Andersons Inc (ANDE) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter year end 2010 Andersons earnings conference call. My name is Derek and I will be your operator for today. At this time, all participants are in a listen-only mode. Towards the end of the conference, we will facilitate a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Nick Conrad, Vice-President of Finance and Treasurer. You may proceed.

Good morning, everyone. Thank you for joining us on the Andersons, Inc 2010 fourth quarter and year end conference call. As you know, certain information will be discussed today, which 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 US and internationally, and additional factors that are described in the Company's publicly filed documents, including its 34F filings and the Prospectus as 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. Though the Company believes that the assumptions upon which the financial information and its forward-looking statements are based are reasonable, it could give no assurance that these assumptions would prove to be. This conference call is being recorded and can be accessed on our website. Mike Anderson, Chairman and Chief Executive Officer, Hal Reed, President of our Grain and Ethanol Group, and I will be available for questions at the end of the call. Mike?

Thank you, Nick, and good morning, everyone. As we announced yesterday in the press release, our fourth quarter net income was a record $25.8 million or $1.39 per diluted share on revenues of $1.2 billion. This compares to the same three-month period last year in which the Company reported net income of $16.2 million or $0.88 per diluted share on revenues of $916 million. Revenues for the quarter were up due mainly to an increase in the average grain price, but were also impacted by volume increases in the grain and fertilizer businesses. Our 2010 net income was $64.7 million or $3.48 per diluted share on revenues of $3.4 billion. This was our second highest annual earnings. The prior record was $68.8 million in 2007.

Last year, the Company reported net income of $38.4 million or $2.08 per diluted share on revenues of $3 billion. The vast majority of the full-year revenue increase was caused by volume increases in both our Grain and Ethanol, and Plant Nutrient Groups. To fully understand the total Company results, let's take a look at each of our five business groups.

Start with the Grain and Ethanol Group, which had an outstanding quarter-end year. The Group achieved record operating income of $38.6 million in the fourth quarter versus $27.8 million a year ago. The Grain business led these results as it benefited from a considerable increase in space income. The sizable wheat basis loss realized in the third quarter, that we said would return, did return. Additionally, even more space income was earned as basis for all grains moved in the right direction.

There was $6.7 million in income received from the net reversal of reserves following the settlement of a long standing collection matter. Also the income from Lansing Trade Group this quarter was almost double the prior year's. The Ethanol business returned to profitability after a small loss in the third quarter. The quarterly Ethanol results, however, were well below the prior year. As in the fourth quarter of 2009, the Ethanol business recorded its highest ever quarterly income. Total fourth quarter revenues for the Group were $913 million. This includes $303 million of Grain and Ethanol sales made by the Group in accordance with origination and marketing agreements between the Company and its ethanol joint ventures, for which it receives a fee.

In the fourth quarter of 2009, the total Group's revenues were $722 million, and included $236 million in ethanol joint venture sales. The Grain and Ethanol Group's full-year was exceptional. It's operating income was a record $81.4 million in 2010, which compares to $51.4 million in the prior year. These results were led by the Grain business, which achieved a best ever performance due primarily to very strong space income. The Ethanol business had a solid performance as well, despite the volatile ethanol margin seen by the ethanol LOCs during the year.

Lansing Trade Group finished the year very strong, which led the 2010 income from this investment to be more than 2.5 times the 2009 level. Total 2010 revenues for the Group were $2.4 billion, which compares to $2.2 billion reported in 2009. These results include $928 million and $806 million of Grain and Ethanol sales for 2010 and 2009 respectively. At the end of 2010, the Grain and Ethanol Group completed the acquisition of B4 Grain, which includes two owned and one leased grain storage facilities in Nebraska. The facilities provide the Company with a 3 million bushels of additional storage capacity and expands its operations into the Western Corn Belt.

The Plant Nutrient Group achieved record operating income of $8.9 million during the fourth quarter, in comparison to an operating income of $1.7 million in the prior year. Fourth quarter revenues for the Group were $159 million, which is up considerably from the $111 million reported last year. The significant income improvement this quarter was due to material increases in both volume and margin. Volume increased almost 20% due to excellent fall application conditions and the continued restocking of the retail fertilizer pipeline. Gross margin increased primarily due to price escalation in all three basic nutrients during the quarter. The Plant Nutrient Group ended the year with record operating income of $30.1 million. In 2009, the Group reported operating income of $11.3 million. Revenues for 2010 and 2009 were $619 million and $491 million respectively. The Group's significant income improvement this year was due primarily to a 30% increase in volume, as gross margin was only up a modest amount in comparison to the prior year. The higher revenue this year was also due to the volume increase, as there was actually a slight decrease in the average selling price.

During the fourth quarter, the Rail Group had revenues of $22 million, and lost $1.1 million. In the same period of 2009, total revenues were $21 million and the operating loss was $1.5 million. The average utilization rate for the quarter was 80.5%, which was up significantly from the 70.8% experienced last year at the same time. There are three primary reasons a larger income impact is not seen from this utilization increase in the fourth quarter. First, the average lease rates experienced downward pressure due to continued system-wide idle car inventory. Also, due to a defect, certain cars were written down to scrap value resulting in a $1.2 million loss, and further, almost $1 million was spent on maintenance and freight to put cars back into service during the quarter, the benefits of which will be seen in future periods.

The Rail Group had an operating income of $100,000 this year on revenues of $95 million. Last year, the Group reported a loss of $1 million on revenues of $93 million. The 2010 results include gains on sales of rail-cars and related leases of $5.5 million, of which $4.3 million is attributable to the scrapping of rail-cars. In 2009, gains of $1.7 million were recognized. Gross profit from leasing was down considerably for the year due mainly to lower average utilization rates, the corresponding increase in storage expense from idle cars, and lower average lease rates. The average utilization rate for the year was 73.6%, which compares to a 78.1% rate in 2009. The Group ended the year with a utilization rate of 81.7%.

