Andersons Inc (ANDE) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2010 Andersons Inc. earnings conference call. My name is Ahmed and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the ends of this conference. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Mr. Nick Conrad, Vice President Finance and Treasurer. Please proceed.

Thank you, Ahmed. Good morning, everyone, and thank you for joining us on The Anderson Inc.'s 2010 first-quarter conference call. As you know, certain information that will be discussed today constitutes forward-looking statements.

Actual results could differ materially from those presented in the forward-looking statements as a result of many factors, including general economic conditions; weather and competitive conditions; conditions of 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-F filings and the prospectus that was 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 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 reasonable.

This conference call is being recorded and can be accessed on our website. As we refer to net income during this conference call we will be referring to net income attributable to The Andersons. Mike Anderson, Chairman and Chief Executive Officer, and I will be available for questions at the end of the call. Mike?

Thank you, Nick, good morning. As we announced yesterday in our press release, we generated record first-quarter net income of $12.3 million or $0.66 per diluted share on revenues of $722 million. In 2009 we reported net income of $5 million or $0.27 per diluted share on $697 million of revenue.

To fully understand the Company results for the quarter let's take a look at each of our five business groups. The Grain & Ethanol Group had a record first quarter, with operating income of $20.7 million versus $5.7 million a year ago. The grain business had record results this quarter as it benefited from significantly higher space income due partially to the late harvest in 2009. Income from equity investments, Lansing Trade Group and the three ethanol limited liability companies, increased significantly this quarter over the prior year.

The ethanol business had a strong first quarter despite the decline in the ethanol industry margins that occurred during the quarter as a significant percentage of the ethanol sales were contracted for profitable margins in advance of the decline. The ethanol business continues to pursue a risk management strategy of locking in future period margins at levels it deems appropriate. In the prior year the ethanol business recorded a small loss during the same time period.

First-quarter results from the Group's investment in Lansing Trade Group were similarly higher than last year due to Lansing's grain and biofuels business performing well. Although revenues are not necessarily a good indicator of performance within the Grain & Ethanol Group, total revenues were $521 million, which is approximately 8% higher than the prior year revenues of $481 million.

This quarter includes $210 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, which is $4 million more than what was reported for these sales in the prior year.

Last week we acquired the assets of O'Malley Grain, Inc. The purchase includes O'Malley's two grain cleaning and storage facilities in Fairmont, Nebraska and Mansfield, Illinois with a 1.4 million bushel capacity. Since 1981 O'Malley has been supplying consistent high-quality food grade corn for snack food and tortilla industries. This acquisition will allow the Group to expand further into the production value chain.

As it relates to our grain business, I want to mention that corn planting progress in our region in the US is well ahead of the five-year average. As of yesterday, the USDA crop progress report indicates that the US corn crop is 68% planted which compares to 32% last year at the same time and a five-year average of 40%.

The Rail Group reported an operating income of $1 million this quarter on revenues of $27 million. Last year the Group reported $900,000 of income on similar revenues. This quarter the Group recognized $2.6 million in gross margin from the scrapping and sales of rail cars whereas last year $300,000 was recognized on similar transactions. The majority of this was due to the scrapping of rail cars which also led to a corresponding increase in depreciation expense of $900,000 that is not considered in the stated gain on sale.

Additionally, there was a gain of $1.7 million recognized in other income as end of lease settlements were received from some lessees who did not return cars in an appropriate condition. Operating income from leasing was considerably lower this year due primarily to lower utilization rates and the corresponding carrying cost of idle assets.

The average utilization rate, which is the percentage of the fleet in service for the quarter, was 70% in comparison to 86.8% for the same period last year. As of the end of March utilization had increased to 70.9%. The Group now has approximately 23,400 cars in locomotives, which is down slightly from its year earlier total due primarily to scrapping of hundreds of rail cars.

Maintenance expense for the quarter was $105 per car per month in comparison to $113 last year. The low maintenance expense levels seen in the fourth quarter of 2009 were not sustained. The quarterly gross profit of the rail car repair and manufacturing business increased from the prior year; however, the businesses are still being impacted negatively by the overall economy.

On a positive note, the Association of American Rail Roads reported that rail traffic freight last week was at its highest level since the first week of December 2008. It is too early to tell if the increased rail freight traffic seen in the last six to eight weeks will continue, but it is definitely a positive sign that the industry could be headed in the right direction.

The Plant Nutrient Group reported operating income of $700,000 on revenues of $103 million this quarter. In the same three-month period for 2009 the Group reported a $2 million operating profit on $112 million of revenue. Even though tons sold increased by almost 10%, revenues declined this year due to a decrease in the average selling price.

Overall margins were down this quarter in comparison to last year because early 2009 margins were favorably impacted by high margins on deferred sales and prepaid contracts from 2008. Margins have now returned to more normal levels and are meeting the Company's expectations.

The Turf & Specialty group earned operating income of $2.7 million this quarter on $42 million of revenue. Last year the Group reported $3.1 million of income on $45 million of revenue. Turf products tonnage was down slightly from year to year; conversely, gross profit per ton was up slightly due to a favorable product mix. The Group continues to experience positive results from its focus on proprietary products and expanded product lines.

As is typical for the first quarter, the retail group incurred an operating loss. The loss of $2.8 million was similar to the $2.7 million loss incurred in the prior year. Last year's first quarter figures included the Lima, Ohio store which was closed in the third quarter of 2009. Total revenues for same-store sales decreased $1 million to $30 million in 2010. Customer counts decreased slightly from year to year; however, the average sale per customer remained flat.

