Andersons Inc (ANDE) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 Andersons Incorporated earnings conference call. My name is Katina and I will be your coordinator for today.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today's call, Mr. Nick Conrad, Vice President of Finance and Treasurer.

Good morning and thank you, everyone, for joining us for the Andersons Inc.'s 2010 third 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 in the Company's industries, both in the U.S. and internationally, and additional factors that are described in the Company's publicly filed documents, including its 34-F 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 website.

Mike Anderson, Chairman and Chief Executive Officer, and I will be available for questions at the end of the call. Mike?

Thanks Nick, and good morning everyone. As noted in our press release, we generated net income of $1.4 million, or $0.08 per diluted share, on revenues of $707 million. In 2009, we reported net income of $1.3 million, or $0.07 per diluted share, on $601 million of revenue.

For the first nine months our total net income stands at $38.8 million, or $2.09 per diluted share. In the same period 2009, we reported net income of $22.1 million, or $1.20 per share. Total revenues of $2.2 billion for the first nine months of the year were up $100 million from last year. Now, to fully understand the Company results for the quarter, let's take a look at each of our five business groups.

The Grain and Ethanol group had an operating income of $2.5 million in the third quarter, versus $8.9 million a year ago. The grain business was down slightly this quarter. This business was positively impacted by the yearly harvest, which led to an increase in gross profit on grain sales. This, however, was more than offset by a significant decrease in space income. The cause of this decrease was a decline in the wheat basis, which is expected to be regained through the balance of the crop year.

The ethanol business results were down $5.5 million this quarter, as opposed to the modest loss due primarily to lower margins. The Company expected the ethanol margins to decline, and therefore contracted for ethanol sales at minimal margins in prior periods. The ethanol results were also impacted by higher maintenance and repair expenses related to two planned shutdowns and one major repair. Additionally, last year's results included a $1.3 million gain on a business interruption claim at the Albion Ethanol LLC.

The results from the group's investment in Lansing Trade Group were also down slightly this quarter when compared to the prior year. Total third quarter revenues for the Grain and Ethanol group were $498 million. This includes $219 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 third quarter 2009, the group's total revenues were $451 million, included $176 million in ethanol joint venture sales.

The Grain and Ethanol group's operating income through the first nine months of 2010 was a record $42.8 million, in comparison to $23.5 million in the prior year. This considerable year-to-date income differential was due to increased performance in all three businesses -- grain, ethanol, and Lansing Trade Group. Although space income in the grain business was down significantly this quarter, space income through September is up from the prior year.

Similarly, even though the ethanol LLCs did not perform well during the third quarter, its results through September are more than double the prior year. Results for Lansing Trade Group through the first nine months exceed the prior year by a considerable amount as well. Total revenues for the Grain and Ethanol group through the first nine months were $1.5 billion, in comparison to $1.4 billion in 2009. The results through September include $625 million of grain and ethanol sales associated with the ethanol affiliates' marketing agreements, which compares to the $571 million reported in the prior year.

The Plant Nutrient group earned an operating income of $1.5 million during the third quarter on revenues of $129 million. In the same three-month period of 2009, the group reported a loss of $2.8 million on $70 million of revenue. The revenue differential from quarter to quarter was primarily impacted by a 60% increase in volume. [But] it was also positively impacted by an increase in average price per ton. The volume increase was primarily due to the restocking of the nutrient pipeline that was caused by rising grain prices and an early harvest, and weather, frankly, throughout the Midwest was favorable for nutrient application. The gross profit per ton also increased due to an escalation of basic nutrient prices.

This year the Plant Nutrient group has earned $21.2 million through the first nine months on $461 million of revenue. Last year the group had operating income of $9.6 million on $380 million of revenue. This year-to-year improvement was due primarily to a significant increase in volume, as Spring and Fall application rates of potassium and phosphate returned to more normal levels. This was further impacted by the nutrient inventory restocking that occurred during the third quarter.

The Rail group reported an operating income of $100,000 this quarter, whereas last year the group reported an operating loss of $1.1 million. The group recognized $1.3 million in gross margin from the sale of rail cars and related leases during the quarter, whereas last year $400,000 was reported on similar transactions. Operating income from leasing was down primarily due to lower utilization rates and the corresponding storage costs associated with vital assets.

The average utilization rate was 72.9%, in comparison to 74.4% for the same period last year. On a positive note, increased leasing activity late in the quarter caused the utilization as of September 30th to increase to 75.6%. The group has approximately 22,600 cars and locomotives, which is down from the prior year total of 24,000 units due to the selective scrapping of over 1,500 rail cars this year.

Maintenance expense for the quarter was $123 per car per month, in comparison to $113 per car per month last year. This increase in maintenance expense was impacted by the need to prepare recently-leased cars for service. The investment in the short-lying railroad made during the second quarter showed solid performance. The gross profit for the rail car business showed significant improvement during the third quarter as well.

Manufacturing business also improved, due mainly to the sale of the SED Hydroflow product lines, which resulted in a one-time gain of $600,000. Revenues for the quarter were $22 million, which is comparable to the $21 million reported for the same period of 2009.

Through the first nine months, the Rail group reported operating income of $1.2 million on revenues of $73 million. In the same period of 2009, operating income amounted to $400,000 on revenues of $72 million. The decreased performance in the leasing business is being more than offset by improvements in the repair and manufacturing businesses, the addition of the income from the investment in the short-lying railroad, and income received this year from the purposeful scrapping of rail cars.

The Turf and Specialty group had an operating loss of $300,000 on $23 million of revenue. Last year the group reported a similar operating loss of $300,000 on $21 million of revenue. For comparative purposes, I wanted to mention that the prior year third quarter results for the group included a $1.3 million non-returning gain. Both turf products tonnage and gross profit per ton increased slightly during the quarter.