The rail fleet ended the year with approximately 22,500 cars and locomotives, which is below the 23,800 units at the end of 2009, due to the purposeful scrapping of cars. The railcar repair business returned to profitability in 2010 as revenue increased by more than 50%. The Iowa Northern Railroad, which the Group invested significantly in, showed solid performance during the year and provided consistent return each of its first three quarters.

During the fourth quarter, the Turf and Specialty Group had an operating loss of $1.4 million, which is comparable to the $1.1 million loss reported in the prior year. It is typical for the Group to incur a loss in the fourth quarter due to the seasonality of its lawn business. Total revenues were $18 million for the quarter, compared to $19 million in 2009. For the full year, the Turf and Specialty Group's operating income was $3.4 million on $124 million of revenue. Last year, the Group had record operating income of $4.7 million on revenues of $125 million. For comparative purposes, I want to mention that the 2009 results included a $1.3 million nonrecurring gain. Also, our cob business had record earnings in 2010, as they've leveraged the development of proprietary products similar to the lawn business.

The Retail Group had an operating loss of $100,000 in the fourth quarter. In the comparable period last year, the Group's operating loss was $700,000. Last year's fourth quarter results were impacted by the inventory liquidation at the Lima store, which we closed. Total revenues of $43 million for the quarter were up approximately 3% from the $42 million reported for the same period in 2009. Revenues increased in part due to the expansion of the grocery and specialty food sections at three of the stores. The Group's full-year operating loss was $2.5 million in comparison to a loss of $2.8 million in 2009. The Retail Group's total revenues of $151 million for the year were 7% below the 2009 total of $162 million. The majority of the revenue decline relates to the closing of the Lima store. Now I'll turn the floor over to Nick for his treasurer's comments.

Thanks, Mike. Turning to taxes for the fourth quarter 2010, the Company's effective tax rate was 36.3%. For the year, the Company's 2010 effective tax rate was 37.7% up 2% from the 2009 rate of 35.7%. This increase is primarily attributable to a one-time increase to income tax expense recorded in the first quarter that resulted from the Patient Protection and Affordable Care Act. The 2010 income tax charge related to this legislation is $1.4 million. We are projecting our 2011 tax rate to be 36%.

Next, as to interest, for the fourth quarter 2010, the Company's interest expense totaled $5.9 million, up approximately $1.2 million from the same period of 2009. Interest expense for the full year was $19.9 million, a decrease of $823,000 compared to 2009, all of which is from reduced long-term interest expense. The Company's 2010 average short-term borrowings for all of 2010 were $63.9 million, up $47 million from 2009. The fourth quarter average short-term borrowings were $215.2 million. For the same 2009 period, the Company had no short term bank debt outstanding. Average short-term investments for the fourth quarter were $22.1 million compared to $103.9 million in 2009 fourth quarter.

For the year, the Company's average short term investments were $50.8 million down $12.9 million for 2009. Earnings before interest, taxes, depreciation and amortization for the fourth quarter 2010 was $57.6 million versus $40.7 million for the same period in 2009. For the full year 2010, EBITDA was $162.7 million, the Company's best ever, and an increase of $45.7 million from last year. The 2010 fourth quarter's pre-tax earnings include $10.5 million made in equity and earnings of affiliates versus $15.1 million in the same period last year. Equity and earnings of affiliates for the full year of 2010 was $26 million up $8.5 million from the 2009 year end. Other income was $2.6 million for the fourth quarter, an improvement of $631,000. For 2010, other income was $11.7 million compared to $8.3 million last year. The EBITDA has been adjusted for the non-controlling interests.

Turning to the balance sheet, at December 31st, current assets total $1.1 billion, an increase of $351 million from a year earlier balance of $786.8 million. Inventories ended 2010 at $647.2 million, up $239.3 million from last year. Grain inventories were up $228.6 million. Plant Nutrient inventories were up $10 million. Turf and Specialty inventories were up $918,000. Retail inventories were up $350,000. Rail inventories were down $543,000 as compared to year end 2009. Commodity derivative assets current ended the year at $226.2 million, an increase of $202 million from last year.

Since the 2009 year end, the Company's cash and cash equivalence decreased $116.7 million, ending the year at $29.2 million. This decrease in our cash position was driven primarily by the increase in inventory levels. Restricted cash was up $9 million at year end as a result of the Build America Bond. The bond is for capital improvements at our Indiana facilities, which are planned for 2011. Trade and notes receivable totaled $152.2 million at year end, up $15 million from 2009. Grain and Ethanol receivables were up $28 million. Plant and Nutrient, Turf and Specialty and Rail receivables were down $9.3 million, $2.4 million and $1.3 million respectively. Retail receivables ended the year about unchanged.

Margin deposits at year end were $20.3 million, a decrease of $6.8 million. Networking capital at the end of the year was $301.8 million, a decrease of $5.9 million from 2009 year end. Total assets at December 31, 2010, were $1.7 billion compared to $1.3 billion at the end of 2009. Along with the changes in current assets, investments and other assets ended the year at $223.2 million, up $40.2 million from 2009. Commodity derivative assets non-current increased $15 million to end the year at $18.1 million, and property plant equipment was up $18.7 million for the year. Railcar assets leased-to-others net was down $10.7 million ending 2010 at $168.5 million.