The Group continues to be impacted by the weakness in the overall economy as well as a highly competitive retail environment for our product lines. Margins however are remaining relatively stable and the Group has continued to manage expense and reduce inventory levels. Now I'll turn the floor over to Nick for his treasurer comments.

Thank you, Mike. The Company's first-quarter 2010 effective tax rate was 43.4%, up 7.2% from the 2009 first quarter and up 7% compared to our 2009 full-year tax rate. This increase is mainly due to a one-time adjustment to increase income tax expense by $1.5 million as a result of the Patient Protection and Affordable Care Act signed into law during the first quarter. Our 2010 projected tax rate is 38.6%.

As of March 31 the Company's interest expense was $4.6 million, down more than $1 million from the same period last year. Short-term interest expense for the first quarter was down $188,000 and long-term interest expense was down approximately $867,000.

Compared to the first quarter 2009 our short-term average borrowing rates for the quarter were up more than 2% while average outstandings under our syndicated line of credit were down approximately $57 million. The Company was investing excess funds during the first quarter, with short-term investments averaging about $44 million.

EBITDA for the first quarter 2010 was $36 million versus $21 million for the same period in 2009. The 2010 first-quarter's pretax earnings include approximately $10 million profit in equity and earnings of affiliates versus a loss of approximately $4 million in equity and earnings of affiliates in the first quarter 2009.

Turning to the balance sheet, at March 31 current assets totaled $709 million, a $27 million decrease from the year earlier balance of $735 million. This decrease was driven by commodity derivative assets current came down $33 billion and also by prepaid and other current assets being down $27 million respectively at quarter end when compared to first quarter 2009.

Since the 2009 first quarter accounts and notes receivable have decreased approximately $12 million; Grain & Ethanol Group receivables were down $9 million; Turf & Specialty receivables were down $7 million; Plant Nutrient receivables were up $4 million; and the Rail and Retail Group's accounts and notes receivable were about unchanged.

Margin deposits net ended the first quarter up $20 million from last year. Inventories were $375 million at March 31 this year. Compared to 2009 first quarter, the inventory changes were as follows -- Grain & Ethanol down $3 million; Turf & Specialty down $0.0 million; retail down $4 million; Plant & Nutrient up $6 million; and Rail about unchanged.

Net working capital at the end of the first quarter was $302 million, a decrease of $25 million from the 2009 first quarter and a decline of $6 million from year end. Total assets at March 31, 2010 were $1.2 billion, up $28 million from the year earlier first-quarter balance. Other assets ended the first quarter at $193 million, up $42 million from 2009's first quarter.

Other assets and notes receivable were up $14 million and investments in and advances to affiliates were up $30 million. Property, plant and equipment, along with railcar assets leased to others, added $12 million.

Depreciation and amortization totaled $10 million at the end of the first quarter. Total capital spending, including investment of affiliates and changes in restricted cash from 2010 first quarter was $5 million versus $7 million for the same period in 2009 excluding railcars. Railcar purchases and sales were $8 million and $6 million respectively during the first quarter. Railcar purchases and sales in the same quarter of 2009 were $7 million and $2 million respectively.

Our long-term debt totals $288 million, $15 million nonrecourse and $273 million recourse, a decrease of $29 million, $17 million nonrecourse and $12 million recourse from 2009's first-quarter ending level. Our long-term funded debt to equity is 0.67 to 1 and includes minority interest. Long-term funded debt to equity exclusive of nonrecourse debt is 0.63 to 1.

The Company's 2010 average interest rate for all long-term debt was 5.8%. As of March 31, 2010 the Company's total equity was $420 million, up $50 million from first quarter 2009. On April 22 we paid our second-quarter 2010 dividend of $0.09 per share. This was an increase of approximately 3% for the dividend paid in first quarter 2010.

Finally, I want to say that we continue to enjoy outstanding support from our bankers; our syndicated line of credit is now at $475 million. Minimal borrowings, along with declining volatility for grain and fertilizer prices allowed us to reduce or syndicated line of credit by $100 million during the quarter. We feel that after the reduction we still have adequate capacity to meet our funding needs going forward. Back to you, Mike.

Thanks, Nick. We're pleased to be able to report record earnings at a time when two of our business groups, Rail and Retail, continue to struggle a little bit and be impacted by the economy. The Grain & Ethanol Group led our results with a record first quarter. The grain business itself had a record first quarter and both the ethanol businesses and the Lansing Trade Group investment had markedly improved results this year.

The Plant Nutrient Group has now been profitable in the first quarter for four years demonstrating that its growth and diversification has allowed it to be profitable in what was previously a lost quarter. And the Turf & Specialty group continues to perform well as it strives to achieve another record year. As we review these results we are again reminded that our strategy of purposeful diversification is successful and allows us to remain a strong and profitable company.

Many of you may be wondering what does the remainder of 2010 hold. First, we expect our Grain & Ethanol Group to continue to do well. The early corn planting is a plus for our grain business; however, there are many other factors, such as weather, through the summer that can impact the crops in the future.

Even though the ethanol market declined in recent months, we expect our ethanol business to earn additional profits this year as profitable margins have been locked in on a significant amount of ethanol sales, albeit at much lower margins than those experienced at the end of 2009 and lower margins than those experienced in 2010 so far.

