth quarter, but actually that was a little lower than we were expecting. My perspective, that was primarily two things -- a concern about buying ahead, and, two, a really wet fall. So, we would expect, assuming we have decent planting weather this year, that we should see a really nice first half. Again, assuming weather is good, high high high likelihood it will be quite a bit above a year ago in the first part of the year because it was so poor in the first part of the

That makes sense from a qualitative perspective and I can understand that easy comparisons might make the year-over-year --

You got the point, Alex.

Yes. Okay. Also a couple of questions here on Rail. What to you think it is going to take in Rail? Is there a utilization rate that you are shooting for to turn a profit there? Also, another question on Rail. I know that in the past you've mentioned that in down markets, it provides a really good opportunity to acquire more cars. But your fleet size has been basically the same. Have you been increasing the acquisition of cars and that's been offset by the scrapping for the Chinese demand? Just comments on why you haven't been acquiring more cars.

I will deal with your first question first, which was around utilization. Ideally we would be operating above 90%. We would like on a down side that it not be worse than 80%. I will give you a little macro stuff on the industry. I will be in the ballpark, I am not pretending to be a perfect deliverer of data. But with roughly 1.6 million car in the US, and in the vicinity of, over the last year or so, we've said 400,000, plus or minus, not being used, one factor impacting utilization is reducing the amount that is not being used through scrapping. Last year, the early indication we had last year is that roughly 70,000 cars were taken out of service permanently. We don't have a great handle on the inventory that is out on tracks being stored. That compares back to years where we would have said a normal amount that goes out is more in the 40,000 to 50,000. So I think we are going to have the impact industry-wide of taking cars out of the denominator, or the total supply, impacting utilization. And with current lease rates, we are not expecting new car production to be hardly anything this year or maybe next year. So we would really like to shoot, even if the economy is poor, to be more in the roughly 80%. By now I already forgot your second question, Alex.

Regarding the acquisition of cars in a down market?

We did not scrap very many cars the last year. We sold a few. We did not buy very many. We've always had, I think, a reasonably good buying discipline, or very good buying discipline. To be candid, I thought we would see more opportunities come to the market at distressed levels, but I think things fell so fast that a number of folks said, I will park it and pay rather than dispose of it. Frankly, if we had to buy a car right now that we didn't think we could get back in service for three years, we would be quite conservative on what we would be willing to pay. If we see any uptick, I would expect so see some more portfolios come to the market. I hope we will be in a position to acquire more. It is a big part of our business. But we stayed stable basically because we just didn't buy that many.

And you mentioned on the down side you would like to have 80% utilization and ideally you'd be looking at 90%. That 80%, though, isn't like a cut off for profitability, right? Am I reading that correctly? Is there a drop dead level that you try to shoot for to achieve profitability in a segment?

It is a good question. We do model that stuff, but we found that there are several moving parts, of which utilization is a big one. We are sitting here having drifted down to 70%. I am not going to be proud of a $1.5 million loss in the quarter, but I would tell you also there are some losses on the Repair side of the business, too. So we've found that we have some ability to manage this to the downside maybe a little better than we thought and that our break even point may be a little lower utilization than we thought. But I say the 80%, because I would much rather be above break even. And, frankly, with a little uptick in use this year, and with the moves we're making on scrapping, I would say that is something that is a stretch for us to reach unless there is a good bounce, but it's a good objective for us to have.

Okay. My last question here. Just looking ahead into 2010, balance sheet's in very good shape. You acquired the fertilizer business here, added some grain elevator space in 2009. Just wondering, thematically, what you guys are looking at in terms of potential M&A opportunities here in 2010 and if you intend to put the cash to use for that purpose.

We would expect, you get into the ability of, first you have to identify and you have to go through due diligence and go through the screens and the filters, but we have a pipeline and we are working on stuff. I can look back over time and know that it is really, really important that you buy right, not just in price, but that you buy right in how does it fit your business, what capabilities do you have, what's in the case of it, including the team you need, what is the capability of the team you would be integrating into the organization. Then you have our own ability to digest. But, to be very clear, M&A is a part of our strategy, and the strength of our balance sheet right now is supportive of that.

Sure. Okay, thank you very much guys. Good quarter.

The final question comes from the line of Eric Larson with Soleil Securities. Please proceed.

Good morning, everyone. A couple of real quick questions. First, more of a general question. You alluded to, on the call here as well, clearly the inflation has come out of the grain markets over the past 12 months. It is basically apples to apples now, year-over-year. With that being said, you had your second best year for cash generation. Is there more cash that you can get out of working capital? And then, how do you look at your interest expense to finance your business these days with the value of grain inventories down, your volumes are a little bit up. How should we look at both cash flow and interest expense now that the grain inflation is out of the business?