Depreciation amortization totaled $38.9 million at the 2010 year end. Acquisition of business, purchase of property plant and equipment, and investment in affiliates for 2010 totaled $70.6 million versus $48.3 million for 2009. Railcar purchases and sales were $18.4 million and $20.1 million respectively through December 31st. Railcar purchases and sales for 2009 were $25 million and $8.5 million respectively. The Company ended the fourth quarter with $241 million borrowed against the short term lines of credit versus no borrowings at the end of 2009. Commodity-derived liabilities current were up $32.8 million from last year. Our long-term debt totals $276.8 million, a decrease of $31.2 million from 2009's ending level. Our total long-term funded debt to equity is 0.57 to 1. The Company's 2010 average interest rate for all long-term debt was 5.37% versus 5.77% for 2009. At December 31, 2010, the Company's total equity was $464.6 million an increase of $58.3 million from December 2009 year end.

We continue to enjoy good support from our bankers. We now have short term lines of credit under our syndicated facility that total $992 million. The Company entered into a restated loan agreement in December of 2010 with an additional amendment in January 2011, which increased our short term lines of credit by $605 million. The Company also has a long term line of credit under its syndicated facility in the amount of $115 million. The total lines of credit available under the Company's syndicated facility are $1.1 billion. Finally, on January 24th, we paid our first quarter 2011 dividend of $0.11 per share. This was an increase of 22.2% from our fourth quarter 2009 dividend. Back to you, Mike.

Thanks. Before we get to questions, I'll cover a few more points. Let me just start by saying how proud I am to see record earnings this year from both our Grain and Ethanol Group, and Plant Nutrient Group. Clearly, our full-year earnings are reflective of our solid position in the agricultural sector. This probably leads you all to wonder what does 2011 hold for our Company?

First, I expect our Grain and Ethanol Group to continue to do well. Although the space income levels being seen today can't continue indefinitely, the outlook near term is positive. I also see our Plant Nutrient Group having a good year as the demand for nutrients is high and acres planted are expected to increase based on current commodity prices. I see our Rail Group benefiting from the gradual climb they have seen on utilization rates. This along with other factors could lead to a considerable income improvement for this group in 2011. Further, I believe our Turf and Specialty Group's propriety product and expanded product line strategy, hoping its lawn and cob businesses will likely lead to continued earnings growth. Again by highlighting some of the things we accomplished during 2010, demonstrate our continued commitment to grow and develop this Company. Within the Grain and Ethanol Group, we completed two acquisitions and increased storage capacity by about 2 million bushels of existing facilities.

First grain business acquisition, O'Malley Grain, a food grade corn handling and cleaning business, has allowed us to forward integrate into the food corn value chain, which is a natural extension of our grain procurement and storage business. The second grain business acquisition, B4 Grain, which was just completed at the end of the year, has allowed us to expand our operations in the West. These acquisitions have had the added benefit of allowing us to expand our customer base for both our direct ship program and risk management tools. Our Rail Group also ventured into new territory when it made a significant investment in the Iowa Northern Railroad. We are seeing good dividends from this investment both literally and figuratively. The Rail Group also expanded its repair shop base to where appropriate diversified of underperforming assets -- I'm sorry, divested of underperforming assets.

As always, we're already reviewing possible expansion and acquisition opportunities for 2011, and I continue to be excited about what our future holds. That concludes my prepared remarks. Nick, Hal Reed, President of the Grain and Ethanol Group, and I will now be happy to answer any questions you may have. So Derek, we'll turn it back to you.

(Operator Instructions) We have our first question coming from the line of Farha Aslam from Stephens, Inc. Please proceed.

Hi, good morning.

Good morning, Farha.

Congratulations.

Thank you.

I'm now faced with a very high-quality problem of trying to figure out how much of these amazing earnings are sustainable and maybe we can focus on the Grain Group. In terms of the wheat basis recovery versus -- how much of that did you think you got back that you didn't have in the third quarter and the fourth quarter, and how much is still to come?

We'll let Hal handle this. This is the first time Hal's joined us for the Q and A, and given the significance of the business and the earnings, felt that was appropriate. So Hal, have at it.

Thanks, Mike. Thanks, Farha. The question, all of the loss that we realized in the third quarter came back in the fourth quarter and then some. So that wheat loss all came back in the fourth quarter.

Great. Then you're earning a higher income on wheat because of the CME's new wheat system. How much of that will continue going into the first part of next year in terms of higher rates?

There is a mechanism in place at the CME which raises and lowers the rates with each contract month that comes out there. We can talk about that offline; it's a lengthy subject. But at this point in time, the current rates would extend into the next contract month, which is going to roll from the March to the May. So we don't see any immediate change in the March or the May rates of income for us. At this point in time, the tracking from the May to the July would assume that they would continue as well, but that changes on a daily recording process that's done at the CME.

For the first part of the year that should be sustainable.

Wheat seems sustainable through the first half of the year, yes.

Okay. Then when you look at your --

Farha, this is Mike. I want to add one thing. Total agreement and feel really positive about this, but just the reminder, any of these things have got supply and demand wrapped in. Tomorrow some news could develop that would suggest that demand for wheat would increase and then that could increase the appetite for people to own that wheat, which could change those spread relationships. Don't see that today, but the outlook looks real healthy in the near term. There's always that question of, well, what if something unpredictable happens.

Of course. Then when you look at your grain storage, this year, Hal, versus last year, what's your total grain storage this year versus last year, and how much of a turn can you get on that grain storage this year maybe versus last year?

As Mike indicated, we added a few facilities at the end of the year. We added 2 million bushels of space to existing facilities. We're slightly over 100 million bushels of total capacity, including our temporary piles. And the mix of the stocks between corn, wheat, and soybeans makes a big difference as to what we earn in space incomes. Our percentage of wheat has been relatively stable over the last two years. Given the current stocks and the current growing crop, that's currently under snow, we don't see the ratio of those group commodities changing. However, I think as we've talked in the past, the board of trade, CME spreads in both corn and beans, have been much more volatile than the wheat spreads. And so there's a lot of volatility in the earnings segment for corn and beans. As we suggested, the wheat looks relatively consistent for the first few months of the year.