We also expect a good return from our investment in Lansing Trade Group. We see our Rail Group continuing to be impacted by the slowdown in the rail industry. However, it is possible we have reached the bottom of this downcycle and the worst may be behind us.

We believe that our Plant Nutrient Group will have an improved level of profitability this year in comparison to 2009 due to the preliminary results we are seeing for the second quarter. Further, we believe that our Turf & Specialty Group's proprietary product and expanded productline strategy will likely lead to continued growth.

Lastly, it is important to remember that the Company's -- the Company typically has weaker first and third quarters and stronger second and fourth quarters. We're excited about the opportunities we have as -- that the Company currently has before us.

Now that concludes the prepared remarks. Nick and I will be happy to answer any questions you may have. So, Ahmed, we'll turn it back to you.

(Operator Instructions). Farha Aslam, Stephens, Incorporated.

Good morning. Congratulations on a great quarter.

Thank you very much.

Mike, a couple of questions starting with the Grain Group. Could you give us some color around bases and storage income opportunities in the fiscal second quarter versus the year ago period and versus the first quarter?

I'm not going to get that specific in the second quarter because, on the one hand we should have continued good bases and storage income from wheat. But when you start getting into the second quarter we have to just wait and see how it plays out.

I'd rather prefer to talk kind of about the whole year in total knowing that -- and the reason I say that, we could be sitting here right now, we could see the farmers get out in the field and be real aggressive in selling corn and bases could drop down, especially if the crop is looking good. On the other hand, if the crop is looking a little challenged you'll see folks holding onto corn.

So the second quarter is often a swing quarter. First quarter was extra good and we talked about the end of last year, that with the late harvest we did not see the typical year-end appreciation and in fact it did come in the first quarter. For the year we're setting up reasonably good assuming the crop comes through.

We're off to an early start that suggests that if things stay well we'll have another large crop on top of carryovers that are reasonably adequate and it bodes well. Exactly what quarter stuff falls in though at this stage I don't really want to try and predict anymore than I have, which was very little.

I can appreciate that. And then in your plant nutrients, clearly the crop is ahead of schedule. In terms of volume versus a year ago period, kind of how should we think about volumes and margins in plant nutrients?

Yes that -- one, we said I think we were up about 10% in the first quarter. I would bet that by the time we get to the end of the year, and this quarter is really an important quarter, it's reasonable to assume that we could be in the vicinity of 20% up in volume year over year. Now that could be 15%, could be a little better than that.

Margins, as we indicated, were quite good in the first quarter a year ago and that was pretty much a carryover from items that were booked at really healthy margins in 2009 that were carried over into 2008. And we settled down into what we called more traditional margins, which means throw out 2009 and throw out 2008 for your analysis. And that seems to be holding up. We're relatively good positioning at the present time.

In the first quarter we've got two main -- to give you a little more color on that, we've got two main businesses, our farm center direct to farmer and our wholesale business. The wholesale business was actually up just a little as the volume increases were more than offsetting some of the decrease in margins to the more normal level.

On the farm center business, first quarter is always weak and although weather has been ideal in February, it wasn't all that great in the north here in the first part of the year. And in the south where we now are we had a problem with the Florida freeze, so that had a little negative impact. But we're getting back on track there. So we're just really excited about where we're sitting at the present time with our agricultural fertilizer business.

And my final question and I'll pass it on is on rail. In terms of your scrapping, you had said you were looking to scrap 800 to 1,500 railcars. Where kind of in that spectrum did you end the fiscal first quarter? And how much more do you anticipate?

Yes, we scrapped between 400 and 500 cars in last quarter 2009. And then we scrapped almost 900 cars in the first quarter. So, we had said -- I think initially we said we might scrap up to 1,500. Steel prices have been pretty robust, so I would say that we could do anywhere from 300 to 600 more cars at this stage of the game and we'll see where we're at at that point in time. So we're pleased.

In net, I did mention in here this acceleration of the depreciation of $900,000. The gain on the scrapping of [27], and that was virtually all scrapping we identify in the gain area, that 900 actually goes through -- it doesn't show up in the gain. And that's an indication that some of the cars we scrapped the book value was actually higher than the ultimate scrap value.

But in total we were able to actually make money on the scrapping and that's a lot of a result of the heavy positioning we have in older and used cars and so we felt pretty good about that. We're not going to be influenced whether we made money or lost money on the scrapping. We were more focused on what cars do we think it would be prudent to just turn into scrap steel and what cars should we continue to hold for future revenue. So let's just say in the vicinity of 300 to 600 more cars this quarter is what we would expect.

That's very helpful. Thank you very much.

Michael Cox, Piper Jaffray.

Congratulations on the quarter, guys.

Thank you, sir.

My first question is on the contribution from Lansing. If I'm doing some rough math here it looks maybe about $5 million of -- in your below the line line item there. I was just wondering if that's a ballpark figure that we could use for the quarter. And if so, how would you expect that to look through the balance of the year?

Okay, I'll get you a little closer without giving you an exact number. We've got equity in earnings of affiliates of $9.9 million on the face of the income statement. And then there's roughly $400 million of income attributable to a non-controlling interest, so that takes it down to $9.5 million. That consists primarily of our three ethanol LLCs and Lansing, but there's also a little bit from some other ventures we have.