Throughout the first nine months of 2010, the group's operating income was $4.9 million on $106 million of revenue. In comparison, through the first nine months of 2009 the group's operating income was a record $5.8 million on similar revenues.

The Retail group had an operating loss of $1.7 million in the third quarter, which compares to an operating loss of $2.3 million in the prior year that included costs associated with the closing of the Lima store. Total revenues of $34 million for the third quarter were approximately 9% below the $37 million in revenue reported in 2009. The sales decline is primarily due to the loss of the Lima store sales. The group's year-to-date operating loss was $2.4 million on revenues of $108 million. This compares to a loss of $2.1 million through the first nine months of 2009 on revenues of $120 million. Both the group's gross margin percent and customer count have declined slightly this year. Conversely, the average sale per customer has increased modestly.

Now I'll turn the floor over to Nick for his Treasurer's comments.

Thanks, Mike. Turning to taxes, for the third quarter 2010 the Company's effective tax rate was 23.9%. The Company's September 30 2010 year-to-date effective tax rate was 38.6%, up 1.9% from September 30 2009. This increase is mainly due to a one-time increase in income tax expense of $1.5 million reported in the first quarter 2010, resulting from the Patient Protection and Affordable Care Act. We are projecting our 2010 full-year effective tax rate to be 37.8%.

As to interest, for the third quarter 2010 the Company's interest expense totaled $4.6 million, down about $500,000 from the third quarter of 2009. As of September 30th, year-to-date interest expense was $13.9 million, down $2.1 million compared to 2009. The decrease in expense for the third quarter in year-to-date was attributable to a decrease in long-term debt.

The Company's 2010 third quarter short-term average borrowings were $40.1 million. For the same 2009 period the Company had no short-term bank debt outstanding. Year-to-date September 2010 average short-term borrowings as compared to 2009 were down $9.1 million. Short-term investments during the third quarter averaged $54.1 million, a decrease of $76.2 million from the third quarter 2009. As of September 30th, our year-to-date average short-term investments were $60.4 million, compared to $50.3 million in 2009.

Earnings before interest, taxes, depreciation, and amortization, EBITDA, for the third quarter 2010 was $15.6 million, versus $16.3 million for the same period 2009. Year-to-date EBITDA totaled $105.1 million, an increase of $28.8 million from the same period last year. The third quarter's pre-tax earnings include a loss of approximately $1.1 million in equity and earnings of affiliates, versus a profit of approximately $5.3 million in the same period last year. Year-to-date equity and earnings of affiliates was a profit of $15.5 million, up $13.1 million from September 30, 2009.

Other income was $3.6 million for the third quarter, an improvement of $1.1 million. Year-to-date September 30 2010 other income was $9.1 million. EBITDA has been adjusted for the non-controlling interest.

Turning to the balance sheet, current assets increased to $830.4 million by the end of the third quarter, from a year-earlier balance of $573.3 million. The majority of this increase was in inventories and commodity derivative assets current. Inventories totaled $432.4 million at the end of the third quarter, compared to $190.8 million for the same period last year.

Grain and Ethanol inventories were up $235.8 million and Plant Nutrient inventories were up $9.1 million, as compared to the 2009 third quarter. Turf and Specialty inventories were down $1.2 million, Rail inventories were down $600,000, and Retail inventories were down $1.4 million for the quarter. Commodity derivative assets current ended the third quarter at $118.5 million, an increase of $91.9 million from the same 2009 period.

The Company's cash and cash equivalents decreased $154.8 million compared to the same period last year, ending the third quarter at $25.7 million. Margin deposits for the 2010 third quarter were up $39.7 million compared to last year, ending the quarter at $58.6 million.

Since the 2009 third quarter, accounts and notes receivable have increased $42.3 million. Plant Nutrient receivables were up $28.5 million, Grain and Ethanol receivables were up $12.9 million, Rail receivables were up $1.2 million, Retail receivables were up $70,000, and Turf and Specialty receivables were down $300,000 compared to the same 2009 quarter. Net working capital at the end of the third quarter was $273.2 million, a decrease of $26.1 million from the third quarter of 2009.

Total assets as of September 30, 2010 were $1.4 billion compared to $1.1 billion from the year-earlier third quarter. Other assets increased $43.4 million, ending the third quarter at $215.2 million versus the 2009 third quarter balance of $171.8 million. This increase was attributable to other assets in notes receivable ending the quarter at $40 million, an increase of $13.4 million, and investments in and advances to affiliates ending the quarter at $165.4 million, an increase of $22.3 million from the same 2009 period.

Property plant and equipment along with rail car assets leased to others [resellers] added $1.7 million. Appreciation totaled $27.9 million at September 30th. Total capital spending including investment of affiliates through September 30, 2010 was $44.7 million, versus $42.8 million for the same period in 2009, excluding rail cars. Rail car purchases and sales were at $13.6 million and $15.9 million respectively through September 30th. Rail car purchases and sales in the same period of 2009 were $20.6 million and $6 million respectively.

Our long-term debt totals $264.3 million, a decrease of $43.1 million from 2009's third quarter ending level. Our total long-term funded debt to equity is 0.58 to 1. The Company's 2010 average interest rate for all long-term funded debt was about 5.52% at the end of the third quarter, a decrease of 0.28% from third quarter 2009. As of September 30, 2010, the Company's total equity was $441.9 million, an increase of $54.7 million from the third quarter of 2009. And finally, on October 22nd, we paid our fourth quarter 2010 of $0.09 per share.

Back to you, Mike.

Thanks. Before we take your questions, I'd like to cover a few points. As I noted in the press release, we have mixed results this quarter. We're pleased with the performance of the Plant Nutrient group which typically has little to no income during the third quarter, based on cyclical nature of the business.