So when you look at your income opportunities in 2011 versus what you've achieved in 2010, excluding that reversal for the collection issue, do you think you'll be able to deliver comparable results in grain. And then some commentary on ethanol would be great.

Are you going to let me know what the weather's going to do from April through August? It'd be an easier question to answer if you could. We expect to plant close to 90 million acres of corn this year in the United States, and 90 million acres of corn for both the Plant Nutrient Group and the Grain division and Lansing Trade Group is a good thing. So if we managed to have a good planted crop, good growing season and work through some of our shortage issues at the end of the crop with very low stocks report, we should have a pretty good year. But again, it's based upon a 90 million acre corn crop and all of the things that go into making that crop work well.

On the ethanol side, as you are aware, we probably got a little over 30% of our year crunched. We've indicated that to you before, and we've also indicated that we see margins, particularly in the second and third quarters, coming under some pressure. We see the short corn carry out stocks potentially creating some problems in certain regions; and it then will become a comparison between the price of oil and gasoline and the price of corn and the cost of making ethanol. So at this point in time, the relationship has margins around the break-even in the ethanol world depending on where your plants are. We do see some pressure in the second and third quarter for ethanol margins given the short supply of corn.

One last question, Mike, and I'll pass it on. On your Plant Nutrients Group, clearly you had a terrific quarter, and can you talk about what you think volumes will do going into the first half of next year and what margin opportunities you see there?

Yes, I think part of that was a good finish. We had almost an exact flip in the fall 2010 from 2009 with weather; and it couldn't have been better for application; and so one could maybe wonder if application rates and volume -- and we had wonderful volume. You could wonder did we steal from 2011 for 2010; again, we don't think so. Again, Hal mentioned weather, assuming we have reasonable weather. Frankly, there were periodic spot shortages of product that if we'd had the product, we likely would have had more volume. I'd say our outlook for the first half of the year, we would consider to be positive and good.

The pipeline to the retail sector is starting to refill at this point in time. I think we're going to be -- and the producers are shipping. I think we're going to be in reasonably good shape, from a volume perspective, from an inventory perspective when we get to the spring. So the prospects for volume look good, and then of course next year's a whole other ball game. Underlying fundamentals are positives. We need to produce more grain. As long as that's there, we would expect the conditions to be ripe for good application rates into the fall.

As far as margin goes, we make -- we have the opportunity to make income on margin from our basic handling margin as well as appreciation from inventory, and of course, as we experienced before, the risk of depreciation. Fertilizer prices have continued to be strong. I'm not going to be here and predict exactly what they're going to be, but again, the outlook, with the need to grow more grain, even though there's not any more additional acres out there or available acres at the present time, would suggest that the combination of US demand, world demand will keep prices reasonably strong. The feeling today is quite a bit different than in 2008. Underlying -- in 2008, there was underlying prospect of increasing demand for protein in the world, but there was that bubble element; oil just taking off like crazy. Things could turn tomorrow, but it just feels stout. So we're looking for a good year in the Plant Nutrient Group.

Thank you for your commentary.

Yes.

Your next question comes from the line of Mike Ritzenthaler from Piper Jaffray. Please proceed.

Hello guys, congratulations on a great quarter.

Thanks, Mike.

You're welcome. On the heel of the [Wazbe] cusp this morning to the ending stocks, do you think that leaner stocks will continue to support grain prices, and what your thoughts are on what that translates into for basis, not just for corn, but wheat and everything else?

Yes, just for the benefit of others this morning, the report that Mike references was a grain carry out, USDA Grain Carry out Report, basically took corn ending stocks down to 675 million bushels. A dangerously low level, I think is how people in the industry would describe it, and some might also almost say an impossible level; and really, the work of the market here is to try to figure out how to ration the corn to make sure we get through this year with enough ending stocks in the pipeline to make it all work. So we continue to suspect there'll be pressure, upside pressure, on corn prices. And it's the market's job to buy as many acres of the commodity as possible and get as many acres of the most valuable product planted; and it's doing a good job with that. I think we're seeing our farmer base excited about getting back into the fields in the spring, although it's awful early. That report's just going to keep pressure on both of those things to happen. It's a lot of anxious folks ready to get into the fields for the spring in this coming year, but prices should remain under some upward pressure.

You think that could translate into more than 90 million acres? That's what people are budgeting for, across the ag sector. There may be some opportunity for low 90 millions.

Yes, you've heard the same as we have. People have talked up to 92 million on corn. It's a balancing act. We can't create any more acres. There isn't any easy way to pick up the next million acres that doesn't exist. It's a balance between very large shortages in cotton and high prices in beans as well. So I'm convinced, based on our direct farmer contact, that there will be as much ground planted as available this year. They're anxious to get into it. Corn is king. Farmers love to plant corn. I do think corn will be a beneficiary, especially at near $7 levels. So we're looking to get the full slate of planting done if the weather will help us get into that point.

Great. And then you guys mentioned that second and third quarter ethanol margins, probably on EBITDA per gallon basis, looked like they might be coming under a little pressure. Do you think that, that would free up some acquisitions opportunities in ethanol plants -- or maybe not acquisitions, but other equity ownership stakes in that and ethanol plants, as you also look at other grain opportunities?

That's a great question. As we've indicated, we really do like our model of being equity investors and owners, but also being the operators and having the income base of the originations and risk managements and sales and marketing. We continue to look forward with that model. We have literally looked at plant opportunities almost on a continual basis for the last three years. Yes, we do believe that the downturn will provide some additional opportunities. Obviously there's some stronger hands out there and there's some well-healed plants, because people have made some money in the last two years, but we do agree with you, there will be some opportunities coming this summer and into the fall and we're preparing for those.