In the quarter it was approximately 30% plus or minus, in that range was Lansing, and then of what was left, and about 70% from the cumulative impact of the income from the three ethanol LLCs. So it would be a member a bit lower from what you said but still nicely profitable.

Okay, that's very helpful. And as we move to the balance of the year, just simply as a placeholder as we're all trying to model some of these different ventures of yours, is that a reasonable run rate to assume or was there something that occurred (multiple speakers)?

Yes, Lansing -- trying to do the run rate on Lansing is like doing the historic run rate on our grain business. We're in commodity businesses and taking some positions. And so the margin will have some volatility to it. So, yet we're expecting and at the same time a lot of the trading that's done is in the physical space and it's an origin to a destination, so there's some stability -- quite a bit of stability in a good chunk of it.

Yes, I would say that's a reasonable run rate to expect. except if I had to put what the dispersion could be from the mean, based on history it would -- you could have some wide dispersion. But we're back on track there, that's for sure.

Okay, that's good. And maybe I missed this on the fertilizer side. Can you quantify the volume benefit that Hartung gave you? You had mentioned volume growth (multiple speakers)?

It's actually a very little volume benefit in the first quarter. And first quarter is a drag there. That's Wisconsin and Winona, Minnesota, a good chunk of the business they do just is not -- in fact it's typically a first-quarter loss and actually had a little drag on our wholesale earnings versus the prior year. And despite that our wholesale earnings were up. Very little volume. So it's kicking in real nicely right now and we'll be able to give you more color commentary on its impact after the second quarter.

Okay, that's great. On the rail business, can you comment on lease rates, what you're seeing there in terms of the trend directionally?

Yes, they've been down about 5% in what we've been able to renew. And that's -- and I don't see any real bounce in that, but what appears to be happening is we're getting a lot more calls for renewals and leasing cars. There is a -- on the average an increasing sense of confidence that we've bottomed this thing out. And we're not seeing some of the real giveaways, the understandable giveaways to keep cars from being parked.

So despite the lower -- I'm not going to say that in the next quarter it still might not be a little lower, but we've really stabilized in here. Our leasing revenue, I'm going to say the drop on the leasing side of the revenue is in the vicinity versus a year ago 85% plus or minus utilization impacted and the rest rate impacted. So by far and away, and as we've been saying, the biggest single most important thing to watch with us is utilization, but at the same time rate is pretty important too.

Okay. And my last question, if I could, on the balance sheet over the past -- certainly the last four quarters you have strengthened the balance sheet a great deal. I'd just be curious what your thoughts are in using that as perhaps a competitive strength now that market conditions seem to be stabilizing?

I'll let Nick handle that one.

Well, I presume you're speaking primarily about the -- of course the strong working capital level and strong level of cash at the end of the quarter. We continue to use the cash of course to fund working capital needs. As I've indicated in past calls, we are going to let the working capital drift lower over the year. We are pleased that we have the flexibility to fund additional growth opportunities should they arise. So, one of the benefits that you've just highlighted for us of having a stronger balance sheet is just that.

So looking at more acquisitions, is that a reasonable (multiple speakers)?

Should they arise.

Okay, thanks.

Ian Horowitz, Rafferty Capital Markets.

Good morning, guys, congratulations on a good quarter. Mike, I think you've talked about in previous quarters -- in fact talking about the acquisitions, your thoughts on making strategic investments in railcars. Can you talk about what the environment is right now? Are you still seeing -- are you seeing interesting opportunities out there? And are you seeing the same or a change in requests from third parties in terms of managing asset pools for them in general?

Got you. I'll answer part of it, just kind of the environment of buying something. And then I'll let Nick talk a little bit to kind of the financial institution's appetite to help support acquisitions.

But, through last year -- and you're right, virtually every quarter talked about our intent to look for buy opportunities, and yet despite that our fleet is down a little from a year ago. To be candid, I honestly thought that as ugly as things got we might have -- I would have predicted we'd have more cars now than less because we would have had what I'll call some bottom picking opportunities.

And yet for us, we did not see prices that we wanted to go after last year, we didn't see them just plummet to the floor and there were transactions going on and maybe we'll look back in two years and wish we might have been a little more aggressive. But I would expect now things are stabilizing. I think some of it is some of the folks who own the cars, if they didn't have to sell basically said I'm not going to sell it at these distressed levels.

So I would expect we'll get into maybe more of a normal pattern of cars offered out for sale and have a little more fluidity in transactions. So I'm hopeful that we'll see some opportunity here to acquire some more cars and continue on our growth path in the rail business. Nick, do you want to add some commentary? If you want to expand on what I said as well as the financial institution side, have at it.

Mike, I think you did a good recap of people wanting to delay taking pain where they could. I'm going to make comments about the capital markets just speaking on the debt side. I think as the economy has recovered I think the banking sector has improved. We feel that on a go-forward basis we will continue to have good access to capital. We've been very blessed through the last two years; when the world was in turmoil our banks gave us great support.

But I think just a general observation about the condition of the markets overall is that we're still in a little bit of a chastened environment. And the ability to -- and the appropriateness of deals with lots of leverage I think are even more suspect today than they were two or three years ago.

So I think that will continue to be a theme, and I think it's probably an appropriate theme on a go-forward basis. So, we have good support, we get great insight from our banks and good long-term strategy ideas from them. But I do think that the overall banking community has become a little more chastened.

But, Nick, are you seeing appetite from financial participants for managing their rail fleets or --?