Conversely, our Grain and Ethanol group's results for the quarter were lower, due primarily to the decreased performance in our ethanol business. Our grain business was impacted by decline in the wheat basis. However, we expect this to be regained. The Rail group has continued to be impacted by the decline in railroad traffic. However, modest but continual increases in traffic have been seen in recent months. Additionally, the increase in rail car lease renewals at the end of the quarter and the resulting increase in the utilization rate were encouraging to see. The Turf and Specialty group had a small loss for the quarter, which is a typical third quarter result. And the Retail group continues to be impacted by economic forces.

All that said, as you look at our quarterly results I want to encourage you to remember that it's common for us to have a very cyclical quarters. As it relates specifically to the third quarter, we have historically showed a loss most years. The exception was during the 2006-to-2008 period where we did have much higher earnings per share during the third quarter, due to many unique occurrences. The last two years we have settled into a more consistent pattern, where our highest earning quarters are the second and fourth quarters.

Many of you may be wondering, "What does the remainder of 2010 hold for the Company?" We expect good results in the grain business, as space income is expected to return in the fourth quarter. In regards to ethanol, we have contracted for a significant percentage of our fourth quarter ethanol sales at nominal margins, based on our previous view of the ethanol market. That logic has been challenged by the recent increase in spot margins, but we still believe in our risk management practices.

We continue to believe that our Plant Nutrient group will have a significantly improved level of profitability this year, as is demonstrated by the year-to-date results. We see our Rail group continuing to be impacted by the overall slowdown in the rail industry. However, the continual increase, albeit slow, in the utilization rate would appear to mean the worst is behind us. As is typical, we do not expect our Turf and Specialty group to be accretive to earnings in the fourth quarter. Further, it is expected that the Retail business will continue to face sales and earnings pressure, but the fourth quarter is a very good quarter for that business.

I would like to end by pointing out some very positive items in regards to our results through September. The Grain and Ethanol group has record results of $42.8 million, and our Plant Nutrient group is having their second-best year ever, surpassed only by the impressive end of earnings seen in 2008 through nine months. I continue to be excited about what the future holds.

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

Thank you. (Operator Instructions). Your first question comes from the line of Farha Aslam representing Stephens Incorporated. Please proceed.

Hi, good morning.

Good morning, Farha.

Good morning, Farha.

A couple of questions -- first of all, in your Plant Nutrients group, clearly the group's having a great year. Looking into the fourth quarter and into next year, how much more upside is there because of the very good grain situation and rising fertilizer prices?

There is more upside. I think you all know that in general, the position that we have with our sizable amount of storage and the need to have product in the position to deliver to customers, we tend to operate from the long inventory side, albeit there's sensitivity around price levels that were now up to above historic trends. But we see continued upside in that area, and there's no question that robust grain prices are a factor that helps support that and will help support producers' decisions to be willing to commit to nutrient prices at these levels.

In addition to that, we expect to see a slight increase in corn acres for next year although what's going on in commodity prices across the board is going to be strong competition for acres in a lot of commodities. So we would expect things to continue reasonably well for the foreseeable future.

And when you look at that business, your normalized earnings, kind of what you expect that business to deliver on a normal basis, and clearly probably next year is going to be ahead of that.

Yes, that's correct as it would be above some normalized trends. However, we've had several acquisitions in the last few years and factoring that into historic norms, we would expect our trend line to be higher than it has been historically because of the acquisitions that we've done.

Okay. And so would you think that that business on a pre-tax basis, year-in, year-out, is a sort of a $25 million to $30 million business now?

I'm not ready to answer that one yet, Farha, but that's a good question.

Okay. And then on to ethanol, the tax credit expires December 31st. I was wondering, your thoughts on the extension of the tax credit and how you're managing around it?

Yes, that's a big deal. The blender's credit, the VTEC that was in the low 50's and is currently at 45, does expire at the end of this year. There's been very little talk about extending it as is. The conversation is should it be extended, or if it should, will it be, or will we get into one of these situations where with very little time left in the year, does it become one of those things that is not addressed. And then if it is addressed, at what levels?

We really do hope that congress will address this issue and not just let it pass inadvertently because it doesn't get attention, and the decision will be made. And I think that there's, I don't know if it's 50-50 that that will happen, but it's not a sure thing that it's addressed. And the conversation we're hearing is that I would say if it is addressed and something is extended, that it would be at some level lower than where it is today, mid 30's. I would just guess it would be lower.

To the extent that we do not have it, then that's an element of support for the blending that gets into the whole economics of ethanol and that could be a factor that would work against the blending of ethanol. Working in favor of ethanol is oil prices high, higher again today. Of course, working against it is corn price, but also the infrastructure that's in place today is in the pipelines, they're moving a lot more lower-octane gasoline because virtually everyone is now blending and that gets a boost. You have the mandate that's in place, but there's no question in my opinion that if you take away the blender's credit and it's not sitting there, that would be a negative to the economics.

Probably just as important would be that we have added more production capacity this year through some new plants that were in place, and some old ones were shuttered that opened, and productivity improvements. And we have the ability to produce at levels that are above what I'll call normal consumption of ethanol. So if we reduce the consumption of ethanol that would be a negative. On the other hand, sugar price continues to be high and to the extent it stays there, if there's forces working against ethanol, high sugar price works in favor of it.

Okay.

So I gave a lot, there's a lot of if's in this one.

And so your ethanol hedging, you said you're largely hedged for the fourth quarter. Do you have any hedges in place for 2011?

Yes, we do have some hedges in place. It's not anywhere near half in the next year, so we have a lot of open positions at this point and time. And as we look at the spot margins, it's pretty obvious that the margins are better in the spots than we predicted before when we locked in the margins. But we still have a general sense that most of the forces suggest the likelihood of a stocks build-up as we get into next year, which works against margins, the VTEC funding credit being one thing. But working for us, if sugar stays high and exports continue, and if some of the current capacity that could produce ethanol continues to produce fructose, that could change things.