Excellent. Thanks.

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

Good morning. Great quarter.

Thank you, Heather.

Thanks, Heather. I see you already popped up expectations for us for next year. Thanks.

Well, you seemed to be able to beat any bar anybody sets for you, so I thought I'd set it higher.

That was a good response.

I had problems getting in the queue, so I think I missed some commentary. So I apologize for any repeated questions. Wheat basis significant contraction in Q4 as well as in Q3, but it looks like going into Q1, that there is still a meaningful gap that's begun to narrow. And the VSR looks like it's set to go up again. So I'm just wondering, I know you said that it can't continue indefinitely, but would you expect strong basis trends to continue for--over the intermediate term, I should say?

Thanks, Heather. We were, I think, in our Toledo facilities about 40 under at the end of the year for our wheat basis. And we have seen some improvement since then. Those were posted bids out there. I also agree with you that the current calculations for the next uptick in VSR for one more tick appear to be in place. So you're right in both counts. Basis was a little bit weak at the end of the year, has improved in to 2011, and the calculations for VSR on one more tick at this point in time are leaning positive.

Okay. What is your bias right now? I know it had previously been to hold as much wheat as possible given cheap basis, but has that bias changed at all?

No. I guess is the simple answer. We continue to add space.

Okay. And as far as -- have you seen any pickup in demand for the sulfured winter wheat given just for feed use and all, given high corn feed costs, or is demand for that quality wheat still relatively lackluster?

We have not seen good quality wheat move into the feed markets, no. There is always on an annual basis some off-quality wheat that goes into those feed markets. Haven't seen much change with that ratio or that amount in this year or previous, but clearly the good quality wheat is much higher priced and reserved for the food grade work.

Okay. Two more questions. Mike, back to you. In Q4, the volumes were up strong, and so I'm just wanting to clarify your earlier comment that it seems like part of it was just a very easy comparison with Q4 '09. Would you expect, given farmers' desire to maximize yields, would you expect volumes in Q2--or in Q1 and Q2 to be strong as well year on year?

Yes, we would. Q4 2009 was really low, weather factors and whatnot. Q4 this year was strong, a combination of the economics and the weather, but the basic economics today support -- I shouldn't say economics. I should also say agronomics. We go back to 2008, we consistently said that despite high grain prices, we expected farmers to pull back on phosphate and potash, because of the ability to mine the soil and there was so much volatility that we didn't see the -- we didn't predict the drop in grain prices and then the collapse from the fertilizer. But the fact is the farmer said, no, I'm not going to put as much down. We're not feeling that at this time this year. So if we have reasonable weather, we would expect good volume this spring. And again, next year, assuming things are looking strong into the fall, we'd expect that to continue.

Do you have an estimate of what application rates were and can relative to a "normal year"?

I really don't know. I would tell you this, that with the wet spring that we had, we do know that we lost some tonnage there. I really -- I don't -- I'm not prepared to answer that right now, so I'd better not. I know that -- it wasn't just application rates. We had all that rain. We had nitrogen put down that leached off. So it was a blend of application rates, and I think some lack of effect. There was the intent to apply. I'm not in a position to answer. I just don't know off the top of my head, Heather.

Okay. We've heard that where the corn is higher quality this year, that you are getting -- that the ethanol yield per bushel has moved up some. Are you all seeing that?

We've seen slight increases, slight improvements. It is not dramatic. The hard thing about it is we are constantly working on the plants to improve the conversion ratios and efficiencies. There's so many things, dials that we're trying to just tweak a little bit. It's hard to say exactly what it is. There is no question that the better corn is having a good impact even if it's just the fact that it stores better for us for a longer period of time, to make sure we have better corn throughout the year. It's a positive. It's just not easily identifiable as to specifically how much.

Finally, on expansion plans, you're buying these elevators, you expand at fertilizer but given the increased globalization of the grain trade, do you have any ambitions over the near to intermediate term to go out more globally?

In the near term, Heather, our primary focus is in the United States. We don't have much penetration there. We're also, as you all know, 50% owner of the Lansing, which primarily operates in the United States, but also has a Geneva office and is trading grains into foreign countries at the present time. We would expect that to continue. But as far as having physical locations in non-North America or outside North America, although that's an aspiration for a longer term in the nearer term, next 12 months I do not see that happening.

Okay. All right. Thank you. Congratulations again.

Thank you.

Your next question comes from the line of Eric Larson of Soleil Securities. Please proceed.

Yes, good morning, everyone. Congratulations. I wasn't sure I could get in the queue here. I was having trouble. I don't know if it's my phone or what's not working here, but anyway --

Eric, I told them not to let you in. I don't know how you snuck in there.

Mike, I've got ways around this. You're never going to keep me off of it.

Thanks for your comments, by the way. Good to hear from you.

You're welcome. I don't know where the question goes to here, but it goes back to the basis. We've obviously seen phenomenal cash prices; and in some of the markets, we're actually seeing negative convergence on the newer contracts. Can you comment how you work your way around through that?

I think the inverse issue that we all see occurring with the summer contracts is certainly a big concern for us, but at this point in time, since the harvest period, we haven't really seen inverses or negative convergence in the corn or being marketed. As we discussed earlier, the wheat market has continued to move towards convergence. It is something that's been on the horizon even since the time of harvest for us to look forward and try to make sure we don't get caught in that trap of the inverses in the summer; and we spent quite a bit of time figuring out how to not do that and how to make sure we've made our decisions so as not to get trapped in those positions. So far today, it appears as though the demand and the basis levels, at least through the spring and into the early summer, should be more normal and still moving in our direction. So we're very aware of it and concerned about the late summer/early fall, but it also provides some opportunities to move dislocated grain and early new crop grain from the South into short markets. We like those opportunities as well. That's a logistical play we like to be involved with.