I would say that in this new kind of chastened environment I think, yes, we have been seeing some interest there from some financial participants to have us act as managers on various types of assets including rail cars. But nothing is firmed up to the point that we could talk about it.

And I would say when it gets to managers, we do have -- we're right at the beginning stages of seriously investigating a major multi-year, multi-million dollars investment in upgrading our systems capability. And one of the areas where we're deficient today is what we really need to be in a position to manage others' fleets is we've got just some deficiencies in our systems capability and would expect that -- and intend to have that as part of our objectives to improve that in our upgrade of our systems.

Okay, that was very helpful. Mike, you typically give us a little bit more color around the utilization rates, kind of how it looks toward the end of the quarter and where you see things (multiple speakers).

Yes, averaged 70% and I forget exactly where it was at the end of the fourth quarter. But we were in that vicinity, we're 70.9% at the end of the quarter. There's no question that taking the rail cars out that we scrapped was a real factor in having us be up as opposed to down. But there is no question, the last several weeks of reported railcar loadings have consistently been mid 15%, 12%, 18% higher year-over-year.

Now they're still below 2008 levels, so if you track back 2008 we're down. But that uptick is finding its way into situations where companies that have renewals, end of lease coming up, it's much more the norm today that we're hearing, you know, I need to keep all my cars or the vast majority. And a year ago it was you can have them all back.

So, it appears that the fleet in total put more cars out of service than the needs are today. So I would expect utilization to improve. Now having said that, this is the biggest overhang of unused cars that we've seen in 30 years. And it's going to take a while to work through that and there will be some competition on with all of us to try and get our cars placed versus someone else. But there were also -- we're not the only ones scrapping cars.

So the amount of cars that are going out of the overhang, those being parked, is being impacted positively in two ways. A little more demand for the cars and the scrapping and we will get to a point here again maybe longer than -- I say this with a lot of confidence, we will likely get to the point, maybe taking a little longer than normal, to where once again there will be a need for some new cars. And then when you look at replacement costs for new cars versus what they're being leased at today there's a sizable gap right there.

So I feel pretty good that we've stabilized for us around that breakeven level to turn us in a positive direction. And that even though it may take longer than we'd like I think this year is going to be a -- still headwinds finding the amount of cars that we have parked, but we'll be getting back in a good direction. So, it's just a nice, really nice being in a situation where your cash flow and we feel we've bottomed and we're going back in the right direction.

Okay, great. Were you -- can you talk a little bit about the forward ethanol curve and have you been able to (multiple speakers)?

Yes, I will. And I am not going to give any specificity, and we haven't before, on the exact margin we've locked in because for one thing, when we lock in margins using often forward derivatives -- when we ultimately -- for example, in corn we're buying futures and we're making assessments on what the basis will be. And we're making assessments on what we'll sell DDG at relative to corn. And in our ethanol some of that is being sold not in a cash actual cents per gallon but in some derivative which later converts to cash.

So you've got all the variabilities around those items which will make whatever we crunched on paper turn out to be better or worse. But the forward curve we had, as you recall, it was an unbelievable situation in the fourth quarter -- end of third quarter, fourth quarter of last year. We had nice opportunities coming into first quarter, parts of second quarter.

But there has never been opportunities in recently -- recently as in the last three, six, nine months, maybe ever, I just don't know for sure -- to lock in third and fourth quarter of this year at levels that even came close to approaching what we experienced. And despite that we've decided to lock in a fair chunk.

We're in the vicinity of a little over three quarters crunched in the second quarter and, oh, I'll say plus or minus two-thirds crunched in the third quarter. And we've been willing to take -- in third and fourth quarters. And we've been willing to take out their lower margins than we've experienced. And primarily because on the supply side of ethanol real-time we have substantially more capacity coming back in a couple of the big plants that were under construction that are finishing and old plants that were bankrupt and shutdown coming back into production.

And we -- our view is for some period of time we're going to be in a situation of supply that is greater than demand, especially while we're in the [E-10] world. We'll have to wait and see later on whether the E-10 has increased E-15; even if it does I don't think there's an immediate surge despite maybe the economic of blendings to go right from 10% to 15%. But that would be positive for us when that happened.

And if it happens in August we may look back and say, geez, the fourth quarter did we jump a little early? Well, if we did it bodes -- it bodes well for first quarter next year, second quarter next year, third quarter next year. So we're just saying this is a good time with some profitability to get some security around what we have understanding that when we get there we'll know whether it was -- we'll have the benefit of a rearview mirror and we'll know whether it was wise or not. Is that helpful?

No, absolutely, absolutely. And one last question and I'll get back in queue. Last quarter you talked about that you would continue to update us on your thoughts around the retail segment and right sizing that side of the business. Is there any update that you can provide us at this time?

Not really. I mean, it's in the same position as we were before.

I think you were still unhappy with at least one of -- one or two of the stores, is that still kind of the --?

That's correct, and we're putting some muscle to it right now. We're putting a little dollars into a few, but we're basically in the same position and we're expecting to see improved results.

Great. Thanks a lot, guys.

Heather Jones, BB&T Capital Markets.

Good morning. Great quarter.

Thank you.

A quick question on the ethanol. So you've locked in -- did I understand correctly? You've locked in roughly two-thirds for Q3 and Q4?

Yes, ma'am.

Okay. And I thought I heard you earlier say that you had locked those in at positive -- positive margins? I assume you're referring to positive EBIT margins for Q3 and Q4?