Okay. And my final question is on rail. In terms of this year, profitability was supported by staffing. Next year it looks like your lease rates are going up and your utilization is going up. Could earnings in that segment double next year, or how would you expect projections of earnings to go?

Well of course, year to date we're not sitting here with very big earnings in there. So just pulling out the year-to-date number in Rail, our operating income through nine months is less than $1 million. So frankly, it's pretty easy for me to say it will double. We would expect to see a nice increase based on utilization rates which we think in the second quarter conference call indicated that there was the possibility we could approach 80% utilization by the end of this year. We're feeling better about that today and so we would expect to be in positive territory, albeit with utilization at lower levels than we had in a lot of the years and at lower average lease rates. But having a lower lease rate and getting income is a lot better than parking it. So we would expect to see some good increases next year from where we are.

Thank you very much.

Yes, thank you.

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

Good morning, guys.

Hey, hi Mike.

Hi, Mike.

My first question is on the fertilizer plant nutrient side. When should we start to see some FIFO inventory benefit like what we saw back in I guess in '08 when prices were escalating? Should that start to show up in 4Q?

It shows up a little bit right now in the sense that as we sell stuff through, the average cost of our inventory, if we've accumulated below where current markets is, is working through the system. So that's helped our margin. We've had some margin enhancement helping this quarter's number along with the significant thing being volume. And I would expect to see a bit of that in the fourth quarter, but again the majority of our volume is in the second quarter. And so we're looking for a good third quarter and we're looking for a good first quarter next year and second quarter. So and we're also at these levels here, if you look back to the years you referenced, we've showed nice margin enhancement as we push through lower-price inventory, and then we got clobbered when what we thought was low-price inventory wasn't low-priced inventory when things turned around.

So we're going to be sensitive to accumulating at positions at levels that we're at today or above, despite the fact that the economics for the farmer look sound, simply because that's just a pretty risky strategy.

Okay. And shifting to the rail segment, that was a $20 million pre-tax profit business '06 through '08 when the utilization rates were in the 90's I believe. If 80% is the right run rate, are you trying to make structural changes to the business that could get you back to those types of run rates of pre-tax profit? Or is it really a prerequisite to be at that sort of utilization rate to get back to those pre-tax profit levels?

You know not only us, but the industry for I would say the bulk of the time runs above 90%. And this equal opportunity depression, recession, whatever you want to call it, just really, really changed things. And there has been a structural realignment of which we don't know the total impact of it yet, which was we scrapped 1,500-plus cars. We have anecdotal evidence that we weren't alone, and new car construction is way, way down. So the fleet size dropped and every year there will regular scrapping and end of life of cars. But the utilization was so poor in the industry and with ourselves that it's just going to take a little longer to get back into that I'll call it mid-90 area.

But at the pace that we're on, if we're above 80 by the end of the year, I would say the trend would suggest that we should be better than that as we go through the year. So we are working hard to get back into the 90% level. I will tell you though, in the near term part of that is coming at the cost of renewals that are below what I would call historical average rates. So we've got two things we have to work with for a while, is renewals at lower-than-historical-average rates, but at least they're at rates, and utilization.

So next year I see a rebuilding year, primarily in utilization. And we're very reluctant to put any rates out for any extended period of time, frankly, because we know at these economics, it's highly likely that we'll continue to take more cars out of the system every year than we put back in with new cars, until we get to a point where the economics of monthly lease rates support the billing of new cars which would be much higher than it is. So next year is a rebuilding year. But it looks like today, barring some surprise, that it will be much improved from the last couple years and below the years that you referenced that were in that $20 million range.

Okay, that's helpful. And one last quick question on the ethanol side -- with the forward ethanol margin looking more compressed, do you see the potential for more M&A activity in 2011, and do you see yourself as a player in that market?

You know, it's interesting that our view is we see the margin compression, but the reality is at least now, it's not compressed, it's good. So let's develop two scenarios -- we're wrong in our assessment of margin compression, and margins stay good; that will generate cash and I think will tend not to cause distress and make life good for those folks who are operating plants and generate cash. On the other hand, if what occurs is like what we think, then the way you control the buildup of stocks is you produce less. If you produce less, then it's usually because of margin compression in trauma. And that could create some situations where some M&A doesn't in fact take place. And if we were able to participate in a manner that's consistent with our model, which is a combination of equity, investor, and service provider and operator, we are looking for those opportunities and we would hope to capitalize on opportunities such as that.

Great, thank you very much.

Yes.

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

Are you there, Heather?

(Operator Instructions).

Okay, so maybe go to the next one and hopefully Heather will be back in the queue after that.

Your next question will come from the line of Eric Larson representing Soleil Securities. Please proceed.

Good morning, everyone.

Hi, Eric.

In the quarter, I want to get into the Grain division a little bit here. Of your $6.4 million decline in operating profit, how much of that was attributable to basis loss on wheat?

Yes. Okay, decline in the group, I think we said $5.5 million was in ethanol I think, so grain was slightly down. But I will tell you on wheat, I won't give you precise dollars. It was down substantially. The wheat basis levels in Toledo, which are available to the public, against the December option on June 30th were 68 under the Dec. In our second quarter conference call, we referenced that. We said the following -- we had a strong escalation of wheat basis in second quarter, and that suggests that some spacing come from wheat moved into the second quarter, and noted that due to the volume of wheat we've been buying, we've seen a drop-off in the wheat basis since the end of June. By the end of September, the wheat basis in Toledo was 87 under the Dec, so $0.19 lower. Last night our basis in Toledo was 62 under the December, $0.25 higher than the end of the month.