Maybe I can come and sit on your desk for a few days, Hal, if you guys would invite an analyst to do so. I'm teasing, of course.

We'll find you somebody a lot smarter that does that every day.

Yes, I know. It is a real trick in today's market, and you get these disequilibrium's. I think we had some of this in 2008, as well. I remember it in '95 and '96 and I certainly remember in '87 and '88. This is something you expect; it's just not a situation you deal with that often, so it's not easy. The next questions that I have is looking -- Mike, we haven't focused on the rail business; and I go back a couple years ago, and you had demonstrably higher income in rail. I guess at some point you're going to start getting some leverage on this. What I'm trying to figure out is where that inflection point is. Now you're, I think, you're at 81% utilization. I think that's where you closed the year, 81% and some change; I think that's correct.

That's correct.

And you bottomed around 70%. Again, I'm just using a round number.

Yes.

I would suspect that at some point here, you're going to get that snap up the yield curve here, or however you want to talk about it.

Eric, I like that thought of yield curve of inflection point. Frankly, we're right there right now. We're at that point where as opposed to fighting to keep our heads above water, it is above water; and the next car that gets put out in the next percent of utilization that goes up, we gain.

If you looked at our earnings over the quarters, the first couple quarters were actually better than this last quarter in actual earnings, but the quality earnings -- the quality in the sense of sustainability weren't as good, because we had income that was very purposely generated from scrapping of older cars that provided cash and was a boost. Basically, we didn't have that to speak of here in the last quarter. And we had, I mentioned in the call here, a couple other things, the costs of getting cars prepared to go back in service, the freight, the write-down we had on some cars. I mentioned that so that you can get the sense of things are turning back north. So we definitely feel that inflection point coming and will boost us up.

I also mentioned average lease rates were lower. So we have the benefit of cars going off lease that are stored being put back on lease with better utilization; and something's better than nothing; and we've seen the storage rate. We also have cars coming off lease that, in general, not always, in general have had, in order to keep them out there with this huge overhang in the US of idle cars, we've had to drop our rates a bit in order to encourage the re-leasing.

It really feels like, and this is a very average statement, that we've bottomed out on rates. About a year ago -- I can't remember the exact time I said it, if it was this-time-of-year ago, I think it was where I said I think we've bottomed out on the utilization. It just felt like it stopped. It feels that way on rates, also. And you're even seeing some announcements of some new car construction. We're a long ways away from the rates that are out there in the spot market, that, in my opinion, justify any big resurgence of building, and that creates some room for rates to escalate.

I don't feel that just rebounding up fast, fast, but it feels like the combination, the demand, fewer cars idle, higher steel prices, that we got the double benefit of cars going back in service; and we'll start getting a little uptick in lease rates from where they are today. Keep in mind, though, we'll also have some cars -- some cars will come off lease this year that likely are rates well above where the current market is. We have to work through that for a little bit here, but to your main point, I think this, we've finished the down year; and we're at that inflection point year; and we should see a nice pop this year. Not anywhere near what it was a few years ago when we were at 93%, 94%, 95% utilization and much stronger rates. I suspect we'll get back there again.

Right. Yes , I get that same sort of feel. Let me then drill just one step further into that. Even if utilization rates or -- even if lease rates didn't improve, let's say, demonstrably from here. You've got to be getting to the point where your extra expenses, that's getting these cars back into service, you are having these things stored on some idle lines, whatever the -- you've got -- if you could just get rid of the bulk of that additional expense, even with today's utilization rates, there's got to be a point where that starts slowing down and ending; and you can even make more money even if rates don't tick up that much from this

The basis out -- I mentioned we had about $1 million of putting cars back in service; it was over $1.5 million, I think almost $2 million in the -- yes, it was $2 million in Q3 of putting cars back in service and freight and whatnot. So we'll have more of that as we put more cars in. Yes, that gets behind you and it's clear sailing. There's no question that we -- well, I shouldn't say no question. A year ago said, it really felt like we hit the floor on the utilization. It felt like we hit the floor on the rates. We're at that inflection point. It's going to be a nicely improved year for the reasons I talked about and what you mentioned.

Okay. That sounds great. Thanks for the answers, and good luck.

Yes.

I'll pass it on.

Thank you.

Your next question comes from the line of Brent Rystrom from Feltl & Company. Please proceed.

Thank you. Congratulations as well.

Thank you.

A couple of quick questions for you guys, maybe more on the grain side, as held. Where do you think the price ration and demand destruction is going to hit first? Is it going to be the exports? Is it going to be ethanol, livestock, what's your gut tell you?

Hal?

Yes, at this point in time, I think we're seeing probably a little bit more pain in the feeding of the livestock market than we are either in exports or in ethanol. Obviously the ethanol piece is highly dependent on the price of oil and the price of gasoline. So any dramatic change in the price of oil or gasoline could make the ethanol pain point a little bit sooner. I don't think we're going to see a dramatic change in the export piece. At this point in time, we're primarily into food use, base food use and government's purchase of commodities, so I think the exports are likely to be the last piece. That would be the order I would put them in.

Hal, an immediate follow-up question on that. Any thoughts on this -- yesterday's coming out saying 12.5 million of the 35 million acres of winter wheat in China look to be under severe stress. Does that feel like a repeat of Russia and Kazakhstan and Ukraine last year, or is it less dramatic than that?

Yes, the China report yesterday that you referred to obviously was a bit of a shock to the market. It was a relatively new revelation. Market reacted obviously, as you saw; and I think it's an ongoing theme that it's hard to get very good data out of China. Usually the data that comes out is a little bit older than some other data we would get from other places. It's always taken with caution whether it's good news or bad news. I would agree, it appears as though they're having certain difficulties with that wheat crop; and it's going to be under a close scrutiny from the market for quite some time here.