Correct.

Okay.

Yes, and I think you caught the tone that it's not like what we've experienced -- but fortunately it's on the plus side.

No, I mean that's -- that's very, very positive in light of what the future strip shows. Could you give us some insight as to frankly how you're able to do that? Because the futures curve like for natural gas, corn, etc., that would have implied pretty unattractive margins for the back half for some time. I mean, how are you -- I know in Q4 you had used some derivatives on like Opus indices and that gave you some kick. I mean how are you able to honestly outperform the future strip so much?

Well, I don't know that we're outperforming it. I really -- we are not -- I would not say we're outperforming it. I would say that we've got folks on the desk daily, we are -- this is what we do. And so there are times when within a given day if you look at the close from the day before to the close at the end of the day you might not see any opportunity. But during a given day there could be opportunity that surfaces --.

It really is a chance favors the prepared mind, Heather.

Yes. And this is not --.

What a great philosophical comment.

But this isn't buy corn today and sell ethanol two days from now. We do very, very, very little of what I would call lagging positions to try and make it work.

And the other thing is we have felt the pressure of odd incoming supply that would be hitting us in second, third and fourth quarters for some time. And that has put us in a position where maybe we'd be willing to be more aggressive. And I would tell you this, if E15 is authorized this summer, right now the demand -- right now E85 works extremely well at the market and you have the blending credit.

So we should see uptick in demand there, but there's only so much demand that will come out of that. But if E15 comes in at this current margin structure of unleaded gasoline versus ethanol, it is a substantial incentive for blenders which could cause our decision to look bad after the fact and despite that I feel really, really good that we said let's just get this sucker locked in.

That's understood. So on the ethanol piece are you using forward sales or are you using futures?

Well, we have used -- we've just started using a little bit of actual futures. It's been a struggle to use the futures before. What we are able to use, Nick, on the ethanol side when we're locking in the ethanol forward. Often it's not cash -- a cash flat price sale.

It's a forward.

We're doing forward derivatives off exchange.

Yes.

Okay, okay. All right, well that's good. On a quick question -- there's talk about trading lanes being shut down around the Gulf given the oil spill there.

Yes.

And that grain would then have to go through the Pacific Northwest. So, my question for you is, have you put any thought to how that could impact you? I mean I would assume it would be good for rail demand and you have a fair number of grain cars. I was just wondering if you put any thought into what the implications could be for your business if that happens?

Well, you answered it. There's enough corn, soybeans to get to the end consumer. And a lot of that grain is going to the Far East, a little bit goes the other direction. And typically -- if -- there are a lot of 'ifs' in this. I mean some (inaudible) it won't close down totally, but it could stack up in delay times and whatnot.

But the Mississippi is heavily served by the barge market. If you take freight out of New Orleans it will likely end up in railcars, so it's a net -- it's a short-term in nature situation likely. But it's a net positive in that regard and it will change the basis relationships a little bit.

I don't want to overstate whether it would really hurt us or not. Back in the days where we were sending a lot of grain east, especially if we were sending corn east, back in the time when Russia was a buyer and Western Europe, something like this would be really positive for the Great Lakes and we would expect not much impact on the Great Lakes, but what occurs could be a little positive.

So I would say for us, if there's an economic impact it's probably a little -- a little net positive but not much. And really the hope is -- our hope is that it just doesn't have to close down and what a disaster that is.

Oh, I know, I know. Your fertilizer business -- you were saying for Q2 not to compare it to 2009 or 2008. But 2007 was still a pretty good year. And given that you have Hartung, given this excellent start to the planting season, volume growth, I mean is 2007 -- and as far as Q2, is that a reasonable comparison?

Yes, you're back into the -- yes, reasonable. You're back into what I'll call a more normal margin and volume situation. So it gets it back in the ballpark.

Okay, okay. Then on your rail side. Did I hear you say that you scrapped about 900 cars in Q1?

Yes.

So that's roughly -- I mean, if my calculator was correct, roughly 4% of your fleet and yet your average utilization came down sequentially. So, just wondering the dynamics and then traffic has now picked up over the past few weeks. So, going forward, given that you're going to scrap more cars, given that traffic seems to be picking up -- I know it's still uncertain, but I mean would it be fair to say that you're fairly confident that your utilization in Q2 should be better than Q1?

Yes, it should be better. And we were -- the end of Q1 we were half a percent, 4/10 of a percent better than the end of the year. So we were 70.5 at the end of the year, averaged 70 for the quarter, finished the quarter at 70.9. And you've done the math on the scrapping, but the impact on utilization is it was scrapped the first day of the month, it has more impact on utilization than the last day.

And so that 900 was kind of ratably spread out through the month. We would expect on what we see going on right now that we would have a little better utilization in the second quarter.

Okay. And do you all (multiple speakers).

And Heather, that is not a promise.

Right. I won't hold you to it.

Thank you.

Do you have a sense, if I remember correctly, I remember you-all saying at some point that you thought it could be -- I thought it was three years before utilization is back to the point that you could make the $20 million to $25 million a year that you were running at one point. I mean, do you have an updated view on that?

If we consider last year as the first year starting January 1 last year and really started maybe a little before that. Recall that 2009 is the first year, I find it very hard to believe in 2010, given that we're starting at 70 that we're going to turn much around this year. I think it's into the third year, which is now -- does it take a full 12 months? Is it the first quarter? I guess that is -- that question is heavily depending on railcar loadings, which is really linked in the economy.