So if you look at a single major driver in the third quarter of our grain results, would have been the fact that we were down substantially in that wheat basis which we have high confidence will come back. Now just what we did, as we mentioned a little bit ago, because the harvest to seller rate at this year, we had more third quarter volume and more margin handling margin than we might normally that ships out of the fourth quarter into the third quarter. So, and I'd also say for the fourth quarter, corn and bean harvest is virtually done, not totally in all of our areas. And last year if you'll recall, we were just getting into harvest about this time, well not getting into it, we were in the middle of it because it was so wet.

So last year we did not see very much basis appreciation in the quarter. We would expect to see basis appreciation, both in corn and beans as well as wheat. But it was the biggest driver, wheat space income was the biggest driver downward on grain results in 2010 third quarter versus 2009.

Okay. Then let's translate that into Q4. When the October 8th West report came out, I think I was shocked to see the basis contract again on corn. Obviously we had fairly strong demand coming in for corn, and so could you lose basis on corn in Q4 as a result of what happened in early October?

No, I doubt it. That was much more in my opinion a reaction to the spot logistics in corn, regardless of what's going in crop reports or yields or anything like that. And by that I mean we've had this unbelievable string of perfect weather for harvesting. It would be nice to have gotten some moisture for the soil. And that created a situation where the flow of corn and beans coming at us and our ability to handle it and get trains and boats in place -- and this was across the system -- it just got congested.

And then you get a spike in corn price, and that just encourages the farmer to sell more. All that is settling down. Harvest has kind of wound down. Corn basis, I don't have it at my fingertips, but I think it's up roughly $0.15 now since the end of the quarter. So we did the dip down in basis, and it's since come up and there's reasonably good demand for corn. And now that it's put away, it's as good a crop, as far as condition and quality goes, maybe I've seen in my career. So there's not going to be quality pressures to push it to market, so it will be surprising.

I guess if you develop the scenario where a futures price ran to the moon here, where farmers just said, "I'm going to let go," maybe it crashes. But a farmer would say, "Why push it out now? I don't need the income now, I want it for next year." I do not see a scenario that's negative to corn basis in regard to what you mentioned, Eric.

Okay, yes.

Through the end of the year.

Okay, that actually makes some sense. Now, you talked about the quality of the corn crop. This year we only had to dry about, we're at 15% moisture. I think last year you probably had some pretty good drying income in your numbers. Would that be a swing factor in your Q4 versus this year, where I'm not so sure on the Eastern corn belt you may have had more moisture. But Western corn belt, it was virtually ideal, it was ideal crops coming off the field.

That will be a sizable negative swing, just as last year was just as what you represented, it was a much-higher-than-normal, substantially higher, materially higher-than-normal blending and drying income quarter last year. This year is on the low end of historical scale. So it is a swing factor. But of course part of that wetness and lateness is one of the reasons why we didn't have depreciation basis in fourth quarter of last year.

Correct, yes. So it comes back in different ways on you, obviously.

Yes, it does. But it --

Okay. I'm just trying to get a (inaudible -- multiple speakers).

No you're right, you're right, you do your modeling and you're looking at last year, that is a chunk that's a large negative this year versus a year ago.

Okay. Alright gentlemen, thank you.

Thank you.

The next question comes from the line Brent Rystrom representing Feltl and Company. Please proceed.

Thank you and good morning, guys.

Hey, Brett.

Hi, how are you?

Good, thank you. Just out of curiosity, I was looking at the ethanol use of corn year over year for the first four weeks in [your] trade year, and it's running 18% higher than it was a year ago. Are you seeing any signs of price rationing out there from a corn consumption perspective?

Unfortunately, the volume wasn't as good as I would have liked. Could you repeat that question?

Sure. We're seeing ethanol-related corn demand up 18% for the first four weeks here of the trade year.

Yes.

Are you seeing any price rationing, despite this surge in corn price? Are you seeing the price come in at all?

No. Today, no, the spot margins continue to be healthy, and so ethanol is competing for the use of corn and it's not rationing at these prices. I do think, I mean you start working at balance tables for every commodity, and I mean line them all up, put cotton and put sugar in there, put corn, put beans. And especially if you look out a year, and it says, "What's up?" If the views around demand and supply stay the same, which is, that's an arguable thing that says, "Boy, we get tight in something." There should end up being some rationing somehow some way, and then it's a question of what gets rationed.

But the dairy sector is struggling, now beef behind it. You know we think exports will stay strong, and China is a major factor on that. And we often really don't know what is the reality on the ground in China, but then does oil drop, does it go up? But the bottom line is the margin structure we have now is there is no rationing of corn use as it relates to ethanol.

Then a quick follow-up on Eric's question -- on the drying, if I recall, you said the drying will be a big impact to income. If I recall, drying --

Negative.

Yes. And what I'm wondering, drying, if I recall, is at relatively lower margin isn't it?

Correct. That's correct.

Alright. So there could be a big impact on the --

Yes.

Not necessarily a big impact on EPS.

Yes, well in a normal, I'll call a normal Fall, it's a nice little add that's important but it's not really material. Last year it was a significant factor in our quarterly results. Still not the biggest factor compared to margin and the put-through, but it was so good that it was noticeable. So we're coming up with probably our best year ever in the last 20 years in drying and blending income a year ago, to our lowest year, and they just happen to be back to back.

Two quick questions on fertilizer, and then one on wheat, and then I'm done. Are you seeing any issues with Fall application with as warm as it has been, you know getting that soil temp down below 50 to be able to put the nitrogen in? Are you seeing any impact here this quarter relative to that?

You know, it's probably less temperature and more availability. Across the belt there are storage, and now we're finally cooling down. It is only the first week of November, so the soil is much better prepared this year than it was, well a lot of it didn't get worked last year but people would have done forward. So not really, let's wait until the Fall plays out. But I don't think there will be issues from temperatures and whatnot. It's going to be more just availability.