Just a little color, maybe not directly answering those questions. Hal answered them. We've gotten virtually every one of the commodities we're talking about into a situation where the annual demand has been outstripping the annual supply. So we've been drawing down stocks, and there is land out there around the world, okay? And there's more productivity out there around the world. So there's even land in the US. You can get into arguments around what should be done with the conservation reserve program. Even with that land coming in, in yields, we're so tight that even with good crops, it feels like you'd have to have a couple good crops to get to a point where you have, not comfort, but just not as much concern. So we're just in the situation where it looks like for at least for a couple years here, we've got to be really attentive to, just as you said, to talk about demand destruction and its impact on both prices and spread relationships and inverses and trading and volatility. But also it's going to take a while, I think, to recharge the pipeline even if we have a couple years of good crops.

Looking at corn, I see -- as a farmer, I see the trade off between corn and soybeans looking pretty decently now. Soybeans looked incredibly profitable, but corn even more so. When you look at what's going on with what's come out of the National Cotton Council over the weekend, probably 2 million acres in the South coming out of savings in corn, where do you think that couple million to 4 million acres of corn is going to come from?

That's a good question.

Just when you said 2 million to 4 million, we've been pretty consistent. I just wanted to clarify, we've not been a 4 million. We -- (multiple speakers)

I'm saying the estimates out there are someplace in the low 90,000's.

Exactly, but -- (multiple speakers)

I know you're not saying it, but the world's talking about it.

Yes, go ahead, Hal.

I think it's a combination of a whole lot of things. I think now this severe winter weather could cause some of the winter wheat acres to go into corn. There always is a little bit of that, that happens. If you look at the last few years, just given the weather conditions, especially last year, we did have some acres that went unplanted last year, probably a larger number than we've seen. Some of that could come into the fold. What the cotton folks are coming up with relative to increases in cotton acres in the South seems like a real big number to me as well. So I'm not convinced that, that number is entirely there. I think it's just small tweaks in four or five different places to get the additional 2 million acres or so of corn that we think will be coming.

My final question is more in the Plant Nutrient Group side. I think you said earlier that in response to some of these questions that you expect volumes to be up for that Group in 2011. When I look at where -- particularly ammonia or [dath and math] is pricing out now through spring, you're looking at prices on average month-over-month that are going to probably run 38% to 45% higher year-over-year. So if you've got a volume increase and you've got price increase in the market like that, you know this should be another substantially higher year for the Plant Nutrient Group. I would guess you've got to be gunning plus 25% plus 35% type revenue growth; is that out of the ballpark?

You said substantial higher year. The revenue calculation I can equate to, but how that translates through into net income is a different ball game, because you made the point of where prices are already.

Yes.

So there's an element of volume that comes in on top. What we have doesn't necessarily get the appreciation. In the fourth quarter, we added a nice appreciation this year, which was a major factor in our fourth quarter results. So it's setting up good on volume. Now, next fall's volume, too, it was ideal. We ran into some situations of out of stock, but that was about as ideal a fall condition as you could have. I wouldn't necessarily predict that we'll have the same conditions next fall, so if prospects--(multiple speakers)

Probably a stronger first through third and maybe a chance for a weaker fourth.

Yes, and then the issue around margin is another issue that's not been determined yet.

I guess the final option to that, Mike, would be, adding curiosity, any answer -- why is potash lagging so much in price compared to phosphorous and nitrogen?

Yes, I'm going to duck that, because I don't feel I'm really necessarily the -- yes, I'm just going to duck that question. I don't really have a solid perspective on that.

All right, thanks, guys.

Your next question comes from the line of Steven Share from Morgan Joseph. Please proceed.

Good morning.

Good morning.

Congratulations. Just a housekeeping item, the equity from affiliates earnings line, I was really surprised of how high that was. I was under the impression that, that was mainly an ethanol operations. And just a little bit of Lansing, did Lansing have a blowout quarter, what made that number much higher than maybe some had thought given, you said, ethanol would be at a nominal margin this quarter.

On that again, although there's a couple modest things that are relatively small, other than ethanol and Lansing, the primary factors are the three ethanol JVs and Lansing Trade Group. The number was $10.5 million for the quarter. We said we were just modestly profitable in ethanol. It was about roughly 25% ethanol, 75% Lansing plus or minus; and Lansing had an extremely good quarter and quite a good year. There was the two-year period where, among other things, we were working through some issues -- some significant negative issues on just a few items that really cost Lansing. And Hal told me earlier today, the earnings in Lansing last year, roughly 85% came from their core merchandising activities in grains and feed ingredients and a substantial amount from the facilities that they have. It is-- You're right, that number does stand out and primarily because of just an extremely good quarter in Lansing. Somewhat because we got back into the plus side on ethanol.

Okay, got it. And then on just one more housekeeping, the $6.7 million gain you had, I assume that's all pre-tax dollars, right? So if we kind of wanted to look at earnings without that, we have to tax effect that?

Correct. Yes. That's a good one. The one we talked about in the grain side, the reversal of the long standing issue that we had there that has come back into income that has -- it's a unique specific item that we felt was worth highlighting for your comparison purposes.

Yes, so I got that impact on GPS about $0.23.

You got it. You got it.

Okay. And then the last one, when I look at the Plant Nutrient quarter, it looks a lot like the quarter you had in December of '07. I was hoping you could maybe compare looking at that environment, looking at this year. In the second quarter of '08, it was a really great quarter. Are these similar? Do you think you can draw that line, that given where we are, we could be looking at a quarter like we had in June of '08 in Plant Nutrient?