Eric, let me take the first part of the question on working capital. We have seen our working capital level drift down a little bit. We feel okay with that directionally. You saw a fairly large cash position, I just described, over the end of the year. I will tell you that in the middle of January, we did have our usual seasonal use of cash to continue buying inventories and all that kind of stuff. So the normal use of cash pattern is intact. I would say that as volatility continues to decline, we will feel directionally comfortable with letting the working capital level drift a little bit lower. Repeat your second question one more time. I want to be sure I have that in mind on interest expense.

Obviously you have to finance those inventories. The outlook for the interest -- you have record low interest rates here. How should we view your financing costs for the next year?

Great question. I think we are all subject to -- when I say we all, everybody who is participating in the capital markets -- subject to swings in interest rates, so I don't want to make some sort of general statement without first beginning with a disclaimer that we are all subject to the mass movements by the Fed and the capital markets in general. But I think the short term cost of interest is really tied to where short term rates are at. So, if you have a view on where short term rates are at, I think you will be able to answer that question.

The issue is, substantially more volume opportunities become available, if you are financing more volume then your rates go up. Then your interest expense, if rates are the same, your interest goes up.

Yes. If the rates are same, but volume increases, expense increases, yes.

And any thoughts on your volume outlook? That is really what it gets to.

I will turn that over to Mike. He has a better flavor for that.

Yes. I would say the big two drivers of that from a variability perspective are really grain, which would include grain as opposed to ethanol which I would call generally stable in that regard. You take it in and you turn it into cash real quickly. Corn in, ethanol, DVG out. Grain and fertilizer. I would expect that we should likely see some increases in inventory in fertilizer that comes from two things. More stability in the price, and the fact we have added storage capacity through acquisition.

In grain, we are jammed full. So, unless we add more space, we added a little bit last year, we are a space merchant, I would expect that over time we would add a little bit more, whether it is expanding capacity in a existing facility or potentially adding a facility, that we will see more demand on capital from that. The mix in the inventory is heavily wheat. Very little soybeans and a lot of corn. If, in fact, wheat, if the benefit of holding wheat in storage would change, and it gets replaced by corn, you get a modest price drop as you substitute more corn in and maybe don't hold it totally 12 months a year, like this wheat we have been holding 12 months, and then you have a little bit less demand. But frankly, for the foreseeable future, as I look out the next year, I would expect us to maintain a very full position in wheat. I look at a little more demand from bushels and tonnage. Not a lot but still more price sensitive than anything.

Okay. Two other real quick questions. With the reduced volatility of the grain markets going forward, do you think you can see as many merchandising opportunities going forward here? Obviously, grain volatility is great for grain merchandisers.

Yes. Frankly, for our space, futures volatility is not good for us. And the volatility really has been primarily futures related. But there has also been volatility a year ago that came from dislocation of grain, the huge influx of ethanol plants. This year we have a situation with grain quality with some toxins in corn in the eastern corn belt stimulating some unusual moves as some folks want to take a little less of the local corn and a little more corn from another distance. The basis volatility is good for traders in our position, both Lansing and Andersons. I am not necessarily predicting that that volatility will change, to tell you the truth.

Yes. We have got some toxin issues, as well. It is becoming an issue with what is still standing on the field. It is actually an issue in the bins, as well. Just a final question. I actually expected on this call to hear you guys say you were basically fully hedged on ethanol for the year, that you'd sold forward. I would have expected you to have more full coverage. Were the opportunities just not there? Is that why you are a little empty on the back half of the year?

I guess that depends on what margin you expect. I won't say exactly what we can expect, but I will say as we were hedging in the first and second quarters at numbers we were comfortable with, you couldn't come close to locking in the same margin forward because of the relationship, ethanol forward at a discount, corn forward at a premium. So one person could argue you should have locked it in. We will find out later whether we should have locked it in or not, but we did not have near the margin opportunity forward as we did in the second half of the year as we did the first quarter, and at times in the second quarter.

If we have 350 corn, 350 to 360 corn, do you think we will still see 87 million, 88 million, 89 million-acres?

That is a great question because some of it is beans at this time, and the bean carryouts lowered to just a little over 200 million, but if we went to 350 corn, I think that drags it down. There is this dynamic this year of wheat acres. I think the number is roughly 6 million acres of less wheat. I'm not 100% sure of that but I think that's the case. Corn, the ground that could be planted to corn that was wheat will not stay bare at 350. It will get planted. So I think it bodes well for 86 million or above acres, if the weather is okay, even if it 350 corn. Now, is it 90 million acres? I think that is where your swing comes in on price relationship with beans and corn, which favors beans slightly right now.

Sounds like you have a long trade on corn right now if you are expecting that kind of acreage.

We are expecting 86 million to 90 million. That is what we are expecting. We will find out.

Okay, I am just busting your chops a little bit.

Bust away, Eric. Feels good.

Okay. Take care.

I would now like to turn the call back over to Mike Anderson for closing comments.

Okay. Thanks a lot for being here with us on the call. Thanks for your interest in this, and the quality of your questions and the dialogue. The next conference call is scheduled for Tuesday, May 4 at 11:00 AM Eastern to review first quarter 2010 results. We hope you are able to join us. Until then, have a great day. See you later.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.