The final question on fertilizer then is really one of the only ways they can create expenses to handle what's going to be a very high taxable income for farmers, are you seeing a lot of pre-buys on next year where they can?

We are seeing some pre-buying, and that's being stimulated both by the point that you made around farmers and taxable income. It's also somewhat stimulated by as a farmer looks to maybe lock in some corn for next year and sell corn, to have input locked in makes sense. We're also seeing one of the ways that those in our position in the middle manage the risk around inventory at high levels is to try and push for more of pre-pay. So there's a number of things that are aligned with that, and the profit, for us in GAAP accounting, doesn't necessarily follow the flow of the dollars as opposed to the farmer who is on a cash basis.

The final quick question -- I know you guys, I think you were more heavily involved in spring wheat than winter wheat. But any thoughts on [whether it's you] or Lansing Trade on the developing drought for winter wheat?

Yes, in our belt we're 100% soft red wheat for us. Lansing broadly in its training covers a much broader belt. We believe that in Southern Indiana, Ohio, parts of Kentucky, maybe a little of Illinois, that we likely have lost some makers that were intended to be planted that have not been planted, due to the extreme lack of moisture. Up in our area here, it's not like we're getting a lot of moisture but we've gotten some moisture, so we're not seeing that. And I suspect that also means for acreage that in fact has been planted where there's stress, when we get to next February and decisions are made around insurance and prevent planted and where corn and bean prices are, that there's some possibility of acreage that's planted if in fact those stresses are there that in fact it possibly could be torn up.

Despite that, we pretty strongly, when it's all said and done, we're going to have a large net increase in soft red acres this year versus a year ago, soft red winter wheat.

Well thank you, guys.

Your next question comes from the line of Brett Hundley representing BB&T Capital Markets. Please proceed.

Hi Brett.

Hey Brett.

Hello, it's Heather Jones.

Hi Heather.

I was having difficulties on my line so I had to hop on his line, so I apologize.

Okay Heather, it's not because I told them to not let you in, just so you know.

Well that's good to hear. Real briefly, just a clarification question -- you said nowhere near to half you've hedged for your 2011 ethanol margins. Would you, is it close to a third or is it much less than a third?

For the full year, you're in the ballpark.

Okay. And moving onto first of all in your guidance, you had originally back on your Q2 call said that you expect the second half to be similar to the second half of 2009. Do you still believe that's feasible?

Yes, there were a number of things going on there that we felt we ought to make the statements we did, and of course we're not giving guidance on a regular basis. Having said that, if we saw anything that was materially different we'd be obligated to say something, so the fact that we've not said anything is confirmation that we're in the same camp.

Okay. And per Eric's question, basis for corn did collapse during September but now it's back up nicely. Did you bring in a fair amount of corn during that period, so that I mean, should the basis appreciation we've seen there be a nice benefit to you during Q4, or are you just moving it as soon as you get it?

Frankly the big change year over year was wheat. But also because of what you said around corn basis being lower by the end of September, and we only moved crop corn, we in fact had some basis losses in corn. The year-to-year difference just wasn't as big a deal by the end of September, and we do own corn, more long corn and more long beans and we work very hard to do that. With the opportunities in wheat we have substantially more in wheat, but we will see benefit in corn and beans from the escalation in basis.

When you say substantially more in wheat, are you talking about just relative to last year or are you holding more wheat than you're holding corn or beans?

We're holding more wheat than corn or beans and a little more wheat than a year ago, but part of the substantial statement has to do with just the dynamic of the wheat basis this year crashing in the third quarter, where last year the opposite occurred. We have more potential wheat at Sep 30, 2010 than Sep 30, 2009.

Okay.

See what I'm trying to say there?

Right. Well one thing I don't understand, I mean to your earlier point that basis has appreciated considerably in wheat really over the last week or so.

Correct.

And what is driving that? I mean is it export demand finally filtering down to the local level or what is driving such a big move in such a short period of time?

Yes, there's a couple things. One, we've got to look back to the fact that it dropped substantially. So you look where it was June 30th, it dropped by Sep 30 which typically doesn't happen. Usually on Sep 30, you're going to tend to be above where you started the harvest at against the December. And the reason it dropped so much is wheat was high priced, yields were decent, it was [slow] into market, and we had this early bean and corn harvest coming right on its heels. So there was this competition for space. So as long as we were in the midst of corn and bean harvest coming so fast and struggling to get it out of the system logistically -- and I'm not talking about the Andersons, I'm talking across the system -- any grain elevator sitting in a situation where most of us really don't want to bother with taking in more wheat at that point in time because of the logistics, the interference with the prime focus in September, October, November, which is corn and beans. So we worked this generally to shut down the flow of wheat.

The mills, on the other hand, need to keep buying wheat but they then aren't competing with grain elevators at that point in time. And you had elevators that had a little more wheat than they planned after the wheat harvest, but were willing to keep taking it to market with fewer buyers. Once corn and bean harvest really starts shutting down, then those like ourselves look at prices like eighty-something under the December and we say, "Time to get back in the business."

On top of that, so then the mills have to compete with grain elevators getting back in and buying it. And on top of that, you are right, we have seen an uptick broadly in wheat and some business that's taking place. Not as much on the soft red wheat yet, but we see that coming and so we sense that there is going to be need for that.

Okay, so --.

But pretty typical, once you get done with corn and bean harvest, wheat basis pops.

Okay. I just had never seen it, well I shouldn't say never, but I haven't seen it move this quickly.

Well, this was unusual because it dropped so much.

Right.

So I'd say the first $0.20 that came back was just making up for a drop that doesn't' typically happen.

So was it your expectation that you should be able to make back the deterioration from Q3, you should be able to make back the entire amount in Q4?