No. There are some similarities in that we've had escalations in prices and we have good conditions. I would say what we had going for us at that point in time, there was a plus and a minus. The plus was borne out in the first half. The minus was borne out big time in the last half, where we took significant write-offs. We feel back then that we were too focused on the volume that we felt we needed to satisfy our producers both in the first half of 2008 and leading into the second half. So we had -- I would say, the position that we had were a higher volume at that time than we'd be willing to have on at this point in time.

We also had at that point in time -- and Brett brought up the question of what potash is in that -- we got up over $1,000 in phosphate. I guess that could happen again. I'm not necessarily going to say it can't. I'm not thinking that will necessarily happen this year. Let's just say things really run away to the upside. Then I think you do take the risk of the producers saying -- which we had several producers back then say -- I probably could make money where corn price is, but I'm just not going to pay that much. Just as you can create demand destruction on grain, you can do the same on fertilizer. You could have that dynamic. The big thing is we just won't be willing to take on the type of inventory and volume that would reward us if things kept going up, but can punish you so big if it goes the other way, so --

Okay. So you're going to play it a little bit closer to the vest than you did in '08?

Yes, but also make sure we have what we need to serve our farmers and maybe work harder to the extent that we feel we have to get out ahead with commitments to make sure we get it sold and whatnot. So I think your closer-to-the-vest comment is a good comment.

Okay. Then one last one and I'll pass it along. CapEx in 2011, any idea what that number should look like?

I'm sorry, what?

CapEx.

I'm not going to predict that. The last few years, CapEx have had some M and A stuff in there, so the base spending for what I would say ongoing CapEx is lower than what we spent. We would hope that we would have some acquisition opportunities, but it's so lumpy that it's really hard to say.

Okay. Sounds good. Thanks for --

The balance sheet is in a wonderful position to support the spending and investing of dollars to the extent that we feel that it is appropriate for you owners. We hope we have the opportunity, but the last thing we want to do is step out and overspend on something.

Sounds good.

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

All right. Thanks, guys.

Hi, Ian.

Congratulations on a great quarter.

Thank you.

Couple quick questions -- it seems a lot of them have been answered already. We're back in an environment where we're seeing a very fast-moving feedstock price with corn, and upward sloping, but not nowhere near as steep a movement in either crude oil or gasoline or ethanol. Can you talk about how this time it's going to be different than what we saw in the last cycle or do you think we are headed back into a period of significant bankruptcies and liquidations?

Oh, okay. You're talking about ethanol profitability and so Hal--and bankruptcy; and so, Hal, why don't you take that one.

Ian, I think that what we are seeing in the volatility with corn suggests, as we said, that there'll be some tightness. I don't at all see the kind of negative impact on the industry that we saw last time around given the current situation. Obviously there's a large share of the industry that is now in much more stable hands. There's a larger share of the industry that's done well over the last couple of years; and we've done quite well. So I don't see it nearly as devastating, and I think the industry's been watching it and is prepared for a little bit of a tough quarter or so. And we'll work through that. We've been doing a lot of different things to try and get through as best we can. So I don't see it being nearly as negative.

That being said, are there still opportunities out there for quality assets or at least assets with potential that you can see over the near term?

Yes, we believe there are and probably will be more so when we get into the summertime months. We've done a lot to improve our plants. We've done a lot of different things from an efficiency perspective. We've got a variety of different products other than just the ethanol, and we're doing -- that's one of the reasons why we like only owning a portion of the plants and doing the risk management and the operations and the marketing. Not only is there a steady stream of income for some of that work we do, but it also allows us to generate ideas across the three plants and use best practices in a lot of different ways. We're pretty excited about those opportunities. We just realize it's going to be a little bit of a tough quarter for a period of time in some of the margins. We think there will be plenty of opportunities, yes.

Hal, with your assets now out in Nebraska, is that any indication of a geographic directional play on your part? Will you be moving out further west or looking further west in terms of assets?

I guess when you are based in Maumee, Ohio, it's easy to look west if you're an ag company, because most everything is west of us. That's a good question. Nebraska and other points west of here are places that we've -- that have been very appealing to us. We've had certain presence out in that area for quite sometime, especially with a customer base--a producer customer base and some work we're doing on our food and risk management business out there.

And clearly, the US agriculture moving the grain in the West off the West Coast to supply the Far East market is going to be a big growth market. So we've continued to spend a lot of time looking how we can play more in that. Lansing's out there already with three elevators in the Western Corn Belt. They continue to look to expand their work and have gotten directly into that export business as well. We think there's great opportunity between the two of us to get right from that producer origination into that export destination; and the Western Corn Belt is where that's going to come from, so that's exactly why we're headed in that direction.

Great. One last question. We saw a reduction of about 100,000 rail cars or rail locomotives this quarter. It gets us back to about third quarter '07 in terms of asset levels. We've seen utilization pick up and actual cars have picked up dramatically, cars being used pick up dramatically quarter over quarter. Is this the bottom as well, Mike, in terms of the actual amount of cars? We start seeing less scrapping, more acquisitions or at least stabilization around this 22.5 number?

As far as for us, yes, yes. We may have some selective pruning and scrapping. Actually, our hope last year -- over that last year and a half, is that we would see more acquisition opportunities along with the scrapping that we did, and we were not successful at levels that we thought, but I believe this should be a -- our expectation is we should grow our fleet from here.

Okay. Great. Thanks a lot, guys.

Thank you.

At this time, I'm showing no further questions in queue. I would like to turn the call back over to Mr. Mike Anderson for any closing remarks.

Thank you very much, Eric. Thank you all for joining us. Next conference call is scheduled for Thursday, May 5th at 11 AM, eastern time to review first quarter 2011 results. Hope you're able to join us and have a great day. Thank you.

Ladies and gentlemen, that concludes today's conference call. You may now disconnect. Have a great day.