You have a degree of scrapping.

Degree of scrapping (multiple speakers).

(multiple speakers) industry.

Will have an impact.

Economic recovery. There are a lot of variables there.

I still say feel reasonably good about what we talked about before with maybe a little more positive lean. But to get back to that mid-93%, 94% utilization, I think we've got to get -- we've got to see some improvement in jobs to tell you the truth, or just wait a little longer because of natural attrition of cars.

So is 2011 -- I mean that's still -- you're using that as year three?

I'm going to still feel that we're out into 2011, early or late. I think it's a great question, it's one we need to focus on our feelings as we come into these calls and how we're feeling about that. For now I'd just stick with what we said before, we feel reasonably good about that.

Okay. And my final question is on your core grain business, nothing to do with ethanol, nothing to do with Lansing. Given the O'Malley -- I think it's O'Malley Elevators, given the capacity you've added in the past few years -- like if I compared -- and I know the business is volatile. But is it a straight line, so say if you've added 10% capacity, I would assume the O'Malley's are higher value added.

Is it a straight line so your normalized earnings power for that business is up 10% or given locations is it up more than that? If you could just give us a sense of a quote unquote normalized earnings base relative to say five years ago before you started adding this capacity?

Oh, you're talking about -- you're not talking just O'Malley in that. You're talking about the last several years of capacity that we've added?

Storage capacity.

Right, and I know a normalized --

Yes.

-- is sort of a joke given the volatility of the business. But (multiple speakers).

I would say that the -- the types of -- this comment first is going to exclude O'Malley and, you're right, that's a higher value add, so there's -- I'll start with O'Malley. That type of capacity would exceed the straight-line estimate because of the cleaning capacity, the gross profit that is recognized from the specialization and the special handling and the cleaning and all that you would expect a greater return per bushel you handle. Now we don't handle as much throughput, but that's a modest uptick in the trend line.

The other facilities that we will have added in the last several years would be more consistent with the trend line, we have not added -- some stuff that might be inconsistent with the trend line to the positive if we had added a 3 million bushel elevator that was a shuttle loader that was intending to turn the elevator 10 or 15 times we'd expect that to exceed a trend line getting more volume and margin less relative space. But what we've added is what I would call more traditional other than O'Malley.

Okay. All right, well thank you and congratulations again.

Thanks, Heather.

(Operator Instructions). Brent Rystrom, Feltl.

Good morning, thank you. Just a couple quick questions for you. The Hartung business that you acquired, is that primarily more of a dairy driven business?

More of a dairy, it is -- it's a liquid fertilizer business 100% and -- nutrient business I should say. And so it's supplying and it's a wholesale business, it's supplying the farm center, retail farm center network in the state of Wisconsin, which does have a varied agriculture. And so it's feeding -- its biggest principal source of income like ours is corn acres and of course corn is feeding dairy.

But Wisconsin is a great agricultural state and we had a gap there, but it's really -- its end market is the same and market as we've had in that it's base agriculture and a lot of agriculture there are crops as opposed to when we moved into Florida you have substantially more non-corn wheat and been stuck in the form of citrus and turf, etc.

The reason I ask is I do a fair amount of farming myself in Wisconsin and have a lot of activities with suppliers in the business and the suppliers in Wisconsin are telling me right now that they're seeing much healthier business environment than say Minnesota, Iowa, Nebraska places like that. And I'm suspecting it has to do with the improving environment for dairy farming from a profit perspective.

Yes, it's -- in that sense I see where you're going on that. And there's no question one's willingness to spend on inputs is directly related not with a perfect correlation, but heavily impacted by one's view of the revenue you're going to generate. And as things get a little healthier that -- especially when you've had the reduction of inputs in P&K there's a desire to refill the soil bank, as it were. But the conditions there right now are quite good.

And you're not doing anything like urea or ammonia there?

What we're doing there is all liquid at this point in time. And we will see over time where it makes sense potentially to move into the granular side, if it makes sense and where it makes sense.

Does the stabilizing livestock herds, does that have implications for you on your DDG pricing?

I'm sorry, say that again?

Stabilizing livestock herds -- we've been in this (multiple speakers).

No, I would say what happened in DDG, that's a good question, but DDG's probably the most, as we've added this huge amount of capacity to produce ethanol the influx of DDG was much faster than the market overall could absorb it. So we went from four years ago DDG trading typically a little above the price of corn when the capacity was starting to expand, 80%-90% of corn to where it got down into the low 60s and now we're in the mid -- depending on where you are -- mid 70s, in that range. Frankly it's exports that continue to increase really what I'll call the lift that helps stabilize DDG prices. I would expect that to continue.

And you mean literally international exports or exports say to (multiple speakers) producers?

Yes, literally.

Okay, all right.

Literally, yes. And I would say at this discount to corn there is an ever increasing desire to figure out how to get more DDG in the mix. But this year, especially in the eastern United States where we are, the vomitoxin, the toxin that was in the corn that when you process the corn concentrates in the DDG is understandably reduced some rations in that -- the percent that one would be willing to put in a ration.

But I see with -- right now we're about to get more ethanol capacity coming on, that's going to increase DDG again. But frankly I feel pretty good because of the export market that will continue to absorb it well.

Does your fertilizer business see any impact in the last couple of years -- the massive shift to narrowcasting has that had any implications that you can identify?