You know, the thing of it is if you've been around us long enough, you see these big swings and so I prefer to look over a crop year. We feel really good about the position in wheat and the ownership and the fact that it was valued in Toledo at the levels it was valued at the end of September, and then our other elevators similar. We expect over the next nine months really nice appreciation. Exactly what quarter it comes in, I just don't know. But the start for this quarter is pretty doggone good.

Okay. I have just two more quick questions. The maintenance repair cost and then the other input costs that negatively impacted ethanol for the quarter, should that extend into Q4?

No, it wasn't that it was that huge a maintenance but it was enough that we had said before, we expect the last half to be profitable and we ended up negative in this quarter. And this third quarter is typically going to be a little lower anyways, because we have our regularly scheduled shutdowns in the third quarter at all our plants, so we lose that production. So you add a little extra maintenance cost at this time. And the other thing that hit us is as we crunch the corn and lock in the margin, the corn side of the cost that we're doing when we do that is futures. And we eventually convert the futures to cash, and frankly the basic value of the cash corn in the third quarter, especially in certain areas, went to higher basis through most of the quarter than we would have anticipated. We shouldn't see those same circumstances impacting our kind of average crunch margin in the fourth quarter that we saw in the third quarter, so we would hope to be modestly profitable if things play out as they're playing out.

Okay. And then the final question is on the improvement in rail utilization towards the end of the quarter. Is that more a pickup and more cars out on longer-term leases, or have you seen a pickup more in the per diem demand?

Well one, we're not going through, now let's define the long term. The long term for us will be more than five years, and we are not interested in locking things in that way. But we are doing a number of six-month and two-month and one-year and two-year, seeing a pickup in per diem, so it's kind of across the board. But at these rate levels, we won't go out very long. And just as we're moving into the fourth quarter, several of the leases that we've put together during the third quarter were getting the cars into service right at the beginning of the quarter as well as at the end of last quarter. So it's a blend of per diem, very short-term, and medium-term leases.

Okay. Alright, thank you very much.

Yes, you're welcome, Heather.

Your next question comes from the line of Ian Horowitz representing Rafferty Capital Markets. Please proceed.

Hi Ian.

Hi Ian.

Just a quick question, Mike, when we were up at the office you kind of gave an acreage outlook for 2011. With the recent run-up we've seen in the commodity prices, has the Company's outlook on acreage shifts changed at all significantly?

Yes, I'll give you kind of a quick current assess. You know we've planted a little over 88 million acres of corn last year, and I'll focus in, we planted maybe 312 million, 313 million acres in the U.S. overall. That's planted acres, not harvested acres. And we planted about 312 million the year before, 314 million the year before that, 312 million, so the base acreage is in that range. You got the CRP at roughly 31 million to 32 million acres on top of that.

So to gain more, and if we went back about six, seven years, we planted 316 million to 320 million. So we think with market prices where they are on a whole host of commodities, there is going to be a fight to get more acres in total. There is also going to be a fight between do I want to put corn in or do I want to put cotton in, do I want to put beans in.

The economics for corn do suggest we ought to get higher acres. We've seen a number of people that are out there at 91 million to 92 million acres. Candidly, what we see today I think it's going to be hard to get above 90 million acres. I think it would be between 89 million and 90 million, up from 88.2 million last year on corn, and that then it's a question of what else gains and what else loses.

But it's --

We know wheat is going to gain acres, we know it.

Right.

Because they lost acres the year before, they're going to put stuff back in. Maybe by the time we get to the Spring, some of those acres disappear. I suspect cotton is going to gain acres.

Right, so your conservative estimate on growth on corn seems to be more because there are other crops that are quite soft --

Right, other crops and the fact that we continue to pay not to plant 32 million acres, for my editorial comment and maybe moral comment -- my perspective.

Is there any ability for any of that to come out this year?

I think it'll be very hard for that to happen.

Okay. And then a question on the Plant Nutrient group -- application rates on a per-acre basis, have they shifted at all due to the lack of applications that we've seen on previous seasons? Should we expect a even stronger Fall this year out of this group?

You know, you've seen the increase in the third quarter. We're going to have a good Fall. And part of it is that volumes are up and part of the volume being up is related to the economics that suggest at prices where we are, it would make sense to have normal utilization for PNK. Nitrogen wasn't dropped as much before. But there still somewhat depends on the last time around, '08, in the late Summer-Fall of '08 before corn prices dropped, you could put a pencil to paper to say that the high fertilizer prices, with pencil, but that got up $1000 a ton, and it's not anywhere near that, potash and whatnot. And farmers were saying, "Even if it penciled, I'm not going to put as much down at those prices."

Right.

And demand was truly destroyed, and it was -- it could certainly by the drop in other commodity prices. Today we don't see indications of demand destruction at these prices. And we expect normal, I'll call normal applications on PNK and then.

Okay. And then last question on the retail segment, we talked kind of every corner and you said you'd give updates about reevaluating this segment and looking at the opportunities and how to kind of [right-size] it. Is there any update for this quarter?

No real strategic update, I would say that we have put some cash into updating a couple of our stores. And just at the re-grand openings and the early results are positive on sales, but we've got some costs to go along with that. But on the broader question you asked, I would say no change at this time.

Okay, great. Thanks a lot guys.

Yes.

Your next question comes from the line of [Chaz Janesh] representing Morgan Joseph. Please proceed.

Hey good morning guys, thanks for taking my call.

Hey Chaz.

Hi.

Hey congratulations on a mixed quarter. I was a bit surprised, I kind of expected the booming grain business to more than compensate for the weakness in the ethanol, but that certainly didn't occur. A question I have for you on the ethanol business, then, is because it seems like we've had a structural shift or would expect one in the corn price at this point. Is that going to, are you making plans for just higher corn across the board? And is there any way for you to offset that which seems to be the primary cost component to that operation?

I would say we believe that we've made a structural shift. And if we go back several years when we were at $2.50 corn to $3 and went up to close to $8 and then came back down to just below $3, under $4, it felt like we made a real structural shift to the point where $4 corn was going to be a low corn price as opposed to $2, and now we're well up above $5, certainly impacted by the yield drop year. Which frankly if you look at the amount of bushels lost and yield drop versus a year ago, that's the equivalent of roughly 5 million acres of land not being produced. But this competition for the land that we talked about earlier suggests that high prices will likely be around.

Right.

The other, the big on the structural thing is you say okay, you got the high input cost but what's the output. And the output is heavily driven by what's oil. So it looks like structurally, oil is going to be [strong]. And there really is not, as far as any ability to manage with a substitute for corn, it is the highest input price. Other ways of producing biofuels aren't even close to economical, so it is the best way to go at this point in time.

Okay, so as long as oil prices stay high, you guys can still make money, oil and corn [whiskey] essentially.

Well, there are signs of, if one is oil price and two is what is the ethanol price. And the ethanol price is impacted by the demand for ethanol that is also somewhat limited today by the fact that for all intents and practical purposes, you really can't blend above 10%. The E15 for four years of life of automobiles will be, in our opinion, add virtually no demand. So there's that structural limitation, and with 130-some billion gallons of gasoline being consumed in the U.S., that suggests roughly as a 10% blend, 13 billion gallons of ethanol. And we've been producing at an annual pace here of 13.5 billion, 13.6 billion, and there is some more capacity coming on. So if we end up producing at a 14 billion to 14.5 billion pace and we can use 13 billion for our own domestic gasoline, then we'll continue to need exports and some of that capacity going to fructose to be able to handle the capacity. Otherwise margin has got to in my opinion take production out.

Right, okay. My second question then, it seems like most people have gotten around to the other thing, was if you look like a fairly significant share repurchaser during the quarter. Am I mistaken, or is that correct?

Nick?

No, there was not.

There wasn't?

No.

Okay.

And Nick, there was not an insignificant share repurchase.

No it was not, it was just our normal activity for a compensation program.

Oh, I see, oh okay. I thought there was a big boost there and I was wondering about that.

No.

Which would lead me to the second half of what that question would have been was M&A opportunities, are you seeing a lot of stuff? It didn't seem like there was a lot of activity. I'm wondering, are asset prices just a little too high, you think, or just not enough attractive opportunities that really fit strategically with your organization?

Nick, why don't you take that one?

Well, you know I think we are focused on growth as a company. At the same time, we are value seekers and so those areas where we feel there is the right combination of both growth and a value opportunity, we've said we'll try to do that. If we're in a situation where you've got full value or more than full value and even the most attractive sector, we really have kind of I guess the DNA that says we overpay for something, we suffer that a long, long time. And so we'd rather be patient and do the right thing when it meets both of those factors, as opposed to growth for growth's sake.

So no big plans in the fourth quarter?

Well I wouldn't say no big plans, we're just continuing to look at what comes along and just leave it at that.

Okay. Alright, now Nick will you be available the rest of the day?

Yes.

Oh okay, super. Thanks guys.

Okay, thank you.

Bye bye.

We've got one more question here, and then we'll wrap it up.

Your next question comes as a follow-up from the line of Farha Aslam representing Stephens Incorporated. Please proceed.

Hi, thanks for the follow-up. Three quick housekeeping items -- one, Nick what do you expect interest expense in the fourth quarter?

Well, that's a great question based on where grain prices go. I wouldn't even hazard a guess. We've seen corn today both up a little strong, we're testing maybe the $6 limit. Farha, it's a little early in the quarter for me to really feel I can nail that number. The long-term debt piece will be fairly static. You've kind of seen over time that number hasn't moved around a lot. But the big driver for us on a quarterly basis is short-term interest expense, and I think it'd be foolish of me to even attempt to try to answer that. So good try on your part, though.

Okay. And then my second question is the other income was up pretty substantially in the third quarter.

Yes.

I was wondering what drove it and do you expect it to continue in the fourth quarter?

Mike, I've got that if you want to, or?

Yes, go ahead.

Okay. So other income was $3.6 million for the quarter and that was sort of proven at one point $1 million over the last year. That was really a number of little things. Part of that was due to real trust earnings, part of it was the sale of Hyperflow unit and part of that was rail end of resettlements, and part of it was our dividend from Iowa Northern. So it's those four middle pieces there, and of course we expect the dividend to continue. And the sale was a one-time event, so you have to kind of piece through what I've just said there a little bit.

Okay. And my final question is on Lansing Trade Group. Earnings this quarter were below the year-ago period. Is it due to one-time items or will they continue this quarter?

This year was not really due to one-time items. I would say it'd kind of the ordinary course of business, and you know we're quite pleased that each quarter we've been profitable in Lansing, and directionally like where we're going, feel optimistic about the direction that we have. Fourth quarter I would think would be reasonable, so it was a myriad of things, it was down a little but profitable. I like the trend that they're on and I like the fact that some of these old issues that we have were put behind us quite some time ago.

Okay, so you would expect next quarter to be similar to current quarter's, all else being equal?

You know and it's a training business, and we got several months to go and you get volatility. Trend-wise, they're on an upward trend so I'm hopeful that it would be better at this point in time.

Okay, that's very helpful. Thank you.

Yes.

Ladies and gentlemen, this concludes the question and answer session for today's call. I would now like to turn the call back to Mr. Mike Anderson for closing remarks.

Thanks, Katina and thank you all for joining us. I appreciate the good questions. The next conference call is scheduled for Wednesday, February 9th at 11 o'clock a.m. Eastern time to review our 2010 four-year results. I hope you're able to join us at that time, and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.