You just got to a level of depth where I'm going to have [Tamara] right down that -- repeat the question.

All right. When you apply fertilizer historically up until a few years ago you used to apply the fertilizer on a broadcast basis.

Yes.

You would apply it typically separate from your planting. Now with the new planters you're narrowcasting your fertilizer application right in with your planting.

Yes, I'm now getting into a zone where we're going to have someone follow you up with more specificity. But I will say this, we have been for quite some time investing in the area of what we'll call more specialty uses for fertilizer, both for agriculture, and that would be in the low salts and whatnot, and for industrial.

And so we are taking advantage -- or I shouldn't say taking advantage, we have been right up front with part of our strategy to be able to serve our customers with what they need including in this area. But I'm going to have someone follow up a little more specifically on that.

I'll get back to you on, Brent, with an answer.

Okay.

But it's been a nice growth area for our business in percentage terms, but in absolute terms it's still a relatively smaller market.

On O'Malley, and again it's a little bit different market, we have similar markets for say wheat for feed use. It seems that you get a $0.50 to $0.75 kind of premium on sale versus say livestock corn. Is that typical O'Malley, that you might see $0.50 to $0.75 more per bushel?

We will see premiums. We will see premiums that we pay to the farmer for the food grade corn and the varieties that I am not close enough to either confirm -- to really attempt to confirm that amount of a premium. So, I just don't know to tell you the truth.

(multiple speakers)?

I know on white corn it can be more of a premium than at times you can get to periods of supply where it can be less. But we will be paying the producers quite a bit more, much like we do in specialty soybeans, but depending on the type of soybeans that we handled we might pay for some a $0.30 premium and some $1.50 premium. This gets into a level of detail where you've got my interest piqued and I'm going to find out. We will also experience higher margins on the handling side of it for ourselves.

Okay, that was my next question. I've got two final questions for you. One is kind of a long-term strategic question and it's going to seem really odd giving the glut of corn. But when you look at the livestock herd stabilizing and possibly starting to build, you look at the carcass weight starting to build, it's likely we're going to use 700 million to 800 million more bushels of feed corn per year within about a year here on an annualized basis. Then you look at the ethanol plants coming online and, you look at exports of China buying corn for the first time here, or at least contracting to buy corn, we don't know about delivery.

I caught that.

Yes, looking at 2011/2012 I would almost guess there's a long-term opportunity to lock in some corn pricing here which seems almost like heresy given where corn has been the last year and a half, two years. But when you look at the demand side of corn, particularly 2011, that's probably going to change a lot. Do you have any thoughts on that?

Well one, as far as the demand side, we agree. We think being in the space of agriculture is just fantastic. And I think you're right, our perspective is that you're right on the livestock here in the domestic. China is always a hard one to peg, but for some time a whole bunch of folks including ourselves are saying the demand for protein is going to be good for production agriculture, those in production agriculture and some recent purchases from the US, at least on the contract side, suggest there's a need.

The one thing that you didn't say that I think is really important and it gets into some of the results we've been seeing in yields lately, that it will be really interesting to see if we're able to change the long-term trend yield to a more steeply inclined trend of improved yields. And that's not just a US situation, there is more productive capability capacity throughout the world to get. And the history over long periods of time there's tended to be an ability to drive productivity higher than people thought and the supply-side has shown an ability to keep up with the demand side.

In any given year it tends to get out of whack. So frankly I'd be a little cautious from a pricing opportunity in the sense of pricing that is locking in prices on the buy side against the belief that demand will be so substantial as to drive higher prices. I'd be personally a little bit cautious on that. Yet in any given year there is the risk of the supply shortage with this amount of demand that puts you I think more at risk for volatility. That's my own perception anyways.

I have one final question and then thank you for your responses. Any thoughts on the impact of the early planting? My guess would be that looking at the early planting progress to date in corn we're not going to have that late-season shift, that late May/June shift to soybeans that we've seen in the past. Does that have any revenue or margin implications for the Plant Nutrient Group in the second quarter?

Yes, we've got to wait and see how it plays out. We've had a little rain here recently that if it slows stuff down it may slow the pace. But typically in early plantings we'll end up planting more corn than what we were predicting. And the opposite of course tends to take place when things get shifted back. And more corn is more nutrients and more nutrients is good for us and also sets up the likelihood of an earlier crop harvest which is more of a grain impact than a plant nutrient impact.

Although if you get a little earlier harvest then it's easier to get the land prepared, you get a little more likelihood of maybe a little more wheat going in, a little more of a fall fertilizer season. At the same time I remember 1983 we had the most unbelievable early planting, the corn looked so good in June and then late June it stopped raining. So, what will be produced, we've increased the odds we're going to have a better crop 'if'. But right now real time it likely means a little bit more corn acres get planted and a little more nutrient goes down.

Is that likely focused on nitrogen because of the (multiple speakers)?

Yes, nitrogen is the biggest one, although you could see a little bit on the others, but nitrogen -- it makes -- nitrogen makes corn this year. So, that often is the one where you're just -- if you're in a position to put it down you do.

Well, thank you.

Yes. Okay, we are over time and sorry about that. But appreciate the questions. I want to thank you all for joining us. Our next conference call is scheduled for Thursday, August 5 at 11 a.m. Eastern Time to review second-quarter 2010 results. And we hope you'll be able to join us. Until then have a great day and appreciate the quality questions and support. Thanks.

Thank you, all.

Bye-bye.

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